Banks’ clean-up seen not affecting despite Rajan exit

Mumbai, June 19: The government's move to cleanup the books of banks saddled with $120 billion of sour loans will be largely unaffected by the decision of Reserve Bank of India governor Raghuram Rajan to step down, bankers and government officials said.

As banks struggle with record levels of distressed assets, Rajan had set an ambitious March 2017 deadline for them to fully reveal the problem loans and make adequate provisions.

An unprecedented asset quality review of banks ordered by the central bank led to reported bad loans surging more than 70% in the six months to March.

Rajan's decision to bow out in September has, however, raised questions on the fate of a clean-up seen as crucial to reviving new lending to support a nascent recovery in Asia's third-largest economy.

Bankers and government officials said Rajan's successor may be less aggressive in fighting bad loans, but the general direction will remain the same.

“Having worked with eight (RBI) governors, I have not seen any new incumbent turn an earlier policy, particularly relating to banks, on its head,” said G Padmanabhan, a former executive director at the RBI who currently chairs the board of third-biggest staterun lender, Bank of India.

“Second, and more important,this was not a one man decision and had the support of the government as well,” he said, although there could be some tweaks as the timeline was "aggressive" and banks' capital needs had to be factored in. Shares in top lender State Bank of India have gained about 16% since it reported March-quarter earnings on May 27, on hopes that the worst was behind it in terms of bad loans. Two dozen public sector banks hold the bulk of the soured loans.

Minister of state for finance Jayant Sinha said recently it was prudent for the RBI to pursue its asset quality review of the banks, signaling the government support for the clean-up.

“Investors of course like it. What Rajan and the RBI did was generally good, but I would say they were a bit too harsh,” said one senior public sector banker, who still sees no clarity on how bad loans will be resolved. Others agree that the mechanics of resolving the issue still need to be clarified.