Bank clean-up will help sup­port long-term growth: Raghu­ram Ra­jan

The Pak Banker - - COMPANIES/BOSS -

Re­serve Bank of In­dia (RBI) gov­er­nor Raghu­ram Ra­jan on Thurs­day said that while the im­pact of the reg­u­la­tor's as­set qual­ity re­view will hit the prof­itabil­ity of some banks in the short run, the clean-up will help sup­port eco­nomic growth in the fu­ture. Ra­jan also warned an­a­lysts against "wild claims" on the size of the as­set qual­ity prob­lem, adding that RBI ex­pects the prob­lem and the ad­di­tional cap­i­tal re­quire­ments of banks to be man­age­able.

"...while the prof­itabil­ity of some banks may be im­paired in the short run, the sys­tem, once cleaned, will be able to sup­port eco­nomic growth in a sus­tain­able and prof­itable way," said Ra­jan, while speak­ing at a bank­ing sum­mit or­ga­nized by the Con­fed­er­a­tion of In­dian In­dus­try in Mum­bai. He said the re­view was un­der­taken to en­sure that banks were tak­ing proac­tive steps to clean up their bal­ance sheets. As part of the process, the reg­u­la­tor had iden­ti­fied loans that were of con­cern, as well those that had po­ten­tial weak­nesses.

Speak­ing at the same con­fer­ence, RBI deputy gov­er­nor S.S. Mun­dra said that stressed as­sets across pub­lic sec­tor banks, which in­clude gross NPAs and re­struc­tured loans, to­gether with loans writ­ten off by banks, stood at 17% of the bank­ing sec­tor's to­tal out­stand­ing loans as of Septem­ber 2015. For the bank­ing in­dus­try as a whole, this num­ber stands at 14%.

"For the loans that are of con­cern, the banks are at­tempt­ing to reg­u­lar­ize the loans that can be put back on track, and are clas­si­fy­ing those that can­not for deeper surgery-and tak­ing pro­vi­sions in ac­cor­dance with the de­gree of ex­tant stress in the loan.

They will also make pro­vi­sions for loans that have weak­nesses. Our in­tent is to have clean and fully pro­vi­sioned bank bal­ance sheets by March 2017," said Ra­jan. The prof­its of a num­ber of banks, par­tic­u­larly pub­lic sec­tor banks, have taken a hit be­cause of the RBI's as­set qual­ity re­view and this has sent bank stocks tum­bling. For 30 of the 39 listed banks that have re­ported earn­ings so far, gross NPAs have risen 26% quar­ter-on-quar­ter and are up 40% com­pared to a year ago. Pro­vi­sions have surged 74% quar­ter-on­quar­ter and 80% on a year-on-year ba­sis. This has pulled down the con­sol­i­dated net profit of th­ese banks by 42% be­tween the Septem­ber and De­cem­ber quar­ters. Yearon-year, the net profit for this set of banks is down about 46%.

How­ever, Ra­jan warned against ex­ag­ger­at­ing the scale of the prob­lem. "There are some wild claims be­ing made by some fi­nan­cial an­a­lysts about the size of the stressed as­set prob­lem. This verges on scare-mon­ger­ing," said Ra­jan.

RBI ex­pects only a small mi­nor­ity of banks to see cap­i­tal fall below the min­i­mum re­quired lev­els, which will re­quire the govern­ment to in­fuse equity. How­ever, other banks may need a "top-up" of their cap­i­tal, said Ra­jan, adding that the govern­ment is com­mit­ted to stand­ing be­hind the banks. "RBI will pro­vide what­ever liq­uid­ity is needed by any bank that needs it, though we do not fore­see liq­uid­ity stress," he said.

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