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