Indicating a shift from his predecessor Raghuram Rajan’s ‘deep-surgery’ policy on bad loans, RBI Governor Urjit Patel today said the central bank will be firm but pragmatic in dealing with bank NPAs so that the economy does not feel lack of credit to support growth.
Reserve Bank will look at resolving the issue with “skill and creativity” so that growth does not become a victim, he said in his first media interaction since taking charge a month ago.
“The non-performing assets situation is an important issue for the RBI. We will deal with the situation with firmness, but also with pragmatism so that the economy does not feel any lack of credit to support the growth in the economy,” Patel told reporters after announcing his maiden policy review.
“You must remember that the situation did not happen overnight and therefore will require skill and thoughtful endeavour to resolve,” Patel said, reading out from a prepared statement.
He said while the work on identifying an NPA, recording it and reporting the same has been satisfactory, resolution of the stress needs more focus.
Acknowledging that five sectors — steel, power, telecom infrastructure and textiles — contribute 61 per cent of total stress in the system, Patel said each of them are very important and hence, calls for “skill and creativity” in dealing with the stressed asset situations.
In mid-FY2016, the RBI had initiated a complete overhaul of the system so that banks’ books reflect true nature of stress. Last December it initiated an asset quality review and asked banks to classify over 125 accounts as bad.
While asking banks to come clean by March 2017, the then governor Rajan had said that “deep surgery” was a must for the clean-up and the process of recognising the NPA was akin to an “anaesthetic” needed for the procedure.
This resulted in massive provisions and historically high losses being reported by the lenders that led to many going slow on new credit growth and in turn hitting the economy.
Total stressed loans, including gross NPAs and restructured assets stood at over 12 per cent as of end June or over Rs 8 trillion, with NPAs alone at 8.7 per cent.
State-run banks, which control over 70 per cent of the system, have reported higher stress.
In a base case scenario, in financial stability report, the RBI had said it expected NPAs to rise further this year.
Patel said the RBI has been at the forefront of initiating measures like the Bankruptcy Code, but said implementation of the new law will take time as it does in case of any new legislation.
The losses or lower profitability have put government in a difficult situation, wherein it has to capitalise banks using taxpayers money as the erosion of share prices has made capital raising from markets difficult.
The additional pressure of migration to the higher capital buffer Basel-III regime only aggravates the problem.
Patel said the RBI will continue to work with the government in helping resolve the situation.