Clean-up act: Robust loan recovery takes centre stage

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SummaryOn the first day of his appointment as Reserve Bank of India governor, Raghuram Rajan empahsised on the need for an efficient system to recover loans at a time when the bad loan problem in the banking sector continues to aggravate

On the first day of his appointment as Reserve Bank of India governor, Raghuram Rajan empahsised on the need for an efficient system to recover loans at a time when the bad loan problem in the banking sector continues to aggravate.

“While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets, and commit to a capital raising programme, where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed,” Rajan said.

He also said the working of Debt Recovery Tribunals and Asset Reconstruction Companies had to be accelerated and to assure this Rajan, along with deputy governor Anand Sinha, will be examine the necessary steps to be taken.

Deputy governor KC Chakrabarty will take a close look at the rising NPAs and the restructuring and recovery process, and necessary steps in the direction will be announced in the coming days, said Rajan. The RBI plans to collect credit data and examine large common exposures across banks to enable the creation of a central repository on large credits, which can be shared with the banks. 

“This will enable banks themselves to be aware of building leverage and common exposures,” Rajan said. 

Rajan said it

will follow the suggestions from Financial Sector Legislative Reforms Commission to set up an enhanced resolution structure for financial firms. The working group on resolution regimes for financial institutions is looking at this and “we will examine its recommendations and take action soon after”, he said. 

The gross NPAs in the banking system is currently estimated at 4.2-4.4% at the end of June 30, while restructuring approved through corporate debt restructuring cell in FY13 was over R76,000 crore. In the April-June quarter restructuring cases approved through the cell were worth R21,266 crore.

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