NPA classification should be considered as an anaesthetic that allows banks to perform extensive necessary surgery to set the project back on its feet, Reserve Bank of India (RBI) governor Raghuram Rajan said on Thursday while asserting the importance of the asset quality review (AQR) undertaken by the central bank.
The governor was delivering a lecture at a summit organised by Confederation of Indian Industry.
Rajan was speaking on the rationale of AQR which was partly seen as a factor that contributed to weak public sector bank results leading to the fall in their share prices.
He said there are two ways to deal with stressed loans: to apply ‘band-aids’ to keep the loan current, and hope that time and growth will set the project back on track or to put the stressed project back on track rather than simply applying band aids. “This may require deep surgery,” he asserted.
The governor said that loan classification is merely good accounting and it reflects the true value of the loan. It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses, he added stating if the losses do not materialise, the bank can write back provisioning to profits.
Rajan also asserted that the very reason why the central bank does not believe in cleaning the bank balance sheets in one go is because a number of loans can be regularised, or stabilized when weak but regular, through the right collective actions. “Our teams are working with the banks to ensure that they (banks) are all broadly on the same page in terms of recognition and provisioning, even though each one has flexibility on individual cases,” he said.
Rajan also pointed out that the central bank has been in constant discussions with the government, including the highest level, regarding the matter of AQR and said that the finance minister has indicated of providing support to the public sector banks with capital infusions as needed.
“Our estimate is that the government support that has been indicated will suffice,” he added.
On the capital front, the governor stressed that claims made by financial analysts about the size of the stressed asset problem verges on scare-mongering. “Our projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalisation, will be small,” he added. Rajan said what the government has already explicitly committed is enough to take care of all reasonable scenarios and the central bank will provide whatever liquidity is needed by any bank although it does not forsee any liquidity risk. “The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health,” Rajan indicated.