Reserve Bank of India Governor Raghuram Rajan on Thursday said central bank and government efforts to clean up banks’ balance sheets would be successful, and warned analysts against “scare-mongering” about the level of stressed assets in the sector.
Banks are struggling under $100 billion of stressed loans, choking the financial system at a time when the economy needs fresh investment to galvanise growth.
The RBI would strive to have “clean and fully provisioned bank balance sheets by March 2017,” Rajan said, adding that the government’s planned capital infusion in state-run banks would be sufficient.
He also said RBI projections showed that only “a small minority” of state-owned banks would breach core capital requirements in the absence of any recapitalisation.
The speech, to an audience of bankers and company executives in Mumbai, was meant as reassurance after shares of state lenders were pummelled this week, following a surge in bad loans many of them posted.
Here are some highlights of his speech:
* We don’t envisage a sequence of asset quality reviews and further recognition of bad assets; most NPAs not due to malfeasance
* Deep surgery needed to clean up balance sheets; NPA recognition is anaesthetic to do surgery
* Quarterly earnings of PSBs not pretty
State Bank of India, the country’s biggest lender, slumped 3 percent on Monday after posting a slump in earnings as it soaked up more bad loans and provisions in line with a central bank drive to tidy up India’s banking industry.
“The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health,” Rajan said.
“There are some wild claims being made by some financial analysts about the size of the stressed asset problem. This verges on scare-mongering.”
In December, Rajan said he expected debt-burdened banks to clean up their balance sheets by March 2017, spurring lenders to increase their provisioning for the October-December quarter.
But some analysts have warned state-owned banks could be under-reporting the extent of bad loans in their balance sheets, posing a big undetected risk to the financial system.
Rajan forcefully rejected those arguments on Thursday, saying capital requirements across state-owned banks remained manageable, while expressing confidence that lenders were now tackling the issue, using more responsible lending standards.
“While we should not underplay the dimensions of the task, we should be confident that it is manageable and that the government and the RBI will do what it takes to make sure that banks are able to support the tremendous growth that lies ahead,” Rajan said.