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Raghuram Rajan expects banks to clean up bad loans by March 2017

Reserve Bank of India Governor Raghuram Rajan said on Tuesday he expects bad debt-burdened banks to clean up their balance sheets by March 2017, warning the central bank would monitor whether concessions made to lenders were being misused.

ET Bureau|
Last Updated: Dec 02, 2015, 06.11 AM IST
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MUMBAI: Reserve Bank of India (RBI) governor Raghuram Rajan said that banking reforms are “absolutely crucial” while setting a deadline of 2017 for banks to clean up their books. In the fifth bi-monthly monetary policy, the central bank said the cleaning-up exercise would create room for fresh lending. The rising level of stressed loans — estimated at about 10% of the total loan book — has taken a toll on banks’ performance as they have to make higher provisions for bad loans.

Speaking to the media on Tuesday after the policy, Rajan hoped banks would be better placed to lend when the economy revives and attempts are made to put stressed assets back on track. “This process is ongoing and my hope is as banks recognise more of what needs to be recognised and they deal with the stressed assets... they will be able to bring that down. And not just by provisioning but also by putting some of these assets back on track so that they can be elevated back to performing assets over time.”

Stressed assets — non-performing assets plus restructured assets — are an important part of banks’ balance sheets. RBI is working with the government to change the governance process of banks, moving towards cleaning up banks’ balance sheets and appropriate recapitalisation. “They will then be in a position to do the kind of lending that the economy will need as the recovery picks up steam,” Rajan said.

He said the RBI was open to giving licence to more asset reconstruction companies, particularly foreign entities that want to bring more capital into the business. As of now, there are 14 ARCs registered with the RBI but only four to five are very active. The gross NPAs of listed banks rose by 24% to `3.1 lakh crore in fiscal 2015.

For the quarter ended September, government-owned Bank of India reported a loss of `1,126 crore, while the loss of Indian Overseas Bank, also run by the state, doubled to `550 crore, prompting the RBI to initiate corrective action.

“Our approach to this has been very systematic. The first part of the process was to give banks more power and flexibility to deal with it (bad loan) and the idea is to put the real asset back on track with whatever needs to be done. That was the first step with things like the SDR and 5:25 rule, with bringing in new promoters and so on… a whole range of steps have been taken there,” said Rajan. “The next step is to make sure that what should be classified as ‘A’ is classified as ‘A’ and not ‘B’ and there we’ve been in constant dialogue with banks and also looking at how some of these existing facilities are being used to make sure we are not kicking the can down the road,” he said.

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