RBI chief Rajan says banks will be restored to health

After various public sector banks came up with result of steep fall in profits and many even reporting loss with sharp spike in loan write-offs and non-performing assets, Reserve Bank Governor Raghuram Rajan has said that the ongoing clean-up of bank balance sheets will help spur economic growth and improve the lenders’ profitability.

Comparing the non-food credit growth, agri-lending and industrial lending, Rajan said, “Loan growth in private sector banks was at least 10 percentage points higher than public sector banks”.

“Our projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalization, will be small”, Rajan said at CII banking summit in Mumbai.

Wild claims made by some financial analysts about the size of problem verge on “scare-mongering” he said. Acknowledging that the AQR, under which the RBI has asked banks to recognise some top defaulting accounts as non-performing ones and provide for them, has had a debilitating impact on banks” numbers and their stocks, Rajan admitted that the earnings of state-run banks do not look “pretty’.

“The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health”, Rajan said. The economic assets of our public sector banks, such as the trust they are held in by the population, their knowledgeable employees, their location and reach, and the low-priced funding they have access to, can then be fully realized. An alternative approach is to try to put the stressed project back on track rather than simply applying band aids.

The bank’s stock, however, recovered on Wednesday after news emerged that it may buy back some of its debt. He also said that they have gone through and done the asset quality review and have identified the full extent of the problem.

“Sometimes, an NPA classification, even while permitting deeper surgery, prompts risk aversion on the part of bank boards and they stop lending even when the project is viable”. Government-controlled lenders will require infusions of 1.8 trillion rupees in equity to comply with global standards under the so-called Basel III regulatory regime, Finance Minister Arun Jaitley said in August.

He said there are two polar approaches to loan stress, first is the apply band-aids and keep the loan current and hope time and growth will set the project on track.

“In sum, to the question of what comes first, clean up or growth, I think the answer is unambiguously “Clean up!” Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned.

Wydler repeatedly warned the Securities and Exchange Commission, other industry trade groups and various media organizations that she believed a Ponzi scheme was taking place at Stanford Financial Group, her former employer.

He said that for loans that are of concern, the banks are attempting to regularize those that can put back on and are classifying those that cannot be and provisioning those that cannot be.

Let me emphasize that all NPAs are not because of malfeasance.