Reserve Bank of India (RBI) governor Raghuram Rajan said on Thursday that the central bank and the government were determined to tidy up India’s problem of mounting bad loans by the next year but warned analysts against “scare-mongering”.
“Our intent is to have clean and fully provisioned bank balance sheets by March 2017,” Rajan told a gathering of top bankers and business executives in a meeting organised by the Confederation of Indian Industry (CII). “An alternative approach is to try to put the stressed project back on track rather than simply applying band aids. This may require deep surgery,” he added.
Rajan’s comments came on a day when India’s stock markets fell by over 3%, hammered by poor financial earnings of State Bank of India (SBI), the country’s largest lender.
Persistent fears of a global slowdown and US Federal Reserve chief Janet Yellen’s comments that she did not expect to reverse the rate hike programme that began in December but saw risks to the US economy added to the negative sentiment.
The 30-share benchmark Sensex closed at a 21-month low of 22,951.83 — down 807.07 points or 3.4% from Wednesday’s close. The NSE Nifty closed at 6976.35, down 239.35 points.
Sliding markets and rising bad loans have added to worries for the government, which will present the budget for 2016-17 on February 29 amid heightened anticipation that finance minister Arun Jaitley will announce measures to boost growth and investment to spin jobs and multiply income.
Most banks have reported a sharp slide in profits, pummelled by higher “provisioning” for non-performing assets (NPAs).
NPAs, short-hand for loans that have turned bad, have jumped sharply, forcing lenders to set aside or “provision” a greater amount to account for these advances that have stopped yielding earnings.
SBI’s net profit for the quarter ended December slid 62% to Rs 1,115 crore from Rs 2,910 crore a year earlier. SBI’s provisions for bad loans almost doubled from a quarter earlier to Rs 7,645 crore.
Rajan obliquely hinted that India would have to take volatility in its stride without losing focus on the primary objective to make banks’ balance sheets healthier.
“The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health,” Rajan said.
The RBI governor, known for not mincing words, said the “full force of the law” is brought “where there is evidence of malfeasance by the promoter”.
The banking sector has been beset with bad loans that have risen due to slow growth and delays in project implementation.
“Finance minister has indicated he will support the public sector banks with capital infusions as needed,” he said.
Rajan hinted the path to cleaner banks’ books could hurt growth in the short run.
“To the question of what comes first, clean-up or growth, I think the answer is unambiguously ‘clean-up!’ Indeed, this is the lesson from every other country that has faced financial stress,” he said.
Rajan cautioned analysts against overplaying the bad-debt problem, asking them to avoid “scare-mongering”.
“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.
“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.