Band-aid won’t do,
banks need deep surgery, says Raghuram Rajan
NPAs largely a
governance issue, not ownership: RBI Dy Governor Mundra
With the sharp spike
in loan write-offs and non-performing assets and a steep fall in
profits spooking the banking sector, Reserve Bank Governor Raghuram
Rajan made it clear Thursday that banks “may require deep surgery”
to clean up their balance sheets and put stressed projects back on
track.
The classification
of loans as non-performing assets (NPAs), he said, is an anaesthetic
that allows the bank to perform extensive necessary surgery to set
the project back on its feet.
“If the bank wants
to pretend that everything is alright with the loan, it can only
apply band-aids. For any more, drastic action would require NPA
classification,” he said.
Rajan’s
observations came in the wake of reports about surging NPAs, loan
write-offs and poor financial results by public sector banks. The
Indian Express had reported that PSU banks had written off Rs 1.14
lakh crore in the last three years.
“But to do deep
surgery such as restructuring or writing down loans, the bank has to
recognise it has a problem, classify the asset as a non-performing
asset,” Rajan said at a CII banking conference.
On the other hand,
blaming the managements of public sector banks and borrowers for the
asset quality mess, Reserve Bank Deputy Governor S S Mundra said the
bad loan issue is largely due to governance issues at PSU banks as
well as borrowers.
“One thing has
come out quite clearly, that the issues we are seeing today have not
much to do with the ownership of the banks. It is more a governance
issue than an ownership issue,” Mundra said.
While there are
external factors which have affected asset quality, internal ones are
also as important and “governance deficit” is a big issue, he
said, adding bank boards need to put in place risk management
practices as per their appetite. The government owns majority stake
in PSU banks.
“The present
ailment is well within cure and that cure is being administered. For
this, the willingness of the affected person is as important as
medicine. I am happy to see that such will power is being shown (by
banks),” Mundra said on the RBI directive to banks to notify
certain loans as non-performing assets.
Referring to the
impact of the clean-up exercise, Rajan said, “The market turmoil
will pass. The clean-up will get done, and Indian banks will be
restored to health. 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.”
According to Rajan,
for the loans that are of concern, the banks are attempting to
regularise the loans that can be put back on track, and are
classifying those that cannot for deeper surgery — and taking
provisions in accordance with the degree of extant stress in the
loan.
“They will also
make provisions for loans that have weaknesses. Our intent is to have
clean and fully provisioned bank balance sheets by March 2017,” he
said.
“Why not do
everything in one go rather than over a period of six quarters?
Precisely because a number of these loans can be regularised, or
stabilised when weak but regular, through the right collective
actions,” he said. 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.
“We need to
overcome this view — we have issued circulars stating that a loan
to a project whose other loans are NPA does not automatically become
an NPA — but it will take time. Pending the change in attitude,
which I think will come as banks turn to unlocking the value in NPAs,
we are working with them to sequence the most obvious actions up
front. However, the end game is clear to everyone and bounded. We do
not envisage a sequence of asset quality reviews,” he said.
Referring to the hit
on bank profits, Rajan said: “While the profitability of some banks
may be impaired in the short run, the system, once cleaned, will be
able to support economic growth in a sustainable and profitable way.
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-cost funding they have access
to, can then be fully realised.”
Loan classification
is merely good accounting — it reflects what the true value of the
loan might be. It is accompanied by provisioning, which ensures the
bank sets aside a buffer to absorb likely losses. “If the losses do
not materialise, the bank can write back provisioning to profits. If
the losses do materialise, the bank does not have to suddenly declare
a big loss, it can set the losses against the prudential provisions
it has made,” he said. The bank balance sheet then represents a
true and fair picture of the bank’s health, as a bank balance sheet
is meant to. “Of course, we can postpone the day of reckoning with
regulatory forbearance. But unless conditions in the industry improve
suddenly and dramatically, the bank balance sheets present a
distorted picture of health, and the eventual hole becomes bigger,”
Rajan said.
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