Band-aid won’t do, banks need deep surgery, says RBI Governor Raghuram Rajan

NPAs largely a governance issue, not ownership: RBI Dy Governor Mundra

By: ENS Economic Bureau | Mumbai | Updated: February 12, 2016 9:19 am
Raghuram rajan, RBI, reserve bank of india, NPA, bad loan, assets, PSU banks, budget 2016, 1.14 lack crore loan, business news RBI Governor Raghuram Rajan.

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.

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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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First Published on: February 12, 2016 3:42 am
  1. T
    TIHAEwale
    Feb 12, 2016 at 5:18 am
    The ED and CMD havebeen even collecting performance bonus. recover and send involved executives to jail. Feku56 always claims he is honest and will not tolerate corrupt. what is preventing him , is the Adani and Ambanis who financed the poll campaigns of Congress and BJP
    Reply
    1. A
      AARAAM
      Feb 12, 2016 at 2:46 am
      I don't know why , I feel somethings are untrue in above report. If I remember, there was that famous Indira hi-Nagarwala case; similarly , one PSU bank's MD was caught in long legal battle down here , in South. Is it not true that, whoever occupies seats of power also have influence over PSU banks? If yes, is it not a case of ownership intrusion into professional functions? NPAs , as per above report should not be viewed as any distortion and, loan clification is only good accounting? Can we swallow these? Can anyone on personal level that one had loaned to people, by clubbing them all into one? - say, what one gives to servant maid with what he gives to a relative to buy a car/ house etc, and he loses job/ meets accident etc and says sorry? For all that, one can write-off loan given to servant-maid as, charity ( usually small in nature). I mean, there is some kind of untruths and hiding going on. I for one feel, NPAs do need to be put into select baskets - depending upon sectors, size of project, time taken, stage in which they are now, capacity of borrowers to repay even if restructured, levels of shouldering burden by a PSU Banks-collective as one of the means ( apart from what experts' have suggested) etc. Possibly, no one will come to know about all these-what with Congress's reported plan of SOS [ Save own Skin] operation in Parliament by now well-known tactics of Block, Block - shall we know at all? But something does not fit!
      Reply
      1. A
        ashok
        Feb 12, 2016 at 1:15 am
        Mr Rajan if honest people are appointed at the top and if RBI is sincerely performs so many bad loans wouldn't have happened its not mis management its corruption and the root cause is RBI alone.giving speaches being governor is easy that any one can do
        Reply
        1. A
          ashok
          Feb 12, 2016 at 1:11 am
          Mr Rajan where was RBI all these years were they sleeping or the earlier governors did not do their job.cleaning up of bad loans doesn't mean fresh bad loans wouldn't occur in future. First the top management shouldn't fix unhealthy targets for which is the main cause for loans turning bad and the other RBI governor with the government appoints inefficient and corrupt executives even now to the top post.unless these two are stopped banks would never perform. IOB npa is 12.45 it is not happened in one day the earlier chairman is happy have RBI taken in him to task no.
          Reply
          1. D
            dvchalam
            Sep 20, 2016 at 2:15 am
            lenders do not close accounts and drain public money
            Reply
            1. C
              Col S
              Feb 12, 2016 at 3:23 am
              EXCUSES. RBI and FM are GUILTY of failed SUPERVISION. DEFAULTERS_ corporate and banks must be punished. Recover AMOUNT and put them in JAIL.Revival/ Rescue, using budget( tax payers money ) is SIN.
              Reply
              1. C
                Col S
                Feb 12, 2016 at 2:39 am
                It is not only GOVERNANCE issue but that of REGULATION Aldo. RBI has failed in its INSPECTIONS and REGULSTORU gu action. WHY? Why isare FM and RBI silernt on RECOVERY and JAIL for DEFSULTERS which also includes the BANKERS.It could not have reached this stage without connivance of. Political executive,RBI , banks and CORTPORATES. What is holding them from CONFISCATING their property.Do not fool the country with EXCUSES. Do not followed country. First SHELTER under SECRECY and now EXCUSRD?
                Reply
                1. C
                  Col S
                  Feb 12, 2016 at 2:43 am
                  It is the result of CONNIVANCE by Political EXECUTIVE RBI, BANKS and CORTPORA.TES. Failed REGULATION and GOVERNANCE. Do not fool the country with EXCUSES. ARREST DEFAULTERS __ corporate as and the bank.
                  Reply
                  1. K
                    KELLY KLAUS
                    Sep 21, 2016 at 6:04 pm
                    HOW I GOT MY LOAN FROM ELITE LOAN FINANCE COMPANY. YOU CAN CONTACT HIM ON HIS EMAIL: FOR MORE DETAILS OK.
                    Reply
                    1. F
                      Farooque Shahab
                      Feb 12, 2016 at 4:36 am
                      Dy. Governor Mr. Mundra makes too facile an observation - it is governance issue and not ownership issue. They are symbiotically connected. A responsible and evolved owner will ensure credible governance and its opposite is also true.
                      Reply
                      1. C
                        Cortz Mendal
                        Feb 15, 2016 at 4:52 am
                        A MUST READ: I am Cortz Mendal, I live in Montana, I like to bring this to the knowledge of the general public about how my life got transformed from the most deverstating part of my life when my shop caught fire and I lost everything. I could no longer pay bills, then i set out to source for funds by all means just to keep I and my kids going. It was during this process i got scammed out of $2,560 and i said to myself that i will never source for funds on the internet anymore. Until I read about on how they helped a woman who had nothing with a loan to get back on he feet. At first I never believed her testimony due to my past experience with lenders online But due to what i was going through, I had no choice but to give them a trial and I am happy i did. I was granted a loan of $70,000.00, by this Company to startup my burnt down business over again. My advice to anyone who requires any financial istance from a genuine lender and can be trusted and capable of paying back in due time of the funds should email them or call 13072984167 and you will never regret it.
                        Reply
                        1. M
                          madan gupta
                          Feb 11, 2016 at 11:39 pm
                          बैंकों को प्राइवेट किया जाये.
                          Reply
                          1. R
                            Ramesh Nittoor
                            Feb 12, 2016 at 1:32 am
                            Agree with you. Except State Bank of India, all other banks can be considered for denationalization via strategic route to MNC banks. This will enable transformation of Indian banking scene almost overnight, and create pipeline capacity for mive infusion of fund for Indian industrialization and infrastructure building. SBI with its reach could still be the agency for funneling social sector priority lending.
                            Reply
                            1. R
                              Ramesh Nittoor
                              Feb 12, 2016 at 1:46 am
                              Seasoned Governor has done well to narrow down the choice to just two elements, and wisely chosen the palatable one. Ownership determines accountable governance. But western banking laws shows that then owners seek to control laws. The system of checks and balances is a long term traverse, will takes years to mature. Enabling MNC ownership accelerates governance reforms.
                              Reply
                              1. R
                                Rajeev Bagra
                                Jul 3, 2016 at 11:56 am
                                Take the case why it may not be correct for RBI Governor Raghuram Rajan to call spade a spade while cleaning NPAs of banks. When banks reported poor numbers, faith on investors to put new money dwindled leading to lower overall investment. Irrespective of the fact whether we acknowledge or not, NPAs remain the same. What he could have done is to take corrective action from back end like reducing dividend payout while not too much publicizing of the actual NPAs feared. lt;br/gt;lt;br/gt;lt;br/gt;Suppose I am in need of 100 Rs. in the morning which I can borrow if lenders on the other side believes I am in good shape. If I show that I may not have enough money to meet my obligation at the end of the day, I may have to go hungry the entire day, jobless, while devoiding myself of the eonomic activity which I could have performed otherwise while generating 100 Rs or even more, in which case both me and lenders win.
                                Reply
                                1. S
                                  Sach
                                  Feb 12, 2016 at 2:50 am
                                  merge all small and medium psu banks and cut out corrupt officials.
                                  Reply
                                  1. S
                                    Sathish
                                    Feb 12, 2016 at 4:49 am
                                    In kalyug, thieves are kings!
                                    Reply
                                    1. S
                                      Sathish
                                      Feb 12, 2016 at 4:50 am
                                      The heads are super corrupt and trolls are dime a dozen!
                                      Reply
                                      1. S
                                        SoKaramchetty
                                        Feb 12, 2016 at 10:28 pm
                                        For every loan that is written off, there should be a set of names of companies, organizations, borrowers, or company officials, approving and recommending officials that should also be written off from future transactions. There should be a set of Do’s and Don’t’s for future guidance.
                                        Reply
                                        1. S
                                          S.D. Murthy
                                          Feb 12, 2016 at 12:45 pm
                                          Raghuram Rajan exceeds his brief quite frequently. He has said on a public platform what he should have told the FM in private. He doesn't understand India. A strong bank like ICICI had a run on it but Indian Bank on sick bed saw continued trust of public and revived beyond expectations. He should know what to say where.
                                          Reply
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