Raghuram Rajan meets bankers over stressed loans

The RBI has already fixed a deadline of March 2017 to clean up the balance sheets of banks. March 2017 deadline for banks to clean up balance sheets.

By: ENS Economic Bureau | Mumbai | Published: January 19, 2016 1:59 am

Reserve Bank of India Governor Raghuram Rajan on Monday reviewed the status of the management of stressed assets in the banks’ books and the implementation of the various measures taken by the RBI.

The meeting, which was attended by the chiefs of banks, non-banking finance companies and asset reconstruction companies, assumes significance as the stringent provisioning norms could lead to setting aside of over Rs 70,000 crore by banks, putting them in pressure on the profitability and capital adequacy fronts. The RBI is likely to come out with some measures to tackle the bad loan issue as banks are set to report weak third quarter results after making higher provisions.

“The meeting reviewed the functioning of the Joint Lenders’ Forum (JLF) mechanism, Flexible Restructuring of Long Term Project Loans, Strategic Debt Restructuring Scheme and regulations on sale of assets by banks to asset reconstruction companies,” the RBI said after the meeting.

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“The meeting took stock of the way these tools are being used by the banking system and the improvements needed to sharpen their efficacy and ease of use. Several suggestions were made by the participants on the way forward which will be examined,” the RBI said. Apart from Rajan, Deputy Governors R Gandhi and SS Mundra and other RBI officials were present at the meeting.

The RBI has already fixed a deadline of March 2017 to clean up the balance sheets of banks. After a recent review exercise involving bank managements and the regulator, banks have now been told to adopt a pro-active approach and identify delinquencies to reflect a far more true picture on bad loans. In turn banks will now commit to more provisioning or setting aside capital against bad loans for upcoming stress.

What this could lead to is a hit on bank profits in the near term. This is likely to be reflected in the profits of banks in the last two quarters of this fiscal but could help their balance sheets in the medium term.

According to a study by Religare, 10 out of 15 strategic debt restructuring cases suggest that this scheme is in no way a cure-all for Indian banks’ deteriorating asset health — instead it exacerbates the risk by deferring an estimated Rs 1,50,000 crore of NPA formation (30-40 accounts or 2.2 per cent of total credit) from FY16-17 to later years.

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