Outgoing RBI Governor Raghuram Rajan, who has ruffled industry for his strident bid to get the bank balance-sheets cleaned up, today admitted that the central bank should have carried out this exercise earlier. “As with inflation, it was the duty of the central bank to press for bank clean-up earlier, when few among the public support the central bank’s activism,” he said, addressing the 10th Statistics Day conference at the RBI headquarters here.
He also said the lenders were initially reluctant to implement the clean-up which started from December 2015 with RBI identifying 150 largest accounts which were facing problems in servicing their debt obligations. “Fortunately, after an initial reluctance, banks have entered the spirit of the clean-up and some have gone beyond what was demanded of them,” he said, adding that it was “easy to ignore” the problem of loan losses hoping that it goes away “somehow”.
Rajan said however that the scourge of loan losses “had a tendency to increase, get too big to ignore, too late to manage, and push the system into crisis”. In late 2015, RBI came out with a list of over 150 accounts, which was pruned to 120 later, and asked all the lenders to recognise their exposures to those as non-performing assets or bad loans.
It gave banks two quarters to recognise the losses and according to some estimates, the banks have taken a hit of Rs 70,000 crore to cover for the reverses. Following this clean-up order, the banks, led by state-run ones, have reported close to 14 per cent or over Rs 8 trillion (Rs 8 lakh crore) of their assets as stressed as of March 2016, while NPAs alone crossed 7.6 per cent.
The Reserve Bank had last month warned in the financial stability report that the NPA pains might worsen and that it would cross 8.5 per cent by March 2017 under its base case scenario.