• Turmoil will pass, lenders' health will be restored, he says
  • RBI, government will ensure banks are able to fuel growth

Dismissing “wild claims” made by some analysts about soured debt in India, central bank Governor Raghuram Rajan assured investors that a clean-up of books underway will help restore lenders’ health and soon position them to revive economic growth.

Projections made by the Reserve Bank of India show any breach of minimum core capital requirements by a few state-owned banks will be small in the absence of recapitalization, he told delegates at a bankers’ conference in Mumbai on Thursday. The RBI and Prime Minister Narendra Modi will do what it takes to nurse them back, he said.

Rajan has set a March 2017 deadline for lenders to clean up their balance sheets by increasing provisioning as the proportion of stressed assets, including restructured and soured loans, to total advances surged to a 14-year high of 11.3 percent end-September. As a result, profit at State Bank of India, the nation’s biggest by assets, slumped 62 percent in the quarter through December, while net income growth at ICICI Bank Ltd., the No. 2, cooled to a six-year low.

“While 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,” Rajan said. “While we shouldn’t 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.”

Good News

Rising bad debts and inadequate risk buffers at India’s state-run banks have been hindering Modi’s attempts to revive lending growth in the $2 trillion economy. Junior Finance Minister Jayant Sinha told reporters in New Delhi on Thursday that the stock of stressed assets is roughly 8 trillion rupees ($117 billion), and the government has committed cash for this.

“It’s good news that we have scoped the problem,” Sinha said. “We are moving swiftly and decisively to deal with the problem.”

State-owned banks account for more than 70 percent of India’s outstanding loans. Government-controlled lenders will require infusions of 1.8 trillion rupees in equity to comply with international standards under the so-called Basel III regulatory regime, Finance Minister Arun Jaitley said in August.

Provisions Surge

Bad loan provisions at SBI in the quarter through December almost doubled to to 76.4 billion rupees from the previous quarter while that at its biggest private sector rival ICICI Bank tripled from a year-ago period, as the lenders tried to meet RBI’s deadline, exchange filings showed.

“If the losses do not materialize, the bank can write back provisioning to profits,” Rajan said Thursday. “If the losses do materialize, the bank does not have to suddenly declare a big loss, it can set the losses against the prudential provisions it has made.”

Wild claims made by some financial analysts about the size of problem verge on “scare-mongering” he said. “The market turmoil will pass. The clean-up will get done and Indian banks will be restored to health.”

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