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  3. Banks may require deep surgery to clean up their balance sheets: Rajan

Banks may require deep surgery to clean up their balance sheets: Rajan

12 Feb 2016 Evaluate

After various public sector banks came up with result of steep fall in profits and many even reporting loss with sharp spike in loan write-offs and non-performing assets, Reserve Bank Governor Raghuram Rajan has said that the ongoing clean-up of bank balance sheets will help spur economic growth and improve the lenders’ profitability. He 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.”

Rajan further said there are two polar approaches to loan stress. One is to apply band aids to keep the loan current and hope that time and growth will set the project back on track, he said. An alternative approach is to try to put the stressed project back on track rather than simply applying band aids. This may require deep surgery.” He said 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. 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.

He justified the move to ask banks to classify loans that were identified during the AQR as bad loans and said loan classification is merely good accounting - it reflects what the true value of the loan might be and said our intent is to have clean and fully provisioned bank balance sheets by March 2017.

The RBI governor referring to the impact of the clean-up exercise, 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.

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