Raghuram Rajan expects banks to clean up bad loans by March 2017

Reserve Bank of India Governor
Raghuram Rajan said on Tuesday he
expects bad debt-burdened banks to clean
up their balance sheets by March 2017,
warning the central bank would monitor
whether concessions made to lenders
were being misused.
India’s banks are struggling under $100
billion of stressed loans, choking the
financial system at a time when the
economy needs fresh investment to
galvanise growth. Bank loans are a key
source of financing for the bulk of Indian
firms.
Despite a string of central bank initiatives
to help banks grapple with the bad debts,
lenders have yet to make a dent on the
pile, a burden shouldered mostly by
India’s state-owned lenders, which
account for just over 70 percent of Indian
banking assets. Most saw bad debts
continue to rise in the last quarter.
“I want to put something like March 2017
on the table as when we hope that a full
clean-up will have been done,” Rajan told
reporters following the RBI’s December
monetary policy statement.
Rajan warned on Tuesday that banks
should take advantage of concessions
like 5/25, a provision which allows banks
to refinance loans for infrastructure for up
to 25 years, and the strategic debt
restructuring scheme, which allows debt-
for-equity swaps.
But they should correctly classify debt –
rather than delay recognising a stressed
loan – and not abuse the system.
“We can now be a little more careful
about recognition… Next step is to make
sure that what should be classified as A
is classified as A and not B,” he said.
“We are … looking at how some of these
existing facilities are being used, to make
sure … we are not kicking the can down
the road.”
Rajan gave few details on the much-
needed but ambitious clean-up, which
would involve some of India’s largest and
most troubled firms, largely in sectors hit
by the commodities downturn, including
steel, mining and power.
“It’s a reasonably tall task,” said Ananda
Bhoumik , managing director and chief
analytical officer at Fitch’s Indian affiliate,
India Ratings & Research.
Bhoumik said state-run banks would need
more capital from the government to
increase provisions for bad loans.
“I think what we are all expecting is a
favourable tailwind of the economy and
cashflows in corporates. But the fact
remains the level of leverage is really very
high.”