Caution required on RBI’s call on Asset Quality Review by banks

From The Hindu

Veteran banker Deepak Parekh said the Reserve Bank of India Governor Raghuram Rajan’s clean-up bid of banks’ bad loans could end up similar to a patient becoming comatose with too much of “anaesthesia”.

“I only wish to caution that too much of anaesthesia can also result in a patient becoming comatose” Mr Parekh said in a speech on Wednesday referring to the banking regulator’s effort to clean up banks’ balance sheet.

Governor Rajan has recently said that Indian banks need deep surgery to fix the bad loan problem rather than a ‘band aid’ or quick-fix solutions. “Think therefore of the NPA classification as an anesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet,” Mr Rajan said last week at the CII banking summit. He was referring to the recent directions of the RBI to banks following an asset quality review (AQR) that has identified loans which lenders need to classify as non-performing in two quarters – Oct-Dec and Jan-March.

“Yes, we need transparency in accounting for NPAs, but surely the objective of the clean-up is to fix the financial rot, not to incapacitate banks,” Mr Parekh said. He cautioned that the banking sector cannot afford another quarter like the one just gone by. “In just 40 days, listed banks have lost more than Rs.1.80 lakh crore in their market cap,” Mr Parekh said. Many banks have already warned that the next quarter earnings will also be under pressure as most of them had classified only 50 per cent of the RBI identified accounts as NPA. Out of 40 listed banks that have declared their third quarter results so far, 10 banks had gross non-performing loan is in excess of 8 per cent, while 22 banks had NPA in excess of 5 per cent. The total loss reported by banks in the third quarter is to the tune of Rs.10,000 crore.

Mr Parekh pointed out that while the government has tried to bring in reforms in public sector banks, though not much of an impact has played out till now. He warned that recapitalization is not a long term solution.

“Will just recapitalising the banks solve the problem? This effectively means it is the taxpayers that are bailing out the banks,” he said. “And every government has considered it political hara-kiri to even consider divesting their stake to below 51%.” The solution to the NPA problem, according to Mr Parekh is that, the mindset of the policy makers that needs to be changed.

He said the government should freely allow the right talent to come in to run PSU banks and where prospective new investors bringing in capital, should be given a role in running those banks.

He also highlighted the need for a Bankruptcy Code becomes which can ensure that large business houses are no longer able to take the banking system for a ride.

Leave a Reply

Your email address will not be published. Required fields are marked *