The Telegraph
Saturday , April 5 , 2014
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Rajan talks tough on NPAs

Rajan: Strict stance

Mumbai, April 4: Reserve Bank of India (RBI) governor Raghuram Rajan today came down heavily on banks that seek relaxations to deal with the burden of sticky assets.

Rajan said the central bank would not give in to such requests and asked the lenders to focus on turning around the stressed asset.

Speaking to reporters on the sidelines of the annual convocation of the RBI-run National Institute of Bank Management in Pune today, Rajan said the RBI had received representations from banks for regulatory “forbearance” in cases of bad assets. The requests were largely to delay recognising certain loans as bad assets.

Asking banks not to resort to such “artificial fixes’’, Rajan said the best way out was to make sure that the asset turned viable.

“Let’s not try to find artificial fixes. Let us go about fixing it the right way. Postponing recognition will not help. If it is not paid today, it won’t get paid tomorrow,” Rajan said.

With the economy going through a slowdown, banks have seen a sharp rise in bad loans over the last couple of years. A recent Assocham study forecast that gross non-performing assets (NPAs) of the banking system could touch 5 per cent of total loans by March this year.

However, the lenders have managed to recast Rs 1 trillion worth of loans, taking the overall corporate debt restructuring loan book to around Rs 4 trillion.

Rajan has made the tackling of NPAs one of his top priorities since taking over as the governor last September. The RBI has put in place a framework that will incentivise early identification of problem cases and timely restructuring of accounts that are considered to be viable.

“Borrowing at 6 per cent and lending at 8 per cent to 10 per cent, net interest margins (NIMs) of 3-4 per cent is easy, but when bad loans start hitting you have to clean up the balance sheets. In fact you have to rise to the task. You have to clean up balance sheets, you have to clean up expenses and bring down costs. That’s the way to do it,” Rajan said.

The RBI governor added that rather than seeking special concessions, banks should focus on getting an asset back on stream through interventions on the payments and management sides or by finding an alternative use for the asset.

Rajan also defended the decision to hand out banking licences to only two entities and said some of those who could not make the cut would be better placed to serve as differentiated banks.