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Clean-up of Balance Sheets necessary to improve health of Indian banking sector: Dr Raghuram Rajan at CII Banking Summit

CII Submits its Recommendations to RBI Governor for Development of Indian Banking Sector



11 February 2016 ; Mumbai


Sharing RBI’s plan of having clear and fully provisioned balance sheets of banks by March 2017, Dr Raghuram Rajan, Governor, RBI stated that the growth in Indian banking sector will not emerge to the full extent unless the clean-up of bank balance sheets is effectively completed.


Speaking at the Banking Summit organized by the Confederation of Indian Industry (CII) in Mumbai, Dr Rajan said that the Asset Quality Review (AQR) initiated by the RBI was necessary to put in place a mechanism for improving the health of the Indian banking system. Expressing his confidence on Indian banks emerging stronger from the AQR process, the RBI Governor said that India needs much healthier banks to strengthen and support higher economic growth.


Dr Rajan further stated that due to higher levels of NPAs and provisioning in Public Sector Banks (PSBs) vis-à-vis the Private Banks, PSBs have curtailed lending leading to more than 10 percentage points difference in growth (compared to Private Banks) in Non-Food Bank Credit as well as to the Agriculture & allied sector and the credit to industry sectors. The RBI Governor was confident that the Indian banking system will tide over the NPAs problem by bringing more effectiveness in the Joint Lenders Forum (JLF) mechanism, Strategic Debt Restructuring (SDR) and 5/25 scheme as well as enactment of the Bankruptcy Law and sufficient capital infusion in PSBs by the Government.


Also addressing the Summit earlier in the day, Mr S S Mundra, Deputy Governor, RBI said that the impaired assets in the banking system (Gross NPAs added with restructured and write-off assets) has risen sharply to 17.0 per cent as at the end of Q2 FY 2015-16. However, the problem was not uniform across public sector banks (17 per cent), private banks (6.7 per cent) and foreign banks (5.8 banks) as well as across sectors. He further stated it was contrary to popular perception that medium scale industry represented the highest levels of stressed assets as against the large scale industry.


Mr Mundra added that bank lending for infrastructure projects, particularly the roads and power sector has created significant stress on the NPAs front. Issues related to high leverage, cost escalations and concerns owing to fuel supply agreements and power purchase agreements have led to a situation for project developers to shift from value sale to distressed sale. To address further deterioration in NPAs level, Mr Mundra prescribed that it is critical for banks to acknowledge the problem and balance should be shifted from borrowers to lenders.


Ms Shikha Sharma, Chairperson, CII National Committee on Banking and Managing Director & CEO, Axis Bank said that “the banking sector in India is witnessing a major evolution with technology and innovation rapidly altering the existing landscape. As markets become more competitive and volatile, commercial success will depend on the ability to operate and scale up in an uncertain environment. Managing risk will become increasingly important.”

Speaking on the launch of the CII Banking Summit, Mr Chandrajit Banerjee, Director General, CII said “There are several challenges to the banking sector at the current complex juncture. Bank NPAs are of high concern to the economy as they constrict lending for new projects. CII is confident that with the Government and the RBI working together on this critical agenda in a well targeted manner, positive results will be evident in the short – medium term”.


Mr Banerjee further stated that CII has recommended a special National Asset Management Company (NAMCO) that can take toxic assets off bank balance sheets. Among other areas, recapitalization, embracing competition with new universal and diversified banks, improving customer service and technology infusion are continued imperatives for banks, added Mr Banerjee.


CII recommendations on three focused areas: (1) Asset Resolution and Managing NPAs, (2) Regulations and Policy, and (3) Market Development and Need for Capital were presented to the RBI Governor at the Summit.


On Asset Resolution and Managing NPAs, the key CII recommendations included enabling special situations fund in National Investment & Infrastructure Fund to resolve large NPAs, enhancing effectiveness of Joint Lenders Forum, early passage of the bankruptcy law and establishment of processes to ensure timely identification and resolution of stressed assets.


Recommendations on Regulations & Policy were made with the focus on accelerating pace of digital transformation for banks. CII recommended steps to promote digitization and less-cash economy along with measures to facilitate financial inclusion.


For Market Development and Need for Capital, CII recommended to create a facilitative environment for promoting the green bond market, municipal bonds and the INR bonds / Masala bonds to support the bank recapitalization plan.


CII took a lead in organizing its first Banking Summit with a focused programme that culminated in to specific recommendations for the Regulator to take cognizance of the concerns of the banking sector to move forward on the development agenda.


About the Author

Sachin Murdeshwar
Sachin Murdeshwar is a Sr.Journalist and Columnist in several Mainline Newspapers and Portals.He is an ardent traveller and likes to explore destinations to the core.