The banking sector cannot afford another quarter like the one ended in December, where they reported huge bad assets, incurred heavy provisions and reported losses, losing Rs 1.8 lakh crore market cap in the process, even as lenders warned that the fourth quarter would not be different, said Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC) on Wednesday.
Delivering a keynote lecture at Indian Merchant Chambers, he criticised Reserve Bank of India (RBI)'s asset quality review (AQR), which prodded banks to clean up their balance sheets, so that accounts look transparent by March 2017.
"While I absolutely do not wish to second guess regulators and I do not at all doubt their competence in assessment of the situation, I only wish to caution that too much of anaesthesia can also result in a patient becoming comatose!" said Parekh. He was alluding to RBI governor Raghuram Rajan's speech last week terming bad debt recognition as an anaesthetic needed for deep surgery (cleaning up balance sheets).
"Yes, we need transparency in accounting for NPAs (non-performing assets), but surely the objective of the clean-up is to fix the financial rot, not incapacitate banks," Parekh said, adding, "The banking sector cannot afford another quarter like the one just gone by."
Parekh agreed that a band-aid would no longer work and deep surgery was needed.
"…the quarter ended December 31, 2015 has been brutal for banks. Out of 40 listed banks that have declared third quarter results so far, 10 had gross NPLs (non-performing loans) in excess of eight per cent, while 22 had NPLs in excess of five per cent. Provisioning for banks has increased manifold with RBI coming in with a sledgehammer following its directives on the AQR."
According to Parekh, the NPA problem will persist till the government allows the right talent to come to run public sector (PSU) banks and allow new investors a role in running banks. There should not be any diktat on who banks can lend to and the bankruptcy code should become a reality, ensuring large business houses no longer take the banking system for a ride.
Just recpaitalising banks through taxpayers' money, or creating a bad bank that houses all bad debts will not solve the NPA problem, he said.
"Merging PSU banks to create few large banks is not feasible any longer," Parekh said, adding, with most PSU banks being valued at less than half or quarter of their values, tapping the market for raising capital is also not feasible.
India needs better infrastructure, faster regulatory approvals, less bureaucracy, increased allocations on social sectors like health and education, new job opportunities, improved ease of doing business, a less adversarial tax regime and focus on improving cities. "This is the standard ask of any investor coming to India," Parekh said, adding that even as investors temporarily pull out their money, they would return as India is the destination that has demand, growth potential and an ability to absorb large investments.