Viral Acharya says 50% provision reasonable

Viral Acharya said banks used various restructuring schemes to delay provisions

Reserve Bank of India (RBI) Deputy Governor Viral Acharya said on Friday the level of provisioning mandated by the regulator for large stressed loans is appropriate and expressed hope that in a year or two, the central bank would get a handle on the bad asset situation in banks.
 
Acharya confirmed the central bank has asked banks to set aside 50 per cent provisions for accounts being resolved through the insolvency law, and termed the same as “very reasonable”.
 
“I think the provisions are very reasonable based on any historical recovery rates, even on secured debt typically earned in our system,” Acharya said on the sidelines of an event organised to launch former RBI governor Y V Reddy’s book Advice and Dissent: My Life in Public Service.

 

“I think it is better to actually mark the books ahead of time where 50 per cent is a very reasonable level of provisions. It’s also in line with the kind of haircut that you hear about in the industry and in the analysts’ reports,” Acharya said.
 
Acharya also criticised banks for not making provisions early enough. Like former RBI governor Raghuram Rajan, Acharya also said banks used various restructuring schemes to delay provisions.
 
“I think the important thing is that you have to work on the health of the banking system and their balance sheets in parallel with the underlying resolution. We have been back-loading the problems of provisioning, which has been the real problem,” adding schemes such as CDR and SDR had been primarily used to avoid provisioning for these assets, rather than resolving them. “In my opinion, going again the same way, again the third time, would not be appropriate,” Acharya said.

 
According to Acharya, India has “the right levels of macro-prudential stability”, but there are also some fronts where the country needs to fix the house. “We are in the midst of doing that so that we look stable in a very overall sense. We have made a good start and the Reserve Bank is pushing on with the efforts.”
 
One of the issues is resolution of bad debts. He said the central bank was working with the government on this and had taken steps. “More will follow and we hope that over the next year or two we can actually grapple with the problem in our full capacity,” Acharya said.

 
Earlier this month, an internal committee of the RBI identified 12 large accounts for insolvency proceedings and said 500 more accounts should be resolved within 6 months.
 
The 12 accounts alone is responsible for about Rs 2 lakh crore of bad debts in the system.