Working with govt, banks to recognise stressed assets: RBI

Says move is being done to ensure true and fair picture of lender's balance sheets

In an attempt to further control the rise of bad loans in the banking system, the Reserve Bank of India (RBI) has said it is working with the government and banks so that stressed assets are recognised on a proactive basis. This is to ensure a bank’s balance sheet reflects a true and fair picture and is adequately provisioned.

“It is important to know that provisioning prepares banks for possible loan loss, but if the loss doesn’t materialise then it can be written back to profit. We mapped out various possible scenarios to determine the extent of likely stress and believe they are all manageable,” Governor Raghuram Rajan said.

RBI has carried out a systemic review of several banks and has asked them to recognise certain assets as non-performing assets (NPAs) on their books. But, Rajan clarified the central bank hadn’t directed lenders on what steps needed to be taken. “We have discussed with them a range of accounts. And now the ball is in the banks’ court to move forward. Our only role is to make sure the process is uniform and essentially ensures that over a period of time bank balance sheets are fully provisioned as well as the assets that could go bad are recognised and classified as such,” he said.

However, he also added that the stressed assets should not immediately be treated as total write-offs. “Some of these cases need changes in conditions, terms, perhaps changes in promoters and could very well repay a fair amount of value in time,” he said. RBI is also looking at tightening the norms around the Joint Lenders’ Forum and strategic debt reconstruction. This comes after both norms were criticised by banks and experts said they lacked transparency and needed to be tightened to ensure efficiency.

RBI said after the clean-up exercise and increased provisioning, banks would be in a position to manage stress. This is because the finance ministry has promised to pump in Rs 25,000 crore each in FY16 and FY17 and Rs 10,000 crore each in FY18 and FY19 into public sector banks (PSBs).

The government estimates PSBs would require Rs 1.8 lakh crore over the next four years. The balance Rs 1.1 lakh crore would have to be raised from the market. Apart from this, RBI is also looking at norms which can help in unlocking some more capital from banks’ balance sheets. “RBI is also working on identifying non-recognisable capital already on banks’ balance sheet such as undervalued assets. RBI could allow some of this to count as capital according to Basel-III norms, provided the bank meets minimum common equity standards…,” Rajan said.