'Deep Surgery', Not 'Band Aids', Needed to Clean Up Bad Loans: Raghuram Rajan

Reserve Bank Governor Raghuram Rajan on Thursday said that strong action is needed to clean up the bad loan problem that has dogged India's banking sector for years.

Speaking at a banking conclave in Mumbai, Dr Rajan said, "An alternative approach is to try to put the stressed project back on track rather than simply applying band aids. This may require deep surgery. Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned."

Analysts say the "deep surgery" Dr Rajan talked about today is already in play. Over the last few days, a string of state-run lenders have reported huge losses following Dr Rajan's orders to treat some stressed borrowers as non-performing even if they have not defaulted yet.

State Bank of India - the country's biggest lender - reported a 62 per cent fall in net profit for its December quarter on account of higher provisioning for bad loans, while Bank of India, the country's third largest lender by assets, reported a Q3 loss of Rs 1,506 crore on rising bad loans.

Investors are dumping shares of state-run banks, which account for close to 90 per cent of the banking sector's troubled assets of nearly $100 billion.

"The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health," Dr Rajan said.

Explaining why he choose the current period of global market turmoil for cleaning up banks' balance sheets, the governor said, "The stressed balance sheet of public sector banks is occupying management attention and holding them back, and the only way for them to supply the economy's need for credit, which is essential for higher economic growth, is to clean up."

The RBI has asked banks to cleanup bank balance sheets by March 2017. Dr Rajan said central bank and government efforts to clean up banks' balance sheets would be successful, and warned analysts against "scare-mongering" about the level of stressed assets in the sector.

"There are some wild claims being made by some financial analysts about the size of the stressed asset problem. This verges on scare-mongering," he added.