Loan recast: Raghuram Rajan spurns bankers call for extension

Virtually rejecting the demand for extending the loan restructuring window beyond April 1, 2015, the Reserve Bank of India Governor Raghuram Rajan on Tuesday said the practice of forbearance should end to increase investor confidence in banks’ balance sheets.

“To build the confidence in banks’ balance sheets, we have to come to an end of forbearance. We have to put banks on the right track,” Mr. Rajan told reporters at the customary post-policy interaction, when asked if the RBI is considering to extend the deadline.

“I do not think the answer is to pretend and extend or extend and pretend, it is ‘to call a spade a spade’,” said the academic-turned-author-turned central banker.

The RBI in May last year announced that from April 1, there would be not any room to restructure loans and that banks would have to treat any recast loan as a bad asset and make mandated provisions.

Fearing a hit on their balance sheets — banks have to provide more for a bad asset compared to a restructured loan — lenders have been requesting for an extension in the deadline citing weak macro-economy and the resultant stress in corporates’ clash-flows leading to defaults.

Mr. Rajan said better investor confidence in balance sheets would help banks raise the much-required capital, especially given that the system is migrating to the capital-intensive Basel-III system under which they need over Rs. 5.3 trillion in additional capital.

The Governor further said that RBI had given “enormous amounts of new flexibility” for the banks to put projects back on track.

“Do what is needed, including making new loans if necessary, to complete a project but move on beyond that,” Mr. Rajan told the banks.

The restructured assets in the system had increased to 6.2 per cent as of September 2014, against 5.9 per cent in March 2014, according to the RBI’s financial stability report. The State-run banks are the worst performing ones on the asset quality. The overall stressed assets — NPAs and CDR loans — are over 10.5 per cent as of the September quarter.

Already, some lenders such as Axis Bank and Federal Bank had said they would see a spike in restructuring during the last quarter as the window comes to a close.