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.

Spurt in vegetable prices next month may be spoiler for inflation, warns RBI

 

 Inflation, excluding food and fuel, declined for the second consecutive month in December.

Seasonal spurt in vegetable prices next month could partly reverse the benefits of low global oil prices reducing inflation and increasing disposable incomes, the Reserve Bank of India (RBI) warned on Tuesday.

“The sharp reduction in oil prices as well as in inflation is likely to increase personal disposable incomes and improve domestic demand conditions in the year ahead,” the central bank said in its monetary policy document.

Inflation, excluding food and fuel, declined for the second consecutive month in December. This was largely on account of the declining prices of transport and communication since August, reflecting the impact of plummeting global crude oil prices, and softer commodity prices more generally.

“However, seasonal increases in vegetable prices, which typically set in around March, have to be monitored carefully,” the RBI said, adding that the retail inflation is likely to be around the target level of 6 per cent by January 2016.

The upside risks to inflation stem from the unlikely possibility of significant fiscal slippage, uncertainty on the spatial and temporal distribution of the monsoon as also the low probability but highly influential risks of reversal of crude prices due to geo-political events, it said.

Referring to economic activities, it said the revision in the base year for GDP and calculation methods will mean some revision in GDP numbers for 2014-15 as well as in forecasts.

However, RBI has retained the baseline projection for growth (using the old GDP base) at 5.5 per cent for 2014-15 and 6.5 per cent for next fiscal.

RBI said advance indicators of industrial activity, like indirect tax collections and expansion in order books point to a modest improvement in the months ahead.

“Policy initiatives in land acquisition, as well as efforts underway to unlock mining activity and to widen the space for FDI in defence, insurance and railways, should create a more conducive setting for industrial revival,” it said.

Faster clearances are also helping in resuscitating stalled projects and the “improvement in business confidence” is visible in a pick-up in new investment intentions, especially in transportation, power and manufacturing.

Overall, the RBI added that the growth prospects will be contingent upon a turnaround in investment and a durable improvement in the business climate to complement the upsurge in business optimism.