The chairman of India’s largest bank has called on the central bank to allow lenders more time to make provisions for loans sold at a discount, arguing that this would help to speed up the resolution of non-performing assets that are weighing on the sector.
As concerns mount about the hefty stock of bad loans, particularly at India’s dominant state-owned lenders, the Reserve Bank of India has encouraged them to clean up their balance sheets by selling the assets to private investors.
But Arundhati Bhattacharya, chairman of State Bank of India, said weaker lenders had been deterred from doing so by the regulatory requirement that they must immediately book provisions reflecting the discount at which the sale was made, dealing an immediate hit to their strained capital reserves.
“If that is relaxed to some extent, in the sense that you allow the provisions to be taken over a longer period of time, then these deadlocks can be broken . . . that is something that definitely the regulator could look at,” she told the Financial Times, suggesting that the provisions could be staggered over up to 24 months.
Banks’ retained earnings during this period would cushion the impact of the provisions on their capital, she said, while stressing that SBI itself was adequately capitalised.
Non-performing loans at the state lenders, which account for more than two-thirds of Indian bank assets, have risen inexorably in recent years, reaching 11.6 per cent of aggregate loans in March, according to Credit Suisse. The problem, which follows a rash of defaults in sectors such as power, roads and steel, has fuelled concerns about banks’ ability to fund new corporate investment, which fell for three out of four quarters last year.
One former RBI official criticised Mrs Bhattacharya’s suggestion, saying it would amount to “window-dressing” of the problem. “Doing it over 24 months or 14 years will not help . . . The real problem is that they don’t have capital,” the person said.
Calls for the government to set up a “bad bank” that would acquire and manage lenders’ troubled assets have grown louder. Critics have warned that the government could be accused of favouring corporations whose loans are written down.
While she said it would take considerable time to implement, Mrs Bhattacharya said a bad bank could be in the national interest.
“While these assets are privately held, there is a lot of public money in there as well, through the aegis of the banks,” she said. “We are not a resource-rich nation, so having created some very good assets, I think its in the national interest to ensure they are made productive.”
SBI has arrested the growth in its bad loan ratio in the three months ending in March, but the ratio rose sharply at five subsidiary banks, which it is in the process of absorbing after agreeing a mass merger last year.
Mrs Bhattacharya said this reflected a “cleansing” of the balance sheets at these banks as part of the merger, and that further rises in their reported bad loans should not be expected.
While SBI itself was now too big to pursue further consolidation, she said the government should consider pushing mergers among the 21 other state-owned banks, some of which have bad loan ratios above 20 per cent.
“We’re already 25 per cent of the market. I don’t think it makes sense for one unit to keep growing larger and larger,” she said. “But I think it would be good if we had four or five large banks — that’s something we’ve seen work in other countries like Australia and China, where the presence of a few large banks has stabilised the economy and encouraged good risk management practices.”