India seen pressing ahead with bank clean-up despite Rajan exit

Sun Jun 19, 2016 7:51am EDT
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By Devidutta Tripathy and Neha Dasgupta

MUMBAI (Reuters) - India's move to clean up the books of its banks saddled with $120 billion of sour loans will be largely unaffected by the decision of central bank chief Raghuram Rajan to step down, say bankers and government officials.

As banks struggle with record levels of distressed assets, Rajan had set an ambitious March 2017 deadline for them to fully reveal the problem loans and make adequate provisions.

An unprecedented asset quality review of banks ordered by the central bank led to reported bad loans surging more than 70 percent in the six months to March.

Rajan's decision to bow out in September has, however, raised questions on the fate of a clean-up seen as crucial to reviving new lending to support a nascent recovery in Asia's third-largest economy.

Bankers and government officials told Reuters Rajan's successor may be less aggressive in fighting bad loans, but the general direction will remain the same.

"Having worked with eight (RBI) Governors, I have not seen any new incumbent turn an earlier policy, particularly relating to banks, on its head," said G. Padmanabhan, a former executive director at the RBI who currently chairs the board of third-biggest state-run lender, Bank of India BOI.NS.

"Second, and more important, this was not a one man decision and had the support of government as well," he said, although there could be some tweaks as the timeline was "aggressive" and banks' capital needs had to be factored in.

Shares in top lender State Bank of India (SBI.NS: Quote) have gained about 16 percent since it reported March-quarter earnings on May 27, on hopes that the worst was behind it in terms of bad loans. The second biggest state-run bank, Bank of Baroda (BOB.NS: Quote), is up about 12 percent during that period. Two dozen lenders majority-owned by the Indian government hold the bulk of the soured loans.   Continued...

Reserve Bank of India (RBI) Governor Raghuram Rajan attends a news conference after their bimonthly monetary policy review in Mumbai, India, June 7, 2016. REUTERS/Danish Siddiqui/File Photo