Stressing that cleaner balancesheets will lead to future loan growth for banks, RBI chief Raghuram Rajan today said a "deep surgery" is must for the clean-up that would require an "anaesthetic" in the form of recognising NPAs on their books.
Seeking to soothe the nerves of the banks hit hard by the RBI's diktat to clean up their books by March 2017, the Reserve Bank Governor also said there won't be a repeat of the asset quality review (AQR) that has hit the banks' bottomlines -- which incidentally has resulted in a steep stock fall and a huge erosion of investors' wealth.
"We do not envisage a sequence of the AQRs," Rajan told bankers at a conference organised by industry body CII here this evening.
Using a medical jargon to impress upon the need for such a review, Rajan said a "deep surgery" is needed to clean up and the process of recognising the NPA is akin to an "anaesthetic" needed for the procedure.
Acknowledging that the AQR, under which the RBI has asked banks to recognise some top defaulting accounts as non-performing ones and provide for them, has had a debilitating impact on banks' numbers and their stocks, Rajan admitted that the earnings of state-run banks do not look "pretty".
While the Sensex has lost a little over 6 per cent since mid-January 15 when banks started declaring Q3 numbers, the sectoral BSE Bankex plunged close to 8 per cent during the same period.
If the fall continues, the market capitalisation of mid-sized private sector bank Kotak Mahindra will be soon be higher than that of the largest public sector bank SBI. Kotak Mahindra Bank today closed the day with a market cap of Rs 115,296.24 crore, while that of SBI was Rs 117,375.5 crore.
The RBI embarked on the AQR exercise from last April and while it had concerns on the world economy, it did not know of the markets getting into turmoil as they have now, he said, defending the move to undertake the AQR.
"We knew at that time that the global economy would continue to be weak but not that markets would be in turmoil as of today. Nevertheless, this simply reinforces our belief that we needed to act when we have to," Rajan said.
Almost all the major lenders in the system have reported a sharp increase in asset quality stress and heightened provisioning as a result of the AQR, under which banks have been reportedly asked to recognise stressed accounts by March end.
Critics say this will result in deserving sections of the economy being deprived of the much needed credit in a situation like the current one filled with economic gloom.
"While the profitability of some banks may be impaired in the short-run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way," Rajan added.