The fall in bank shares can partly be attributed to the recent volatility and turmoil seen in the markets, said Reserve Bank governor Raghuram Rajan, while speaking at the CII conference. But the other half of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty, he added. This perhaps is on the back of the Asset Quality Review (AQR) conducted by the Reserve Bank, Rajan said.
The Bank Nifty on Thursday was down nearly 560 points or 3.8 percent to close at 14028.5 on a day when the Sensex shed 807 points to close at 22,952 and the Nifty tumbled 239 points to end at 6976. Both indices lost over 3 percent each.
While explaining the rationale behind the AQR, Rajan said a number of large projects in the economy have run into difficulty, resulting in loans to these project turning stressed, adding that the RBI started AQR to ensure that banks were taking proactive steps to clean up their balance sheets.
"For the loans that are of concern, the banks are attempting to regularize the loans that can be put back on track, and are classifying those that cannot for deeper surgery – and taking provisions in accordance with the degree of stress in the loan. They will also make provisions for loans that have weaknesses. Our intent is to have clean and fully provisioned bank balance sheets by March 2017," he said at the CII conference.
Furthermore, Rajan said the government too has indicated that it will support public sector banks. "Finance Minister Arun Jaitley has indicated he will support the public sector banks with capital infusions as needed. Our estimate is that the government support that has been indicated will suffice."
Talking about the size of the stressed asset problem, he said: "Our projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalization, will be small. They will need government equity or preference share infusion since they are typically banks that will find it difficult to raise equity in the markets." The governor also added that a few others will need a top up of their capital to ensure they have a reasonable buffer over and above minimum capital. He further went on to say that the RBI does not foresee any liquidity stress.
He also praised the government by saying that through the Indradhanush initiative, it has sent a clear signal that it wants to make sure that public sector banks, once healthy, stay healthy.
He signed off by saying that while 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.