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Last Updated : Feb 18, 2016 09:19 AM IST | Source: Moneycontrol.com

Deepak Parekh cautions RBI against too-painful NPA cleanup

With the Reserve Bank of India (RBI) having made a clean-up of the country's banks a priority, veteran banker Deepak Parekh feels that the "sledgehammer" approach adopted by the central bank may be too painful for banks to withstand.


Moneycontrol Bureau

With the Reserve Bank of India (RBI) having made a clean-up of the country's banks a priority, veteran banker Deepak Parekh feels that the "sledgehammer" approach adopted by the central bank may be too painful for banks to withstand.


In an address, Parekh said he agreed with the RBI's assessment that a "deep surgery" was required to fix banks' non-performing assets (NPA) problem but added that the anaesthesia being prescribed -- in the form of NPA recognition -- should not be so strong as to make the "patient comatose".


Parekh, chairman of country's largest housing finance company HDFC, made the comments while delivering a keynote address at the Indian Merchant Chamber's Pravinchandra V Gandhi Chair in Banking and Finance at the Mumbai University.

It must be pointed out that HDFC and HDFC Bank are among institutions least impacted by the NPA crisis, even by private sector bank standards.

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"The RBI has clearly articulated that band aid solutions no longer work and that deep surgery is needed. I agree. The RBI went on further to state that the recognition of NPAs was the anesthetic needed for the surgery," Parekh said. "While I absolutely do not wish to second guess the regulators and I do not at all doubt their competence in assessment of the situation, I only wish to caution that too much of anesthesia can also result in a patient becoming comatose."


The banker was referring to the result of the asset quality review (AQR) that the RBI has undertaken in which it has asked banks to identify NPAs more strictly and recognize them over two quarters, October-December 2015 and January-March 2016.


The Raghuram Rajan-led central bank's AQR was prompted by the drawing out of the NPA problem that has afflicted Indian lenders, chiefly those in the public sector, and for which the RBI has prescribed a painful course of action.


The results were indeed painful: over the third quarter, profits of 39 listed banks fell 98.24 percent quarter-on-quarter to Rs 306.7 crore, provisions surged by 90 percent to Rs 49,016 crore while gross NPAs surged 29 percent to Rs 4.37 lakh crore, according to a Mint report. The outcome is worse if only state-run banks are taken into consideration.


But Parekh cautioned that banks, whose shares have taken a hammering since the results started coming out, may not be able to withstand another quarter of pain.


"We need transparency in accounting for NPAs, but surely the objective of the clean-up is to fix the financial rot, not to incapacitate banks," Parekh said. "The banking sector cannot afford another quarter like the one just gone by, but banks have already warned that the next quarter may also look dismal. In just 40 days, listed banks have lost more than Rs 1.80 lakh crore in their market cap."


He gave the government some credit for rolling out some reforms for public sector banks, the impact of which he said was yet to play out but he added that the options such as recapitalization, creating a bad bank, consolidation, stake sale or privatization not feasible or not enough at this point.


Further, he called for a change in mindset with respect to how state-run banks operate where:


- The government freely allows the right talent to come in to run PSU banks;


- Where prospective new investors bringing in capital are given a role in running those banks;


- Where there are no diktats by those in power on who banks lend to; and


- When the bankruptcy code becomes a reality which ensures that large business houses are no longer able to take the banking system for a ride. 



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First Published on Feb 17, 2016 08:00 pm
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