Gold Silver Reports — India’s under-capitalized lenders should be restricted from expanding deposits and loans to help revive the banking sector burdened by increasing bad loans, a deputy governor at the nation’s central bank said.
“Under-capitalized banks could be shown some tough love and be subjected to corrective action” Reserve Bank of India Deputy Governor Viral Acharya said in a speech to bankers in Mumbai on Tuesday. “Such action should entail no further growth in deposit base and lending. We must not allocate capital so poorly, recreate ‘heads I win, tails the taxpayer loses’ incentives, and sow the seeds of another lending excess.”
Ridding banks’ balance sheets of bad loans is crucial to reviving credit growth in Asia’s third-largest economy that’s slowing after an unprecedented clampdown on cash. India’s state-run banks are cash strapped as rising bad loans has led to larger provisioning for soured debt. Gross bad loans of public-sector lenders amounted to 11.8 percent of total loans as of Sept. 30, more than double the level of private-sector peers, central bank data show.
The government may cut the amount of capital it plans to inject into the country’s state-controlled lenders this fiscal year by as much as 78 billion rupees ($1.2 billion) because of slow loan growth, people with knowledge of the matter said. A part of the proposed capital infusion may be carried forward to next financial year, a finance ministry official told reporters on Monday.
The RBI deputy governor said it’s not clear if so many public sector banks were needed and the system will be better off if they are consolidated into fewer but healthier banks.
“Some banks can be merged, as a quid pro quo for timely government capital injection into the combined entity,” Acharya said. “It would offer the opportunity to rejig management responsibility away from those who have under-performed or dragged their feet the most.”
Acharya said the government should divest from state-run lenders and proposed setting up a private asset management company for solving bad debts and a national asset management company for taking over inviable assets.