MUMBAI (Reuters) - India’s central bank will keep reviewing the asset quality at commercial lenders this financial year, Deputy Governor R. Gandhi said on Tuesday, as part of “a continuous process” intended to avoid an increase of distressed debt in the sector.
In late 2015, the Reserve Bank of India announced a more formal and comprehensive process of reviewing asset quality at lenders for the financial year that ended in March 2016.
Gandhi said reviewing asset quality would continue this financial year though he did not specify whether it would be under the same process carried out in the last one.
Previously, the RBI used a more fragmented approach to review asset quality at different lenders, with the processes taking place throughout the year.
“It is not that we will not assess the quality of the assets of the banks hereafter,” Gandhi told Reuters in an interview as part of the Reuters Financial Regulation Summit in Mumbai.
Reviewing asset quality “is a permanent process of supervisory action,” he said.
According to the RBI, the total of stressed assets held by Indian banks at the end of 2015 was around 8 trillion rupees ($120 billion), constraining their ability to lend at a time when economic growth has slowed below a recent trend of 8 percent.
Given banks’ aversion to take risk following the surge in bad loans, the RBI will not compel them to lend, Gandhi said.
Recognizing the extent of bad assets in the banking sector and cleaning up banks’ balance sheets has become a priority for RBI Governor Raghuram Rajan.
The asset quality review program carried out last financial year led lenders to increase their provisioning against potential bad assets, causing many banks to incur losses, though the RBI saw that as a necessary step to clean up the sector.
Gandhi said that after banks’ balance sheets are cleaned up, the RBI’s focus will be on scaling up credit and deposit growth.
“Given that last year’s deposit and credit growth were low, in the coming year it has to scale up. That will be one of the focuses, definitely,” he said.
India’s annual loan growth slumped to a near-decade low of 10.7 percent in 2015/16 as investments slowed sharply while deposit growth was the slowest in more than 50 years, at 9.7 percent.
Gandhi said he was hopeful that investors will be interested in picking up equity stakes in cleaned-up lenders, helping the sector achieve Basel III capital requirements.
“Once the banks would clean up their balance sheets completely, then the market will have greater confidence,” he said.
The Indian government has estimated that state-run banks will need 1.8 trillion rupees by March 2019 to meet Basel III norms, of which 700 billion rupees will be injected by the government, and the remainder raised from markets.
($1 = 66.8200 Indian rupees)
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Reporting by Suvashree Dey Choudhury and Devidutta Tripathy; Editing by Rafael Nam and Richard Borsuk