Indian central bank Deputy Governor Viral Acharya said injecting new funds into lenders won’t resolve the nation’s stressed asset plight until companies take steps to reduce debt.

The Reserve Bank of India is seeking to strengthen the banking system through measures including merging weaker banks and pushing to privatize some state-run lenders as it ramps up efforts to resolve the world’s highest stressed-asset ratios. Banks would be happy to lend but there is no demand from corporates as they are heavily indebted, he said in a speech in Kolkata on Friday.

Cleaning up bank balance sheets is key to reviving credit growth and furthering Prime Minister Narendra Modi’s goal of creating more jobs in the $2 trillion economy. Various programs proposed by the Reserve Bank of India to solve the problem have been unsuccessful, with lenders reluctant to write down assets sufficiently and company owners unwilling to negotiate repayment plans.

“If you fix the banks by simply putting capital into them or you simply provision better at the banks so that they get restoration of their lending capacity, that by itself is not going to create credit,” Acharya said. “You need to fix the underlying corporations because there might be excess capacity that you have to clear before you can see pick up in demand.”

Earlier this month, the government amended the Banking Regulation Act to enable the RBI to order lenders to initiate insolvency proceedings against defaulters and to create committees to advise banks on recovering non-performing loans. Stressed assets have reached “unacceptably high levels” requiring urgent measures to resolve them, according to a statement on the Gazette of India website.

Under Restriction

Stressed assets -- which include bad loans, restructured debt and advances to companies that can’t meet servicing requirements -- have risen to about 17 percent of total loans, the highest level among major economies, data compiled by the government shows.

In the past two weeks the central bank has put two banks under restrictions so that they can bring down their non-performing loans. IDBI Bank and Kolkata-based UCO Bank have been put under a regime that may reduce their ability to lend or distribute dividends.

In earlier speeches, Acharya, who took over as deputy governor in January, said it’s not clear if the country needed so many state-run banks and whether the sector will be better off if they were consolidated into fewer healthier banks.

He also said some state-run banks which were struggling could be privatized with the government divesting its stake. Some banks can be merged, as a quid pro quo for timely government capital injection into the combined entity, he said.

Source:
courtesy of BLOOMBERG

by Pradipta Mukherjee and Anirban Nag

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