As India awaits a new leader to takeover Reserve Bank of India governor Raghuram Rajan's place, critics say the next central bank chief will have a lot on his hands, including the task of completing a bank clean up. Rajan has been praised for his efforts to tackle bad debt that maims India's financial system, however, critics say an excessive focus on asset quality has scared banks out of lending and is partly to blame for credit growth slumping to a near two-decade low.
"The bad thing is that funding by banks has almost stopped. There's too much negativity. The government may not want it to precipitate more," said a senior banker. Officials also said the government has narrowed down to four candidates likely to replace Rajan. The former International Monetary Fund chief economist, has often spoken out against India's "crony capitalism", which has witnessed banks endlessly rolling over dud loans to companies, and insisted lenders fully reveal the extent of bad assets and undertake "deep surgery" to deal with them by March 2017.
Rajan had recently stunned the world by denouncing a second term as the RBI chief. His term as governor has been considerably fruitful to the Indian economy. As the clean-up has taken hold, loan growth slipped to 10.7 per cent in the last fiscal year to the end of March, the slowest in almost 20 years. The risk is that clamping down too hard on lending crimps economic growth, stoking a vicious cycle of more defaults and lower business investment and production.
Finance Minister Arun Jaitley said in a recent interview that banks should strike a balance between expanding credit and cutting non-performing assets, warning them not to stop lending as a "panic reaction".
No agreement on haircuts
Moody's analyst Gene Fang said that pushing for growth before completing the clean-up of bad debts would strain banks' capital ratios. "Stimulating more loan growth now would only delay or derail corporate deleveraging," said Fang. Meanwhile, bankers say a shortage of well-capitalised funds specialising in buying bad loans, a sluggish legal system and an inability to decide on the size of "haircuts", or losses borne by creditors, have all slowed efforts to tackle the problem.
"To some extent a few things were quite harsh knowing very well that the economy is not doing very well," said another senior commercial banker, who declined to be named. "And you don't have those kinds of stressed assets funds, (and mechanisms) for banks to take haircuts and move ahead."
The RBI's debt-for-equity swap scheme, which allows banks to take temporary majority control in defaulting companies, has been seen as a failure, with banks struggling to find buyers for stakes they have taken in companies sitting on $15 billion worth of loans. A new scheme is not seen as a game changer. While central bank officials say there is no going back on the clean-up, a senior policymaker said the March 2017 deadline was not "cast in stone".
