Reserve Bank of India Governor Raghuram Rajan said on Tuesday he expects bad debt-burdened banks to clean up their balance sheets by March 2017, warning the central bank would monitor whether concessions made to lenders were being misused.
India's banks are struggling under $100 billion of stressed loans, choking the financial system at a time when the economy needs fresh investment to galvanise growth. Bank loans are a key source of financing for the bulk of Indian firms.
Despite a string of central bank initiatives to help banks grapple with the bad debts, lenders have yet to make a dent on the pile, a burden shouldered mostly by India's state-owned lenders, which account for just over 70% of Indian banking assets. Most saw bad debts continue to rise in the last quarter.
"I want to put something like March 2017 on the table as when we hope that a full clean-up will have been done," Rajan told reporters following the RBI's December monetary policy statement.
Rajan warned on Tuesday that banks should take advantage of concessions like 5/25, a provision which allows banks to refinance loans for infrastructure for up to 25 years, and the strategic debt restructuring scheme, which allows debt-for-equity swaps.
But they should correctly classify debt - rather than delay recognising a stressed loan - and not abuse the system.
"We can now be a little more careful about recognition... Next step is to make sure that what should be classified as A is classified as A and not B," he said.
"We are ... looking at how some of these existing facilities are being used, to make sure ... we are not kicking the can down the road."
Rajan gave few details on the much-needed but ambitious clean-up, which would involve some of India's largest and most troubled firms, largely in sectors hit by the commodities downturn, including steel, mining and power.
"It's a reasonably tall task," said Ananda Bhoumik, managing director and chief analytical officer at Fitch's Indian affiliate, India Ratings & Research.
Bhoumik said state-run banks would need more capital from the government to increase provisions for bad loans.
"I think what we are all expecting is a favourable tailwind of the economy and cashflows in corporates. But the fact remains the level of leverage is really very high."
