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RBI unlikely to dictate banks’ haircuts on bad loans: S&P

LiveMint logoLiveMint 30-05-2017 Alekh Archana

Mumbai: The Reserve Bank of India (RBI) is unlikely to step in and dictate the loan amounts banks must sacrifice in the process of resolving bad loans, S&P Global Ratings said.

On 5 May, the government moved an ordinance empowering RBI to intervene directly in stressed asset cases.

Resolving stressed loans will involve banks taking so-called haircuts, or sacrificing a part of the principal and interest payments due to them. The available pool of capital, especially with public sector banks, to absorb stressed loans remained thin as of the end of March, S&P said in a report.

S&P also pointed out that the ordinance and the other measures announced by RBI and the government fail to address the structural issue of lack of capital, which restricts the ability of state-owned banks to write down non-performing assets to more accurate levels.

The rating agency estimates total stressed loans, gross bad loans and restructured assets in the banking sector will increase to 13-15% by end of March 2018, from 12.3% reported on 30 September 2016.

“India’s public sector banks, which dominate the industry, will account for most of this weakness,” said S&P Global Ratings credit analyst Deepali Seth Chhabria.

Public sector banks accounted for 89% of the Indian banking industry’s Rs7.7 trillion gross bad loans at the end of March.

S&P said the shortfall in capital coupled with asset quality issue could pave the way for consolidation among the government-owned banks.

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