Reserve Bank Governor Raghuram Rajan on Thursday asked analysts to refrain from spreading panic about the magnitude of bad loans in the Indian banking sector. His warning comes at a time when investors have been dumping shares of state-run banks, leading to sharp erosion in shareholders' wealth.
"There are some wild claims being made by some financial analysts about the size of the stressed asset problem. This verges on scare-mongering," Dr Rajan told bankers at a Mumbai summit.
According to estimates, India's banking system is struggling under $100 billion (over Rs. 6.5 lakh crore) of stressed loans (including restructured loans). Through this week, a string of small state-run lenders have reported huge losses because of rising bad loans on their balance sheets. (Read)
Profitability of big banks is also under severe pressure. State Bank of India - the country's biggest lender by assets - reported a 62 per cent fall in Q3 profit, while Punjab National Bank's profit fell 93 per cent earlier this week. Both banks expect asset quality issues to hit profitability in the current March quarter too, which is worrying investors.
Unsurprisingly, banking shares bore the brunt of the selloff in markets. SBI shares are down nearly 25 per cent over the last one month, with most of the damage coming in last few days. Smaller lenders have crashed nearly 35 per cent in one month as compared to 9 per cent fall in broader Nifty.
"The recent decline in bank share prices has investors on the edge. Of course, part of the reason is that markets are in turmoil... However, part of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty," Dr Rajan said.
In a bid to calm investors, Dr Rajan said that only a "small minority" of public sector banks may breach minimum core capital requirements. The government's 'Indradhanush' plan, which aims to infuse Rs 70,000 crore in state-owned banks over four years, will be adequate to recapitalize banks, he added.
"What the government has already explicitly committed is, in our view, enough to take care of all reasonable scenarios... The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health," Dr Rajan said.
Market experts say domestic investors are overlooking the fact that India is not the only country where the banking sector in under stress. Most big banks in US and Europe are under severe pressure amid concerns about global growth.
Shares of Deutsche Bank - Germany's biggest - have slumped over 20 per cent in the last few weeks over payment concerns. Its competitor Credit Suisse earlier this week reported its first loss since the global financial crisis in 2008.
Shares of four of the biggest US banks - JPMorgan Chase, Bank of America, Citigroup and Wells Fargo - are down 15-30 per cent year-to-date.
"The only way to get out of this morass is to support the banks, handhold them and walk them out of crisis. Else, we fall into another global mayhem like 2008," said Dr Soumya Kanti Ghosh, chief economic adviser of State Bank of India.
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