Rajan says RBI working to clean up lenders' balance sheets

The government plans to inject a total Rs 70,000 crore into the lenders over four years

Reserve Bank of India Governor Raghuram Rajan said on Friday the RBI is working to ensure that commercial lenders are dealing with their stressed assets on a "proactive" basis and are provisioning for them "adequately".

India's banking sector, dominated by two-dozen state-run lenders, is suffering from its highest stressed-assets ratio in 13 years as an economic slowdown hit company earnings, exposing the sector's history of profligate lending.

The RBI is "working with the government and banks to ensure that the stressed assets are dealt with on a proactive basis, and that bank balance sheets both reflect a true and fair picture, and are adequately provisioned," Rajan said in a speech to a research body on Friday.

Rajan had in December said he expected banks to clean up their balance sheets by March 2017. The RBI has since identified some troubled loan accounts and asked lenders to treat those as non-performing even if the borrowers have yet to default.

The RBI Governor on Friday added the government's current plans to inject funds into banks "will suffice, especially when coupled with other capital sources that are usually available to banks".

The government plans to inject a total Rs 70,000 crore ($10.32 billion) into the lenders over four years, to help the sector met new Basel III capital requirements by March 2019.

The regulator is also working on identifying undervalued assets and other types of capital that may not be reflected on banks' balance sheets, Rajan added, and could allow some of these to count as capital for Basel requirements under certain provisions.

Rajan added it was "premature" to talk of bank mergers given bank managements are preoccupied with dealing with stressed assets, but he pondered whether it was worth allowing state-run banks to bring in skilled financial firms as strategic investors holding 10 or 15 percent stakes.