Too much anaesthesia can make banks comatose: Parekh to RBI

With RBI firm on need for 'deep surgery' to get bad loans out of the books of banks, noted banker Deepak Parekh today said warned that too much of "anaesthesia can result in a patient becoming comatose".
Referring to RBI's directive on asset quality review of banks and a March 2017 deadline to clean their balance sheets, the HDFC Chairman said he agrees with RBI's view that "band-aid solutions no longer work and a deep surgery is needed".
"The RBI went on further to state that the recognition of NPAs was the anaesthetic for needed for the surgery".
Stating that he doesn't doubt the RBI's competence in assessing the situation, Parekh said, "I only wish to caution (RBI) that too much of anaesthesia can also result in a patient becoming comatose!

"We need transparency in accounting for NPAs, but surely the objective of the clean-up is to fix the financial rot, not to incapacitate banks," he said while delivering the third Pravinchandra V Gandhi lecture on 'Changing macro landscape' at the Mumbai University's convention hall here this evening.
He also warned that "the banking sector cannot afford another quarter like the one just gone by," where many banks have declared net losses with 10 of them reporting more than 8 per cent NPAs.

Comments come amidst rout in banking stocks, which pulled down the market badly since the middle of last month and RBI Governor Raghuram Rajan stating that "band-aids will no longer work and banks in fact need deep surgery".

The Reserve Bank had recently identified as many as 150 top stressed accounts and asked banks to make provisions and clean the book by the March quarter.
Parekh, however, added that he "does not wish to second guess the regulator and I do not at all doubt their competence in assessment of the situation."
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Terming the banking sector health a key concern currently for the economy, Parekh said the problem of NPAs is not new, and there was no doubt that the rot has to be tackled.
Parekh said the quarter ended December 31, 2015 has been "brutal" for banks and provisioning for banks have increased manifold with the "RBI coming in with a sledgehammer on banks following its directives on the Asset Quality Review".

On how to redeem state-run banks, Parekh said none of the most-talked about solutions like recapitalisation, mergers or government bringing down its stake to 50-51 per cent (which finance minister had reiterated this Sunday) will work.
He said just recapitalising banks effectively means it is the taxpayers who are bailing out banks. Banks needs Rs 2.4 trillion in fresh capital under the Basel III and an indebted government will find it hugely challenging to mop-up.
The bad bank was an idea toyed with. The objective was to clean up the banks' books, transfer out the bad loans and allow banks to get on with fresh lending. Yet, the drawback is that such a free hand given to the banks would not prevent a build back of bad loans in the banking system again, he said.

Dismissing merger as a possible solution he said "in the present situation, merging PSU banks to create a few large banks is neither a feasible option any longer," adding clearly, the banks have missed the capital raising bus as "most PSU banks are being valued at less than half their book value, some even at a quarter of their book value."
Calling for a radical mindset change, he said so NPAs are going to persist till there is a complete mindset change.
Under the mindset change Parekh said, "the government must freely allow the right talent to come into run its banks, and give prospective new investors a role in running those banks and also the government and politicians give no diktats on who to lend to and make the Bankruptcy Code a reality which

Will ensure that large business houses are no longer able to take the banking system for a ride."
Stating that "it is India's time now", he said, "we can look at our country from various perspectives-- the India that is doom, disruption and delays or one that sees opportunity through its demand, democracy and demography. It is about what options we choose for ourselves.
"India has never been at such an advantageous position. We only need to cease this opportunity. When the dust settles down and the din of market chaos lessens, we will stand stronger, ready to welcome more investment as it builds upon its future," the industry thought leader said.

Noting that we tend to be more pessimistic about ourselves than many outsiders, he said, "more than ever before, we need doers and dreamers."
"India has never been at such an advantageous position in
the world. We only need to cease this opportunity. When the dust settles down and the din of market chaos lessens, India will stand stronger, ready to welcome more investment as it builds upon its future," Parekh said.
Stating that the global economic scenario is more gloomy today than last year, he said since the beginning of this year, there has been a brutal sell off in equity markets across the globe, which has seen global market capitalisation shrinking to around USD 56 trillion from a peak of USD 70 trillion in May 2015, which is a whopping USD 14 trillion wipe-off.

What is more important is that global markets had lost only USD 18 trillion in the six months period during the 2008 financial crisis.
"So, naturally this sell-off too feels like a looming crisis and around Rs 14 trillion or about USD 200 billion have been wiped off the domestic markets this year alone.
"Not surprisingly, there has been a rush back to safe haven assets such as government debt, gold, the US dollar and yen. But what has been perplexing is that fundamentally, nothing has changed so drastically from what was known last year," he said.
Blaming part of the problem to the divergent monetary policies of major global central banks, with many following negative interest rates, he said while the US has finally raised interest rates, Japan, the EU and China are continuing with quantitative easing measures to bolster growth.

The global slowdown is reflected in the fact that the central banks of the EU, Japan, Sweden, Switzerland and Denmark have negative interest rates ranging between 0.1-0.3 per cent.
This is at a time when a quarter of the world's government debt, worth over USD 7 trillion is offering below zero returns, he added.