Banks well capitalised to absorb losses due to project delays: Rajan

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Raghuram Rajan, Governor, RBI.
Raghuram Rajan, Governor, RBI.

Forex reserves sufficient to finance entire CAD for several years, says RBI Governor

Indian banks have enough capital to absorb losses until the delayed projects revive and start generating revenues to repay loans, said Reserve Bank of India Governor Raghuram Rajan.

“The banking sector has undoubtedly experienced an increase in bad loans, often owing to investment projects that are not unviable but only delayed. As these projects come on-stream, they will generate the revenue needed to repay loans. India’s banks have the capital to absorb losses in the meantime,” Rajan said at a lecture delivered at the Harvard Business School (HBS) in Boston last week.

Addressing HBS students with notes from his recent article, Rajan also said, while it is projected that the current account deficit (CAD) will come down to 3.7 per cent this year, “I think we could be pleasantly surprised (positively).”

“Despite its shortcomings, India’s GDP (gross domestic product) will probably grow by 5-5.5 per cent this year — not great, but certainly not bad for what is likely to be a low point in economic performance.

“The monsoon has been good and will spur consumption, especially in rural areas, which are already growing strongly, owing to improvements in road transport and communications connectivity,” Rajan added.

Expressing further optimism, the RBI chief said, “India’s finances are stronger than in the typical emerging-market country, let alone an emerging-market country in crisis. India’s overall public debt/GDP ratio has been on a declining trend….External debt burden is even more favourable, at only 21.2 per cent of GDP (much of it owed by the private sector.”

Also, our foreign-exchange reserves stand at $278 billion (about 15 per cent of GDP), enough to finance the entire current-account deficit for several years, Rajan said.

(This article was published on October 20, 2013)
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Rajalakshmi Nirmal and Radhika Merwin of the BL Research Bureau discuss the role of asset reconstruction companies (ARCs) in the banking sector and how they deal with bad loans.


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