Mumbai: The Reserve Bank of India (RBI) expects banks to do enough to clean out bad loans and improve the quality on their balance sheets by March 2017, Reserve Bank of India (RBI) governor Raghuram Rajan said on Tuesday.

“I want to put something like March 2017 as when we hope that enough will have been done," Rajan said at a press conference post a monetary policy review at which the central bank left interest rates unchanged.

Apart from tackling inflation, the RBI has been focussed on reducing the high level of stressed assets in the banking sector. Years of slow economic growth and procedural delays across sectors like infrastructure have led to an increase in bad loans and restructured loans across banks.

For 39 listed banks, gross non-performing assets (NPAs) rose 26.87% to 3.40 trillion for the quarter ended September 2015 from 2.68 trillion for the same quarter last year.

According to rating agency ICRA Ltd, the level of stressed assets—sum of gross NPAs and restructured assets—in the Indian banking system stood at 11.1% of total advances at the end of the July-September quarter. A large part of the stressed assets came from public sector banks.

The central bank is in constant dialogue with banks and is insisting that the facilities provided to them to clean up their balance sheets are being used in the right way, Rajan said, addressing fears that some of new rules could be used to mask bad loans.

RBI’s attempts at improving management of stressed assets began with the introduction of the joint lender forum (JLF) norms in April 2014. These were intended to ensure timely action to prevent stressed accounts from going bad.

In July that year, the regulator introduced the 5/25 refinancing norms which allow banks to extend the tenure of loans given to infrastructure firms for up to 25 years.

In June 2015, the RBI introduced the strategic debt restructuring (SDR) norms where banks are allowed to convert their debt to majority equity in a borrower firm, through which they could effect change in management, where necessary.

“The idea is to put the real asset back on track with whatever needs to be done. That was the first part with the SDR, the 5/25 (refinancing), bringing in new promoters and the whole range of steps that have been taken there," Rajan said.

The next step in improving asset quality conditions would be to ensure that banks recognize troubled assets as required. As banks begin to recognize assets as troubled at the right time, they will start to deal with them not just by provisioning but also by taking all necessary steps to elevate them to the standard category, Rajan added.

Some fear that norms such as 5/25 and SDR can be misused. In the past, schemes such as the corporate debt restructuring (CDR) scheme have been used to delay recognition of bad loans.

In the first six months of 2015-16, the CDR cell saw 24 cases of failed exits with loans together worth 19,303 crore. The number is higher than the 23 cases with loans worth nearly 17,062 crore that had failed and exited the cell in the same period last year, according to official data. In contrast, successful exits are few and far between.

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