(Bloomberg) -- State Bank of India, the nation’s largest lender, sees provisioning for soured debt as the biggest challenge for the South Asian nation’s banking system even as credit growth is reviving from a three-decade low.
“Whatever process we resort to for the resolution of non-performing assets there will be a gap in the provisioning,” Chairman Rajnish Kumar said in an interview with Bloomberg Television’s Haslinda Amin on the sidelines of the World Economic Forum in Davos on Tuesday. "That is precisely where the support from the government is required. For the banking system to come out of the problem we have to provide for those loan losses that have been incurred."
Kumar is at the forefront of helping clean up the worst soured-debt ratio among the world’s biggest economies. Overdue loans have dragged economic growth to the lowest since 2014, piling pressure on the government to revive activity before elections next year.
Prime Minister Narendra Modi’s administration has pledged to inject $33 billion of fresh capital into struggling state-run banks -- including SBI -- and the Reserve Bank of India has asked commercial lenders to resolve bad loans at 40 of the biggest defaulters within a year. Policy makers are betting these moves will boost loan growth from a 30-year low.
“Banks need to recapitalize, write down bad debts and be in a stronger position first," Kumar said, referring to the government’s plan to merge some state-run banks. "We need to create a few more large banks in the country as the gap between SBI and others is very wide."
State Bank, which accounts for more than a fifth of India’s banking assets, broke into the ranks of the world’s top 50 lenders in April after it merged with five smaller units and Bharatiya Mahila Bank Ltd. The lender is set to report earnings for the December quarter next month.
Under Kumar, the lender aims to focus on expanding loans to consumers as well as small and medium-sized enterprises. His task will probably become tougher as monetary conditions tighten. India’s inflation has breached the central bank’s target, increasing the odds the RBI will raise borrowing costs sooner than expected. It’s due to review policy Feb. 7.
“Our sense is that going forward the inflation numbers will stabilize and at least for the next six months there will not be an up-move in terms of the central bank’s policy rates and government bond yields,” Kumar said.
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