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Why you shouldn't be worried about India's bad loans: State bank

The State Bank of India has moved to quash mounting concerns over India's banking sector after a Reserve Bank of India (RBI) asset quality review uncovered mounting debts in the sector.

Asked whether a banking crisis was unfolding in India, Arundhati Bhattacharya, chair of the State Bank of India, told CNBC: "I don't really think so."

"I think what the regulator has done is a stress test and then told us to take up front whatever hits that might be there down the line," she said, speaking to CNBC from the Asian Development Bank's annual meeting in Frankfurt, adding that the AQR could lead to a speedier resolution of non-performing loans.

KOLKATA ECONOMY
Brent Lewin | Bloomberg | Getty Images

"When something of this nature happens, resolution of these stressed assets happens faster," she said.

She said that a bankruptcy law was being introduced by India's government and that this too would also facilitate doing business in India.

Indian banks have been left reeling from the asset quality review, which ended in March and identified many assets within India's public sector banks that should be classified as non-performing, or "bad", loans.

Commenting on the findings of the review, the RBI's deputy governor said in a speech last week that signs of "rising stress" in the banking sector had become apparent in early 2012.

At the end of March 2012, the "stressed assets" for the banking system as a whole stood at 9.8 percent but the amount rose "sharply" to 14.5 percent as at the end of December 2015. During the same period, the stressed assets for public sector banks spiked from 11.0 percent to 17.7 percent.

Speaking last week, the RBI's Deputy Governor Shri S. S. Mundra added that bank earnings had suffered as a result of higher provisioning on banks' "delinquent loans" between 2012 and 2014 and that more could have been done to prevent the extent of bad loans.

"The global economy has been passing through a difficult phase and vulnerabilities remain. Against this backdrop and that in a globally integrated economy, a general decline in the asset quality was not totally unexpected. However, the extent being witnessed could have been avoided. It is probably because neither the banks nor the corporates resorted to preventive healthcare," he said, according to a copy of the speech on the RBI's website.

On a wider level, the chair of the State Bank of India told CNBC that global central banks needed to more coordination on monetary policy in terms of stimulating global growth.

"I think that is absolutely the answer. Nothing can really happen without much better collaboration," she said. "There also has to be better understanding of the cycle at which point nations are, so the things that are required for the western nations, developed nations, might not be the things needed by developing nations because the risks are different, the cycle of development is very different, the need for capital is different and I think those things have to be better understood and appreciated."

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