India's central bank governor has said there is no chance of a "Lehman moment" in India. Speaking to CNBC, Raghuram Rajan, the governor of Reserve Bank of India said while there is no banking crisis in India, it is important that banks clean up bad assets.
"There is absolutely no chance we will have a 'Lehman' moment," Rajan said, referring to the collapse of the U.S. bank that triggered a chain reaction which led to the 2008 financial crisis.
"It is about ensuring that the assets are cleaned up and investors have a good idea of the balance sheets of the bank and that process is under way and some banks have cleaned up much faster than the pace that we had set for them," he added.
He said the Indian economy is a recovering economy and while there are bad news, overall the country is getting stronger.
"I think we are a recovering economy and when you talk about structural reforms, we have seen a playout in the past few days. For example we have a bankruptcy bill that was legislated last week and we also have a monetary policy committee that lays the framework that was also legislated last week. I think structural reforms are happening, are on their way and you see more green shoots."
India has taken a crucial first step to speeding up its insolvency regime by passing the country's first national bankruptcy law. The breakthrough is expected to help India tackle its mounting bad debt problem after two of the country's largest lenders provided unprecedented guidance on non-performing loans last month.
The country's bad loans problems have been estimated to be much bigger than New Zealand's $170 billion economy. Earlier this week an analyst from India Ratings and Research, a credit ratings agency and a unit of Fitch Ratings told Reuters that about Rs 13 lakh crore ($195 billion) of bad loans are already stressed.
In their first-ever report, ICICI Bank and Axis Bank revealed the depth of the problem. According to Axis Bank, 225 billion rupees of its loans is on a 'watch list.' The bank expects to put 60 percent of those to default in two years. ICICI Bank, one of India's top private lenders said about 525 billion rupees of its loans has been put on watch. These loans were made to sectors such as steel and power.
The true extent of these bad loans was laid to rest after data from Axis Bank and ICICI hit the wires but the long-term impact of this continues to baffle both investors and analysts who compare the mounting loans problem to that of the U.S. subprime crisis. But Rajan thinks they are different.
"Ours is not a retail problem. It is a wholesale problem. There are big projects…and it is not because of corrupted lending or corruption. It was because the world changed."
He explained that these projects were set up with fairly high levels of leverage when things looked good, but then the economy slowed. "What we need to do is restructure the debt for some of these projects, put them back on track. It is not that there are acres of real estate that are unoccupiable. It's actually a power plant that can produce power and India is a growing economy that needs power. We just need to make sure the debt levels are appropriate."
Rajan has given the banks a deadline of March 2017 to fully disclose and provide for bad debt. However, investors are concerned that the central bank governor won't be around to see the end of this. With his tenure coming to an end in September this year, there is speculation if he will run for the second time.
Rajan assumed office in September 2013 in the midst of a crisis for the Indian economy. An allegedly corrupt government, high levels of current account deficit and over dependence on external factors such as the U.S. Federal Reserve's monetary policy had been plaguing the economy.
Rajan told CNBC that extending the country's debt maturities, implementing sound policies and building up foreign exchange reserves were the best way to "firewall" the economy.
"I think the real way we are trying to firewall the economy is, on the first hand, with good policies, including as I said, the moves on reforms that have been enacted recently." The second he said is by trying to increase the maturity of debt.
"We have substantially increased the maturity of debt, external debt that we owe. The third is we built-up reserves."
India was one of the countries to be grouped under the notorious "Fragile Five" along with Indonesia, Turkey, Russia and Brazil after the Fed's decision to roll back its bond-buying program hit emerging markets. However, analysts have pointed out that Rajan's economic reforms and optimism surrounding the election of the Indian Prime Minister Narendra Modi pulled India out of the weak emerging economies to one of the fastest growing today.
"We have accomplished a lot. There is always more to do," Rajan said.