Following the steps taken by the Reserve Bank of India (RBI) and the government in the last few years, the tide has turned for the banks, with asset quality improving.
“...the banking system is on the cusp of a transformation, aided by recent policy measures to reduce vulnerabilities and improve its financial health,” RBI Governor Shaktikanta Das said in a speech at NIBM, Pune, on Saturday.
There was a significant improvement in asset quality of scheduled commercial banks (SCBs) in 2018-19 as the gross non-performing assets (NPA) ratio declined to 9.3% as on March 2019. It was 10.8% in September 2018 and 11.5% in March 2018.
At the same time, there has been an improvement in the provision coverage ratio (PCR) of SCBs to 60.9% in March 2019 from 48.3% in March 2018 and 44% in March 2015.
There has been evidence of credit growth picking up after remaining subdued in the last few years.
“With incipient signs of improvement in the health of banks, credit growth is picking up,” the RBI Governor added.
The capital adequacy ratio of the banks, which were at 14.2%, remains well above the regulatory requirement of 9%. “However, if we take into account the capital conservation buffer (CCB), some banks, especially public-sector banks (PSBs), are falling short of the required 10.875%,” he noted.
Capital infusion
Even though the government’s capital infusion has helped PSBs improve their balance sheets, they should not become too dependent on this source. “Depending upon individual situations, PSBs should access the capital market for mobilisation of capital,” Mr. Das said.
The Governor said among the issues that would be addressed in the coming months, was that of governance reforms, which was a ‘first and foremost’ priority.
It was important to enhance the quality and the stability of bank boards through further streamlining the appointment process, succession planning and compensation. For this, there was a need to create a pool of independent directors across areas of expertise, Mr. Das said.
“The performance of MDs/CEOs of both the public and the private sector banks should be closely monitored by the board of directors either through a sub-committee or through an external peer group review,” he said.
He also highlighted the need for an effective performance evaluation system to improve banks’ financial and operating parameters.
After the Supreme Court struck down the February 12, 2018 circular of the RBI on stressed asset resolution, the central bank came out with a revised circular on Friday.
Mr. Das said the new norms would provide a system of strong disincentives in the form of additional provisioning for delay in initiation of resolution or insolvency proceedings.
“It is expected that the revised prudential framework for resolution of stressed assets will sustain the improvements in credit culture … it will go a long way in promoting a strong and resilient financial system in India,” Mr. Das said, adding wherever necessary, the RBI would issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults.
NBFC crisis
On the issue of crisis of confidence that the ‘shadow banks’ are facing, triggered by debt default by Infrastructure Leasing & Financial Services in August last year, Mr. Das said while the conventional approach to NBFC regulation and supervision has been light-touch, now, with a view to strengthen the sector, RBI had been pro-actively taking necessary regulatory and supervisory steps, keeping in mind the requirements of the time.
“In the light of recent developments, there is a case for having a fresh look at their regulation and supervision. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust,” Mr. Das said.
The RBI would continue to monitor the activity and performance of the sector with a focus on major entities and their inter-linkages with other sectors and would take steps, if needed, to maintain financial stability in the short, medium and long-term.
The central bank’s objective was to harmonise the liquidity norms between banks and NBFCs, taking into account the unique business model of the NBFCs vis-à-vis the banks’, he added.
“In this context, the final guidelines on the liquidity risk management framework, which we have proposed recently, would be issued shortly,” the RBI Governor added.
