While the Indian banking sector may be slowly turning around on the back of improvement in asset quality, its profitability remains fragile, Reserve Bank of India Governor Shaktikanta Das said.
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He also said that banks continued to face challenges like the present crisis in the telecom sector.
“In terms of recent progress, the Indian banking sector is slowly turning around on the back of improvements in asset quality with enhanced resolutions through the Insolvency and Bankruptcy Code (IBC). Despite the recent decline in impaired assets and a significant improvement in provisioning, profitability of the banking sector remains fragile,” Mr. Das said at an event.
He said the capital position of banks had improved on account of recapitalisation of public sector banks by the government and capital raising efforts by private sector banks.
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“Nevertheless, the sector continues to encounter challenges from events like those around the telecom sector,” he said.
According to Mr. Das, the overhang of non-performing assets (NPAs) remains relatively high, which is weighing on credit growth. “Also, in view of subdued profitability and deleveraging by certain corporates, risk-averse banks have shifted their focus away from large infrastructure and industrial loans towards retail loans,” he said, adding that this diversification strategy, while helpful as a risk mitigation tool, had its own limitations. He also said sector-specific pockets of stress needed policy attention.
“At the same time, proper due diligence and risk pricing in lending is of prime importance so that the health of the banking sector is not compromised while ensuring adequate flow of credit to productive sectors of the economy,” Mr. Das said.
On the issue of resolution of asset quality, the RBI Governor expects to have an integrated framework for resolution of financial firms operating in India, in the near future.
On consolidation in public sector banks, he said a properly worked out consolidation of PSBs can generate synergies in allocation of workforce and branches.
“The focus has to be on ushering in significant improvements in efficiency and rationalisation of scarce capital to meet the capital adequacy requirements,” he said.
As far as regulation of banks is concerned, he said the RBI was focussing on a sharper and more forward-looking off-site surveillance framework, apart from on-site supervision.
On non-banking finance companies, he said recognising the systemic importance of such entities and their inter-linkages with the financial system, the RBI had taken steps and the asset-liability management (ALM) position and other aspects of top 50 NBFCs were being closely monitored, covering all NBFCs with asset size above ₹5,000 crore.
The ALM of top 51-100 NBFCs is also being examined by the respective regional offices of the Reserve Bank, he added.
He reiterated that the RBI would also issue draft guidelines on corporate governance in banks.