ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by K Srinivasa RaoSubscribe to K Srinivasa Rao

Asset Quality in Banks: Looking Far beyond Bad Banks

Startling rise in toxic assets of banks by March 2018 following the asset quality review of the Reserve Bank of India in 2015 heightened concerns. The fear of further deterioration of asset quality due to COVID-19-induced stress culminated into the historic step to form of National Asset Reconstruction Company Ltd –bad bank. When the loan recovery ecosystem is gradually strengthened with the enactment of the Insolvency and Bankruptcy Code, 2016, formation of bad banks can only be a temporary measure. With the improved credit appraisal, monitoring and debt resolution mechanism, banks should be capable to enforce recovery of loans and manage asset quality without the perpetual help of external institutions. The urgency is for banks to improve people and system competency to source quality credit, monitor it and recover it in time as part of normal banking operations. Bad banks cannot be a panacea against the systemic flaws in credit administration.

Reviving the Lending Appetite of Banks

The flow of bank credit is crucial to revive the economy. The fear of potential asset quality woes has reduced the risk appetite of banks. Going beyond the restructuring support, banks need policy support by relaxations in prudential norms in the near term to be normalised in the next four–fi ve years. Coping with the adversities of the pandemic needs a collaborative policy support of all stakeholders to step up the lending appetite.

RBI’s Efforts towards ‘Pandexit’ Go beyond Policy Measures

In a proactive move, the Reserve Bank of India rescued the economy with its innovative—blended conventional and unconventional—monetary policy measures. Low-interest rates, aligning targeted liquidity, and granting moratorium coupled with forbearance to enable banks to restructure loans, mandated the Kamath panel to work out modalities to restructure corporate sector loans. After affirming stability and orderliness of the financial sector throughout the crisis period, it rightly signalled descent towards normalisation paving for pandexit manoeuvring the tool of variable reverse repo rate.

Stiffer Challenges Await the New Banks Board Bureau

Though it will benefit from the preparatory work done by its predecessor, the new Banks Board Bureau has a tough task ahead of it. The operational state of public sector banks has deteriorated, asset quality woes have increased, and employee morale is sagging. While many of these issues are beyond its mandate, it may need to account for and address them in order to meet its core objective of fixing the governance of public sector banks.

PNB Fraud: How Do Banks Manage Operational Risk?

The Punjab National Bank fraud has brought attention back to how banks manage operational risk. There is a need to investigate what procedures were undermined, and how a few employees in connivance with clients could take control of such large amounts of money for such a long time without raising any red flags.

Money Supply Analysis

in these columns [1], Suraj B Gupta vehemently criticises the manner in which RBI carries out the analysis of money supply in India in its monthly Bulletin. He states that RBI's analysis is tautological in nature, in that the statements made therein are in the shape of identities, and do not add anything to our knowledge of the rial, causal factors underlying the variations in money supply. Gupta has argued that the whole investigation by RBI, which is only an accounting analysis, is empirically devoid of meaning. As such, he contends, the approach has led to faulty policy and analytical conclusions. He has argued for a complete revision of the methodology adopted by RBI, so that the results put out by it can be meaningful in an empirical way and can help in understanding the behavioural and other real factors that lead to changes in money stock. Such an approach, indicates the author, also will serve as a useful tool in predicting the likely trends in the economy attributable to variations in money supply and will provide a weapon to the central banking authorities in directing the economy along the desired lines, Gupta's critique of RBI's traditional approach towards the factors affecting money supply has touched off a major controversy [2 to 8]. While RBI itself has not officially joined battle, it has not changed its methods either: RBI analysis continues as before. Probably, it is waiting to see which way the weight of the arguments leans, so that necessary changes can be made after a full discussion of the pros and cons by the academic world and interested professionals. Or, maybe, while RBI is convinced that the present methodology is in need of some revision, it strongly feels that what has, been offered as an alternative is no sensible substitute at all as claimed but is empirically meaningless and mechanistic in its own way. Whatever RBI's own official reaction, several writers have argued equally vehemently in defence of RBI. They have attempted to uphold RBI's present analytical schema as being really useful and valid, and as being the only practical thing to do in the context of the myriad factors at play in the Indian economy.

Back to Top