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Introduction

This speech is given by Mr Shaktikanta Das, RBI Governor at 15th annual convocation at NIBM pune for Post-Graduate Diploma in Management (Banking and Financial Services) for the Batch of 2017-19.

Indian Banking Sector

Key challenges in Indian Banking sector

The banking sector is being aided by various policies and regulations to battle problems like deteriorating asset quality, falling profitability and weak capital position. Several measures are being taken to increase their financial health.

Banking Regulation

The CRAR of scheduled commercial banks remains at 14.2 per cent. However, some PSBs when scaled with the CCB fall short of the required 10.875%. The Reserve Bank provides guidelines for frameworks like CCCB, liquidity coverage ratio, leverage ratio and NFSR. The Reserve Bank provides guidelines to align national banks with international standards. By 2020, it will come up with the required consulations.

Non-Performing Assets

The deterioration of PSBs is due to the credit boom of 2006-2011 and other factors include adverse micro-financial environment, lax credit appraisal, post sanctioning monitoring standards, project delays and over runs and absence of strong bankruptcy regime. The Reserve Bank set up CRILCs and AQRs which eventually developed the non performing assets leading to rise in NPA from 4.3% to 7.3%. It reached 11.5% in March 2018. RBI’s IBC reflected improvement in asset quality of SCBs as gross NPA declined to 9.3%. PCRs of SCBs improved from 48.3% to 60.9%. Credit growth remained the same due to various factors but it is on the rise due to the improvement in health of banks.

Resolution of Stressed Assets

The IBC altered the financial landscape in which creditors take control of assets leading to an improvement in credit culture. The Supreme Court nullified RBI’s circular dated February 12, 2018 for resolution of assets. RBI has released new guidelines that provide strong disincentives for delay. RBI will issue direction for banks for insolvency proceedings. Resolution of stressed assets improves credit culture.

Non-Banking Financial Companies (NBFCs)

NBFCs provide competition and cater to financial needs. At end of March 2019, the CRAR of NBFCs was 19.3% while the gross NPA was 6.6%. The credit growth of NBFCs slowed down. The RBI provides guidelines for liquidity framework of NBFCs following the vulnerability in ALMs. The norms for securing bank loans have been relaxed and banks are allowed to issue PCEs for NBFCs and companies.

An IT framework for securing surveillance of NBFCs is put in place. Multiple categories under NBFCs have been merged to provide flexibility. To enhance supervision, the RBI has installed on site examination, off site surveillance, market intelligence and annual reports of auditors. Periodic interaction with shareholders has also been arranged.

Way Forward

Important issues to be addressed:

  1. To improve the functioning of PSB boards, their quality and stability must be improved. These aspects must be reviewed by Banks Board Review. A pool of expert directors must also be created.
  2. Performance of MDs and CEOs must be monitored by Board of Directors.
  • A performance evaluation system should be put in place. The Government, RBI and Board of Directors are providing a framework for PSBs in performance evaluation with respect to accountability, transparency and efficiency.
  1. PVBs face problems in management, quality of audits, and functioning of committees. The RBI has issued a paper proposing compensation of minimum variable pay and clawback arrangements.

To create potent risk management system, the CROs should be directly accountable to MDs, CEOs and Risk Management Committee of the Board.

For comprehensive compliance function, banks should review their statutory and regulatory prescriptions as well as their guidelines, Board directions and audit assessments.

To combat frauds, the Board of Directors and senior management must take responsibility to emphasize internal control. Banks must train their employees with internal controls in their stations.

PSBs should not be dependent on the government for capital. They must mobilize the markets to their advantage.

More number of NCLT benches must be introduced to combat delay in resolution of cases. An RBI Professional Chair is being opened at the IICA and Haryana is starting a 2 year programme to train insolvency professionals.

For specialization in supervision and regulation and to combat risks the RBI has a cadre for supervision of banks, non banks and co-operatives.

For growth of digital technology, the RBI has issued guidelines for Framework on Regulatory Sandbox. It also came up with a Payment Vision System 2021 for safe, secure, accessible and affordable payment systems. Further, it will examine the report of the Nilekani Committee for implementation.

For inadequacies in customer service, efforts are being made for customer grievance redressal mechanisms. Data protection and cyber security are strengthened.

The RBI is taking steps for the regulation and supervision of NBFCs. It will continue the monitor the activity and performance of this sector.

The periodicity of NBFC supervision has been reduced from 18 months to 12 months. The Board of Directors are expected to take the necessary action.

The RBI is in the process of issuing guidelines regarding UCBs. There is a need to set up an umbrella organization that takes care of the activities of UCBs. The sector also needs merging and consolidation to reduce operating costs, encourage risk diversification and capital economizing. A Centralised Fraud Registry is also proposed for UCBs.

The reforms mentioned by the RBI ensures in a sound and resilient financial economic system. The RBI will continue to battle any oncoming challenges in the economic sector and respond to them.

Important terms used in RBI speech

  • CRAR = capital to risk weighted assets ratio
  • SCB = scheduled commercial banks
  • CCB = capital conservation buffer
  • PSB = Public-Sector Banks
  • CCCB = counter cyclical capital buffer
  • LCR = Liquidity Coverage Ratio
  • NSFR = Net Stable Funding Ratio
  • BCBS = Basel committee on Banking Supervision
  • AQR = Asset Quality Review
  • CRILC = Central Repository of Information on Large Credits
  • IBC = Insolvency and Bankruptcy Code
  • PCR = provision coverage ratio
  • NBFC = Non-Banking Financial Companies
  • ALM = asset liability management
  • PCE = partial credit enhancement