Clear & present danger: Bad loans

Written by fe Bureau | Mumbai | Updated: Nov 22 2013, 15:58pm hrs
Indian banks must focus on improving their asset quality and bring down bad loans in the near term even as they gear up for major structural changes going forward, the Reserve Bank of India (RBI) has said. In its report on Trend and Progress of Banking in India in 2012-13, RBI noted that banks asset quality had deteriorated during the year, with their gross non-performing assets rising to 3.6% in 2012-13 from 3.1% a year ago.

Lenders need to beef up their credit risk management and loan monitoring systems immediately, RBI said, adding that effectiveness of the recovery system must also be increased.

Recovery should be focused on efficiency and fairness - preserving the value of the underlying assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly, the central bank said.

Indian banks will have to scale up in business to meet the needs of a growing economy and also meet regulatory standards, the apex bank noted. On its part, the central bank would ensure bank credit flow to productive sectors and it believes banks' investment in government securities must reduce from the current mandated 23% under the Statutory Liquidity Ratio. It is necessary to reduce banks requirements of investing in government securities in a calibrated way, the RBI said.

Several regulatory initiatives are on the anvil that will help reinforce the dynamism of the banking system over the medium term, it noted.

The RBI will push foreign banks to move to a subsidiary-based business model from the existing branch-based one and re-orient the existing structure of the banking system to help banks grow faster, the central bank said. The RBI had issued a discussion paper recently over the structure of Indian banks and invited comments from stakeholders.

Banks challenges going forward would be to raise capital to conform to regulatory standards and expand business in the wake of increased competition as new players come in and foreign banks fortify their presence.

In the context of capital requirements of public sector banks, RBI noted that public sector banks will need R4.15 lakh crore by the time Basel 3 norms are fully implemented in March 2018. Of this, equity capital needed will be of the order of R1.4 - 1.5 lakh crore.

The present level of government shareholding in these banks ranges from 55% to 82%. Thus, there is sufficient headroom available to the government for dilution of its stake in a number of public sector banks, noted RBI. The bank licensing policy needs to be liberalised further and the central bank favours continuous licencing of new banks and always seeks to move towards differentiated licenses, the RBI said.

Stating that the banking system needs to expand to R288 lakh crore by 2020 from R115 lakh crore in 2012, RBI said banks will have to match up to the accelerating credit to GDP ratio as the economy grows.

While beefing up their asset quality and scaling up their business, banks would also require to cater to the needs of the small ticket and rural customers in a bid to deepen financial inclusion, the RBI said.

Noting that the number of banking transactions continue to be dismal in rural areas and a larger part of the country remains beyond the banking space, the central bank said that banks must develop products and delivery models suitable for such customers.