On the face of things, RBI is more sanguine about the asset quality of Indian banks than credit rating firm Moody’s which has said it finds the loan classification practices weak and believes “they mask the extent of the banks’ asset quality and capital challenges”. Indeed, the stress scenarios Moody’s outlines are a lot scarier than those in RBI’s financial stability reports. But the fact that RBI is mulling the recommendations of a panel entrusted with suggesting new provisioning norms for restructured assets and hopes to put in place a tighter set of rules by end-January suggests the central bank isn’t as sanguine as many believe. Meanwhile, RBI has upped the provisioning for restructured standard assets to 2.75% from 2%. Nonetheless, RBI hasn’t been too forthcoming on the subject except to say that one big reason for the deterioration in asset quality has been the absence of information-sharing between between banks. It has of course reinforced this point with them while warning penal action.
While RBI may need to react to Moody’s somewhat sweeping condemnation of how banks are governed, Moody’s also points out that India’s loan classification rules were far more lenient than in other parts of the world; it pointed out that very often bad loans were being categorised as ‘restructured assets’ in the process allowing banks to get away with lower provisioning. RBI needs to work on this and some of it will probably be addressed in the new rules but simply framing rules may not be enough,