The practice of "window dressing" by state-run banks towards the end of every financial year to meet performance objectives came in for sharp criticism from Governor Raghuram Rajan today, who said the Reserve Bank of India (RBI) will not "bail out" lenders for their bad policies in future.
The year-end should not be a time for any spectacular changes in the banking system and must pass smoothly, Raghuram Rajan told reporters after announcing the bi-monthly monetary policy, which left key policy rates unchanged.
"I don't think the RBI should be in the business of bailing out the banking system with infusion of liquidity when the banking system is creating its own problems," he said.
"What happens towards the end of the year is banks are trying to build a certain kind of balance sheet for a variety of reasons," he said, adding that some lenders reduce their risk-weighted assets to lower their capital requirements, while some state-run banks increase their assets in order to meet performance targets set by the government.
Raghuram Rajan said such adjustments by banks affect various market segments and cited volatility in certificates of deposit starting even from February, which had to be curtailed by the Reserve Bank by improving long-term liquidity through long-term repo.
Raghuram Rajan, who was scheduled to meet bankers after the press conference, said he will discuss the issue with the lenders with a focus on liquidity distortions towards the year end.
"(We should) not come to this pass where banks aren't lending to each other to maintain the kind of balance sheets they want. The year end should not be a time for anything special to happen, it should be smooth," he said.