RBI Deputy Governor K C Chakrabarty has come down heavily on banks showing higher profits without providing adequately for bad loans, and said if need be, the central bank may hike provision coverage ratio (PCR) levels.
"Why banks need to show profits as high as 25 per cent? They can show 5 per cent growth in their profits. If they are not doing (providing more), I will increase it (PCR)," he said.
The RBI had done away with its earlier requirement of forcing banks to maintain the PCR, or the ratio of provision to gross non-performing assets (NPAs), at 70 per cent.
The apex bank had increased the PCR to 70 per cent after the Lehman crisis in 2008 and this was applicable till September, 2011. While almost all private banks have higher PCR, majority of the state-run lenders could not meet this deadline.
A number of public sector banks, especially the smaller ones, have shown a drop in PCR in the second quarter earnings and posted a good jump in profits as a result.
The RBI has floated a discussion paper to explore having dynamic provisioning which requires banks to keep aside money during good times for a rainy day, rather than providing after an account has gone bad.
Speaking about NPAs of banks, Chakrabarty attributed a majority of them to poor administration and risk management practices of lenders and went to the extent of terming it as 'non-performing administration.'
"I call NPA as non-performing administration. We have to make the administration functioning," Chakrabarty, who oversees banking supervision at RBI, said.
The RBI Deputy Governor said the "change in the administration" has to come in a slew of areas which would be internal as well as external.
Lending rates would have been far lower if banks had got their NPAs down, Chakrabarty said.
"It is a burden on the people who are paying the money. People forget that if NPAs would have been 1 per cent, banks' lending rates would have been 4 per cent lower with the same inflation, and same repo rate.
"That's why we should tackle NPAs -- not only for the survival of the system,