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Rough terrain ahead for public sector banks

Jun 27 2014, 12:44 IST
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SummaryPublic sector banks face challenges in terms of asset quality, profitability and governance

The Reserve Bank of India (RBI) on Thursday said although India’s financial system remains stable, public sector banks (PSBs) face challenges in the coming quarters in terms of their capital needs, asset quality, profitability and, more importantly, their governance and management processes.

In its ninth financial stability report (FSR), RBI said: “While India remains committed to implementing global regulatory reforms, priorities may differ as the Indian financial system faces a different set of challenges compared to those jurisdictions which faced financial crises.”

The report highlighted the risks faced by the financial system in both the global and domestic environments, with specific reference to various segments of the Indian financial system.

“An attempt has been also made to assess the soundness and resilience of financial institutions through banking stability measures. Further, the report gives an overview of financial sector regulation and infrastructure, and reflects the views and assessment of various regulators and stake holders of the Indian financial system.”

The central bank said growth in advanced economies is still some distance from full-fledged recovery, even as the easy monetary policy stance continues in major jurisdictions, in one form or another.

“Emerging geo-political risks may unravel hidden vulnerabilities, and emerging market and developing economies (EMDEs) like India need to bolster their defences against the impact of uncertainties,” RBI said.

RBI explained that, as hoped for in the previous FSR (published in December 2013), the country has chosen a politically stable government and the market expects more decisiveness in government policy formulation, as well as greater efficiency in implementation.

“Further progress on fiscal consolidation, a predictable tax and policy regime, and low and stable inflation rates will be the key anchors in promoting India’s macroeconomic as well as financial stability,” the report said. RBI also said that, right now, global financial markets are showing signs of improved stability compared to December 2013, but new risks, such as the escalating conflict in Iraq, are constantly emerging.

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