Reserve Bank of India (RBI) on March 2014 extended the deadline for compliance of capital requirements under Basel III norms to March 2019. At that time the banking industry believed that it had got some reprieve given the time accorded in the face of slower economic growth. Extending more time under Basel III means lower capital burden on the banks in terms of provisioning requirements, including the NPAs.
As per Basel III norms, most of the regulatory adjustments are made from common equity capital, like deduction from common equity component of Tier-1 capital in respect of shortfall in provisions to the expected losses for credit risk.The banking industry’s bad loan teething troubles have been compounded many folds. The non-food credits of the banks have decreased by 37% from Rs 7,754 billion in 2015-16 to Rs 4,818 billion in 2016-17. Whenever, there is an unanticipated large increase in stressed assets, banks require more capital to boost their loss-absorbing capacity. In the given situation, it become quite difficult to raise the capital through equity as it becomes costlier and unattractive in such a situation. It is a natural tendency that whenever banks are faced with large stressed assets, they tend to reduce supply of credit. Within stress assets the non-payment of loans brake the financial cycle of lending-repaying-borrowing.
With the latest development of amending Banking Regulation (amendment) ordinance, RBI may try to bring down stressed assets, while consequently increasing provisioning for non-performing assets (NPAs) of the banks to improve the financial condition of the banking industry. Section 35A empowers the central bank to issue directions to the banks in public interest and interests of depositors. Without losing any time, RBI has taken prompt action on six PSU banks and has placed them under Prompt Corrective Action (PCA) rules.
There is positive response coming from the banks as well. Banks are reducing stressed assets by selling them to asset reconstruction companies (ARCs). And, this has been increasing because of the regulatory support extended to banks under the Framework to Revitalise the distressed assets in the economy. Further, difficulties faced by micro, small and medium enterprises (MSMEs) in restructuring their stressed bank loans, regulator has issued a separate guidelines for revival of distressed assets in this segment.
RBI’s risk-based supervision (RBS), helps in timely identification of stressed assets and instructed banks to make adequate provision for such assets. Retaining the concepts and the principle of RBS, the model can also be extended to cover Regional Rural Banks and Local Area Banks. The Central Repository of Information on Large Credits (CRILC) has published data on dates of assets turning into NPAs, whereas special mention accounts (SMA) gives insights into ageing analysis of the banking industry data. The database of CRILC may be further fine-tuned for futuristic approach.
The composition of liabilities of banks should not influence the price and quantity of credit. Assocham has suggested to create Stressed Assets Funds (SAFs) with the active participation of cash-rich public sector firms. Suggestion is going to be useful for the large borrowers, but it would not be much help unless the benefit of such fund reach the micro small and medium enterprise sector. Even if all the above remedial action is taken, the greatest challenge will still be to extend the deadline of Basel III as it would impact the perception of Indian Banks and central bank in the eyes of the global players.