RBI Governor D Subbarao on the state of banking industry and challenges it faces
Reserve Bank of India Governor D. Subbarao discusses the state of the
banking industry and its future challenges with Chaitanya Kalbag and
Anand Adhikari.
RBI Governor D. Subbarao. Photo: Nishikant Gamre
Reserve Bank of India Governor D. Subbarao discusses the state of the banking industry and its future challenges with Chaitanya Kalbag and Anand Adhikari. Edited excerpts:
On the deteriorating asset quality of banks:
There is growing concern about asset quality. NPAs (non-performing assets) have gone up from 2.9 per cent in March this year to 3.25 per cent in June. Even when it comes to restructured assets, they have gone up in absolute terms and in proportional terms. But even though this is a concern, it is not alarming because a stress test done by RBI has shown that even in the event of extreme stress, our banking system will be able to withstand it.
On the RBI-appointed Mahapatra Committee's proposal that promoters of companies seeking debt restructuring should have to make bigger sacrifices:
The promoters' contribution during restructuring or promoters' sacrifice has always been a component of the restructuring package, except that some promoters get away without making it, or they agree to it but fail to comply. So it is important we enforce this promoters' contribution and that of course was the intention of the committee's proposals.
But banks don't want their actions to adversely affect the performance of an asset in any way. So if there is a chance of the asset improving, they give it a longer rope. I'm not holding a brief for banks. In certain cases, they have overextended themselves.
There is certainly need for greater vigil on the quality of assets, particularly those assets which are sick or those that are being restructured. Some deterioration in quality is to be expected in times of economic downturn.
There are a host of things that banks can do to arrest further deterioration. We have emphasised them in our monetary policy review.
On the January 1, 2013 deadline to start enforcing the stringent new global banking standard Basel-III in India (the process must be completed by March 2018):
There are just 13 countries (India among them) out of the 27 in the Basel committee which have issued final guidelines on Basel-III. Obviously, Basel-III cannot take off unless all members, particularly the important members, fall in line. We will watch the global situation and take a call. But from our side we have given the guidelines and told banks to be ready to implement them.
On the recapitalisation challenge banks face in implementing Basel-III norms (they will need an additional infusion of `4 to 4.25 trillion by March 2018):
The recapitalisation is necessary if our banks have to be resilient and globally competitive. You cannot have the benefits of stronger banks without paying the cost.
On new banking licences under the existing guidelines:
We believe more banks should come in but some necessary conditions (such as amendments to the Banking Act) have to be fulfilled. I don't think it is possible to issue new licences without changing the Act. The old guidelines did not contemplate the entry of corporate houses into banking. If we allow corporate houses, it's important we have the amendment or the authority we have sought.
On the future of urban cooperative banks (UCBs):
The (RBI-appointed) Malegam Committee (which submitted its report last year) had recommended that UCBs be allowed to convert to commercial banks provided they meet certain criteria. We must also allow new banks in the cooperative space.
The process of licensing was halted in 2003/04 because of some adverse developments. We need to take it up again. We are studying the recommendations of the committee. There are some governance issues we need to settle. Once they are resolved, we will be able to take final action.
On changes in monetary policy not having lowered the base rate of banks so far:
There has been some transmission (of change) in the deposit rates and in the base rates. What matters is the lending rate, which is the base rate plus the spread. If you look at the lending rate, the transmission has been more effective and stronger than the base rate. We hope our recent CRR (cash reserve ratio) cut, making the liquidity situation more comfortable, will improve the transmission.
On the deteriorating asset quality of banks:
There is growing concern about asset quality. NPAs (non-performing assets) have gone up from 2.9 per cent in March this year to 3.25 per cent in June. Even when it comes to restructured assets, they have gone up in absolute terms and in proportional terms. But even though this is a concern, it is not alarming because a stress test done by RBI has shown that even in the event of extreme stress, our banking system will be able to withstand it.
On the RBI-appointed Mahapatra Committee's proposal that promoters of companies seeking debt restructuring should have to make bigger sacrifices:
The promoters' contribution during restructuring or promoters' sacrifice has always been a component of the restructuring package, except that some promoters get away without making it, or they agree to it but fail to comply. So it is important we enforce this promoters' contribution and that of course was the intention of the committee's proposals.
But banks don't want their actions to adversely affect the performance of an asset in any way. So if there is a chance of the asset improving, they give it a longer rope. I'm not holding a brief for banks. In certain cases, they have overextended themselves.
There is certainly need for greater vigil on the quality of assets, particularly those assets which are sick or those that are being restructured. Some deterioration in quality is to be expected in times of economic downturn.
There are a host of things that banks can do to arrest further deterioration. We have emphasised them in our monetary policy review.
On the January 1, 2013 deadline to start enforcing the stringent new global banking standard Basel-III in India (the process must be completed by March 2018):
There are just 13 countries (India among them) out of the 27 in the Basel committee which have issued final guidelines on Basel-III. Obviously, Basel-III cannot take off unless all members, particularly the important members, fall in line. We will watch the global situation and take a call. But from our side we have given the guidelines and told banks to be ready to implement them.
On the recapitalisation challenge banks face in implementing Basel-III norms (they will need an additional infusion of `4 to 4.25 trillion by March 2018):
The recapitalisation is necessary if our banks have to be resilient and globally competitive. You cannot have the benefits of stronger banks without paying the cost.
On new banking licences under the existing guidelines:
We believe more banks should come in but some necessary conditions (such as amendments to the Banking Act) have to be fulfilled. I don't think it is possible to issue new licences without changing the Act. The old guidelines did not contemplate the entry of corporate houses into banking. If we allow corporate houses, it's important we have the amendment or the authority we have sought.
On the future of urban cooperative banks (UCBs):
The (RBI-appointed) Malegam Committee (which submitted its report last year) had recommended that UCBs be allowed to convert to commercial banks provided they meet certain criteria. We must also allow new banks in the cooperative space.
The process of licensing was halted in 2003/04 because of some adverse developments. We need to take it up again. We are studying the recommendations of the committee. There are some governance issues we need to settle. Once they are resolved, we will be able to take final action.
On changes in monetary policy not having lowered the base rate of banks so far:
There has been some transmission (of change) in the deposit rates and in the base rates. What matters is the lending rate, which is the base rate plus the spread. If you look at the lending rate, the transmission has been more effective and stronger than the base rate. We hope our recent CRR (cash reserve ratio) cut, making the liquidity situation more comfortable, will improve the transmission.
