Money & Banking
Banking system shows signs of instability on rising NPAs: RBI

NPAs, or bad loans, of the Indian banking sector rose sharply to 1.28% in 2011-12 from 0.97% in the previous year due to high interest rate and slowdown in the global economy

Mumbai: The banking system in the country has recently shown signs of moderate rise in instability due to increase in non-performing assets (NPAs), the Reserve Bank of India (RBI) has said in a working paper, reports PTI.


“The movements in the banking stability indicator... that there are symptoms of a moderate rise in instability of the banking sector in recent periods perhaps due to the rise in the NPA,” it said in a working paper on “Banking Stability - A Precursor to Financial Stability”.


The NPAs, or bad loans, of the Indian banking sector rose sharply to 1.28% in 2011-12 from 0.97% in the previous year, because of high interest rate and slowdown in the global economy.


For public sector banks, it rose to 1.53% in 2011-12 from 1.09% a year ago though private lenders reduced their NPAs to 0.46% from 0.56%.


The paper said there is a need to exert precautionary measures to improve the overall performance of the banking sector and initiate regulatory measures appropriately.


It said policymakers will need to work towards strengthening the banking sector to enable the banks to bear the shocks resulting from an adverse turn in the real sector environment.


Also, it said there is a need to build enough safeguard in the banking sector to avoid the negative feed-back loop between the banking sector and the real sector which could lead to the germination and aggravation of a financial crisis.


Referring to the recent global economic crisis that began in 2008-09, the paper said, “The real act of the financial crisis was enacted in the courtyard of the banking sector where the trigger of financial crisis initially took place.”


However, concerted efforts are being made by various organisations such as the IMF, BIS and the World Bank as well as individual central banks to evolve various leading indicators of the financial stability, including banking sector, in order to make an informed judgement about the evolving risks to the financial system and initiate corrective policy measures.


The paper also observed that banking instability has immediate adverse effect on the financial markets stability as well as real sector output.


“...stability in the banking sector is a necessary condition for maintaining financial stability,” it added.


It further said deterioration in the banking stability indicator has adverse impact on the real sector and similarly deceleration in the real sector performance will adversely affect the banking sector.


Finance ministry requests RBI for relaxing capital adequacy norms

RBI deferred the implementation of Basel III, the global capital norms for banks, by three months to 1st April. Meanwhile, the deadline for the full implementation of the Liquidity Coverage Ratio for banks, which were to kick in from 2015, has been extended till 2019

New Delhi: The finance ministry has requested the Reserve Bank of India (RBI) to relax capital adequacy norms for banks in line with the recommendations made earlier this month by the Basel Committee on Banking Supervision, reports PTI.


“RBI is fully seized of the matter and we have also requested it to look into the issue. We are in conversation with them,” said an official source.


RBI deferred the implementation of Basel III, the global capital norms for banks, by three months to 1st April.


The deadline for the full implementation of the stiff liquidity norms or Liquidity Coverage Ratio (LCR) for banks, which were to kick in from 2015, has been extended till 2019.


Earlier this month, oversight panel Group of Governors and Heads of Supervision (GHOS), which includes representation from India, of the Basel Committee on Banking Supervision decided to ease the LCR regulations.


The Committee, a grouping of top regulators and central bankers, had mooted the stiff liquidity requirements for banks to ring fence as well as prevent financial disruptions.


A major component of the Basel III banking norms, LCR aims to ensure that a bank has an adequate stock of unencumbered high quality liquid assets to meet liquidity needs for a month's stress scenario.


The LCR would be introduced as planned on 1 January 2015, but the minimum requirement would be 60%. The same would be increased by 10 percentage points in the subsequent years to reach 100% on 1 January 2019.


According to GHOS, this graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.


Among others, the panel has approved amendments to LCR rules, including revisions to the definition of high quality liquid assets and net cash outflows.


Bankers want RBI to focus on growth, seek cut in repo, CRR

Bankers have asked the central bank for a cut in both repo and CRR in the upcoming policy review

Mumbai: Leading bankers met top brass of the Reserve Bank of India (RBI), impressing upon them the need to shift focus of monetary policy to growth and sought reduction in the repo rate and the cash reserve ratio (CRR) by 0.5%, reports PTI.


“While inflation concerns remain, growth is a bigger concern... so, while we understand the issues related to inflation at this point of time, it was our recommendation that there should be a rate cut so that growth comes first,” HDFC Bank's MD Aditya Puri told reporters.


Speaking after the customary pre-policy meeting with RBI brass, he said that bankers have asked for a cut in both repo (rate at which the RBI lends to banks) and CRR—the portion of deposits banks have to mandatorily park with the central bank—in the upcoming policy review.


CRR stands at 4.25%. Repo rate is at 8%.


“The bankers have urged the RBI to reduce interest rates by 50 basis points at least. Even the CRR should come down by 25-50 basis points,” Indian Banks Association (IBA) chief executive K Ramakrishnan said.


One basis point is equal to 0.01%.


The body’s chairman and CMD of Punjab National Bank, KR Kamath said the banks would reduce interest rates if RBI cuts policy rates in the coming policy.


“If the rate of interest is reduced, probably the transmission will happen. Bankers have already been saying that transmission will happen if there is a rate cut,” Kamath said.


He also said reduction in rates would help in increase in investment, which would boost credit growth.


Ramakrishnan said if both these rates are lowered, it will send a positive signal to market.


“If both these things (repo and a CRR cut) happen, transmission will happen and it will be a good sign to the market that growth is going to happen in a big way,” he said.


The likelihood of a rate cut became strong with manufacturing growth remaining in the negative terrain and WPI-based headline inflation hitting a three-year low at 7.18% in December.


Moreover, RBI governor D Subbarao had in the October policy as well as at the subsequent mid-quarter review had hinted at a rate cut in the January policy.


On the poor deposit growth, the IBA chief executive said bankers raised concerns regarding sluggish deposit growth along with low credit uptake. “Sluggish deposit growth is a matter of concern to the bankers. Credit is also not picking up the way it should and hovering around 8% now.”


According to Ramakrishnan, both bankers and the central bank are concerned about rising bad assets in the system.


About the recent suggestion to pay interest on current account, Ramakrishnan said there was a passing mention regarding this with the apex bank at the meeting.


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