Startling rise in toxic assets of banks by March 2018 following the asset quality review of the Reserve Bank of India in 2015 heightened concerns. The fear of further deterioration of asset quality due to COVID-19-induced stress culminated into the historic step to form of National Asset Reconstruction Company Ltd –bad bank. When the loan recovery ecosystem is gradually strengthened with the enactment of the Insolvency and Bankruptcy Code, 2016, formation of bad banks can only be a temporary measure. With the improved credit appraisal, monitoring and debt resolution mechanism, banks should be capable to enforce recovery of loans and manage asset quality without the perpetual help of external institutions. The urgency is for banks to improve people and system competency to source quality credit, monitor it and recover it in time as part of normal banking operations. Bad banks cannot be a panacea against the systemic flaws in credit administration.
Articles By K Srinivasa Rao
The flow of bank credit is crucial to revive the economy. The fear of potential asset quality woes has reduced the risk appetite of banks. Going beyond the restructuring support, banks need policy support by relaxations in prudential norms in the near term to be normalised in the next four–fi ve years. Coping with the adversities of the pandemic needs a collaborative policy support of all stakeholders to step up the lending appetite.
In a proactive move, the Reserve Bank of India rescued the economy with its innovative—blended conventional and unconventional—monetary policy measures. Low-interest rates, aligning targeted liquidity, and granting moratorium coupled with forbearance to enable banks to restructure loans, mandated the Kamath panel to work out modalities to restructure corporate sector loans. After affirming stability and orderliness of the financial sector throughout the crisis period, it rightly signalled descent towards normalisation paving for pandexit manoeuvring the tool of variable reverse repo rate.
Though it will benefit from the preparatory work done by its predecessor, the new Banks Board Bureau has a tough task ahead of it. The operational state of public sector banks has deteriorated, asset quality woes have increased, and employee morale is sagging. While many of these issues are beyond its mandate, it may need to account for and address them in order to meet its core objective of fixing the governance of public sector banks.
The Punjab National Bank fraud has brought attention back to how banks manage operational risk. There is a need to investigate what procedures were undermined, and how a few employees in connivance with clients could take control of such large amounts of money for such a long time without raising any red flags.