Indian banking sector strong, can manage risks: IMF-World Bank

At a time when analysts have been critical of the banking sector and its regulator, the IMF-World Bank report comes as some respite

GN Bureau | August 30, 2013



At a time when Messrs Manmohan Singh, P Chidambaram and the outgoing and incumbent RBI governors are facing flak on all quarters for the tumbling value of the rupee, and the overall economic and fiscal mess, there’s a bit of good news for the country’s banking sector, which has received a pat on the back from the IMF and World Bank.

According to the two global institutions, as the world economy continues to reel under the collapse of the financial institutions triggered by the 2008 sub-prime mortgage crisis, the Indian banking sector has emerged strong, and the risks it faces today are nothing to worry about.

The observation was part of a detailed assessment report (DAR) prepared by a joint team of experts from the International Monetary Fund and the World Bank and released on Thursday. The assessment was carried out in an effort to compare India’s banking regulatory standards with those adopted by other countries.

The report points out that continuous reform in the legal and regulatory aspects have helped the Indian banking system achieve significant development over the years. And the continuous pace of reforms has provided India the necessary cushioning to absorb the shock of the 2008 crisis, which had a severe impact on several developed countries, it notes.

The report also reserves some kudos for the apex bank: “The Reserve Bank of India (RBI) is to be commended for its tightly controlled regulatory and supervisory regime, consisting of higher than minimum capital requirements, frequent, hands-on and comprehensive onsite inspections, a conservative liquidity risk policy and restrictions on banks’ capacity to take on more volatile exposures.”

However, the report also highlights that several gaps and constraints in the implementation of regulatory and supervisory framework continue to exist. Some of these mentioned in the report are international and domestic supervisory information sharing and cooperation, consolidated supervision of financial conglomerates, higher large exposure limits for group borrowers, and some limits on independence of the apex bank.

Some of these concerns were also flagged off in the report released by the joint team last year. Since then, measures have been undertaken to cover these gaps, RBI claims. “(The) Reserve Bank has made significant progress regarding supervisory information sharing and cooperation with jurisdictions where Indian banks are operating. It has entered into memorandums of understanding (MoUs) on ‘Supervisory Co-operation and Exchange of Information’ with 16 overseas jurisdictions where Indian banks have significant presence. Correspondence is in progress with another 28 jurisdictions to finalise mutually agreeable MoUs,” a statement issued by the central bank said.

According to the RBI statement, “Inspection of Indian banks in five overseas jurisdictions covering almost 60 percent of the total overseas assets of Indian banks was undertaken last year. Inspection of Indian banks in six other overseas jurisdictions covering another 20 per cent of the total overseas assets of Indian banks is currently in progress.”

It also pointed out that the financial stability and development council (FSDC), headed by the finance minister, serves as the apex forum for effective regulatory coordination.
On the issue of autonomy, the banking regulator said that it has de facto autonomy, even as it does not have de jure independence. “Regarding the moral hazard posed by the presence of Reserve Bank’s nominee director on the banks’ board, the matter has been taken up with the government for amendment of the enabling legal provision,” the central bank clarified.

With the economic woes refusing to die down, the banking sector has been terribly affected. Low demand for credit and poor loan recoveries have plagued the sector. Soaring non-performing assets (NPAs) at 3.84 percent this year, compared with 2.32 percent two years ago, have become the biggest worry. Banks have been desperately trying to bring down these figures that have been hurting their financials.

On the same day, speaking at the third parliamentary consultative committee meeting of his ministry, union finance minister P Chidambaram reiterated that banks must ensure flow of credit to every sector of industry. “This is the time for hand-holding of borrowers who are facing difficulties, especially our industries,” he said. 

He also directed bankers to adopt a sympathetic and humane approach towards genuine defaulters while asking them adopted the strictest measures with the wilful ones.

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