Asset quality and reforms

The banking environment was characterised by further doses of reforms. In the first phase of reforms, the focus was on accounting policie...

The banking environment was characterised by further doses of reforms. In the first phase of reforms, the focus was on accounting policies including income recognition, asset classification and provisioning norms, which aimed at bringing in a fair degree of transparency in the bank balance sheets. In the second phase of reforms, the objective is to encourage banks to streamline their internal systems and procedures for achieving better operational efficiency. Certain banks including Bank of Baroda, have been given autonomy in certain areas besides fixation of interest rates on deposits and advances. In the area of credit, banks are now given lot of freedom for assessing the requirements of bank finance, deciding the industry wise exposures within the overall ceilings.

The recommendation of Narasimham Committee-II were also accepted by the RBI and accordingly banks are required to maintain higher capital adequacy ratio of 9 from 31/03/2000. The asset classification and income recognition norms weretightened further to bring them closer to international standards. But apart from these, Indian banks are now oriented towards sophisticated tools of risk management and asset liability management.

But such initiatives of individual banks have to be supplemented with an improved recovery climate. If banks are able to bring down their net non-performing loans to international standards, this could greatly improve their ability to operate with even lower net interest margins. The recent initiative taken by the RBI in preparing the guidelines for compromise/settlement is a welcome step.

If economy performs well, NPAs will be less whereas NPAs tend to rise in a recessionary environment. Rising trend in NPAs during 1998-99 was the fallout of economic recession. Further, in tackling the problem of NPAs, much emphasis is laid on accounting system rather than addressing the real issues of NPAs, viz. legal problem, improving recovery climate.

However, we should be pro-active in tackling the problem of NPAs.There is over emphasis on quantifying NPAs rather than finding solutions to bring them down. As mentioned earlier, NPA is not a bank specific or industry specific problem but a global problem. Also it is closely linked with the performance of the industry and economy as a whole. When the economy is not doing well, there is a greater need to identify the genuine borrowers who need to be extended the necessary comfort so that they can be saved from slipping back.

Here if all the financing agencies can work in close co-ordination with each other, they could find better and effective solutions to the problem rather than each one trying to deal with the affected borrowers in an isolated manner. Such coordinated effort on the part of all the financing agencies would also result into a common stand on the concerned borrowers and also ensure effective functioning of the agencies like Board for Industrial and Financial Reconstruction and Debt Recovery Tribunals BIFR/DRT.

Another aspect I would like to stressupon is that there is a need to view NPAs from a different perspective. Internationally, NPAs relate to non-performing loans NPLs only which is due to excessive exposure of banks in loan assets. As against this, Indian banks are much more leveraged as their loan exposure is only about 40-45 per cent with about 30 per cent to 35 per cent of their assets in the form of zero-risk securities. The loan to GDP ratio in India is only 28 per cent as against 100 per cent or more in South East Asian countries. Viewed against this background, banks in India are much better off than their international counterparts.

The author is CMD of Bank of Baroda