RBI policy sets deadline for banking reforms

The central bank has laid down rules for provisioning on sticky advances backed by government guarantees from April 2000 while shortening the life of sub-standard assets from 24 months to 18 months by March 31, 2001. The Bank has also called for 0.25 per cent provisioning on standard assets from fiscal 2000, 100 per cent risk weightage on foreign exchange March 31, 1999 and a minimum capital adequacy ratio of 9 per cent as onMarch 31, 2000.

RBI governor Bimal Jalan said the move to increase the CAR by one per cent will help the banks to strengthen their balance sheets. "A lot of time has been given to the banks to clean up their balance-sheets… we do not anticipate any problem in meeting the CAR norms by them. This is only a supplementary measure and not a burden on banks," the governor said.

"We have taken a three to four year perspective to implement the Narasimham Committee’s recommendations," he added.

Straying from its regular policy, the bank did not make any change in the short-term measures like the bank rate and banks’ cash reserve ratio (CRR) and instead focused on long-term perspectives. "This is not an appropriate day to announce measures. What we have decided to do is to take a long-term perspective and strengthen the financial soundness of the banking system," Jalan said.

Three short-term measures announced today include withdrawal of the restriction on the minimum period of three days for repo deals,introduction of interest-rate swaps to enable banks hedge against rate risk arising out of asset liability mismatches and 100 per cent risk weightage on foreign exchange open positions with effect from March 31, 1999.

Charting out the path for the second phase of financial sector reforms, the RBI has raised the minimum capital to risk weightage ratio from the existing 8 per cent to 9 per cent form the year ending March 31, 2000. Jalan, however, hinted at relaxation of this norm for certain banks which will have `genuine’ problem in meeting the requirement.

Income recognition and provisioning norms on government-guaranteed advances are being brought on a par with other advances from 2000-2001. Provisions on existing and old government-guaranteed advances which would consequently become NPA are to be fully provide for over a period of four years beginning March 31, 1999. It has also asked banks to make a minimum 0.25 per cent provisioning on standard assets for the year ending March 31, 2000 against theNarasimham panel recommendation for 1 per cent provisioning. The decision to raise further the provisioning requirement will be announced in due course, it said.

Against the Narasimham panel recommendation of 5 per cent risk weightage on government papers, the RBI has assigned 2.5 per cent risk weightage by the next fiscal. It has also announced an additional risk weightage of 20% would be imposed on securities of government undertakings which do not form part of government borrowings with effect from 2000-2001.

Jalan has admitted that strengthening of capital adequacy and prudential norms could pose immediate resource management problems for some of the public sector banks. "The issue of capital support from the government and enhancing public sector banks’ ability to access the capital market to meet their capital requirements deserves to be … resolved at an early day as it is central to ensuring the future financial viability of the banking sector," the policy document said.

On the central bank’ssilence on other structural issues like paring of the government stake in state-run banks, RBI said: "The Narasimham committee had also made certain important recommendations regarding reduction in government and RBI shareholding in public sector banks and some other matter on which final decisions have to be taken by the government of India."

Bankers say that the Reserve Bank’s move to introduce 0.25 per cent provisioning norms for standard assets will set back banks’ earnings by over Rs 600-650 crore in the first year if one takes into account the level of present standard assets of the banking sector.