RBI asks banks to guard asset quality,tighten risk management

“While gross NPAs,in percentage terms,have declined steadily from 15.70 per cent at end March 1997 to 2.25 per cent at end March 2011,this does not fully reveal the underlying realities and some trends are a matter of concern,which could put pressure on asset quality of banks in future,” the RBI said. Aggressive lending during the high credit growth phase followed by the crisis resulted in slippage with gross NPA ratio steadily rising from 1.81 per cent at end March 2008 to 2.21 per cent at end March 2010,followed by a slight moderation to 2.01 per cent in 2011. The concern is that the recoveries have not kept pace with slippages since 2007-08. Rising interest rates and substantial amount of restructuring done during the crisis period,if not done with due care,are likely to put further pressure on asset quality of banks.

On corporate governance standards in banks,the RBI report said,“If a corporate fails,the fallout can be restricted to the stakeholders. If a bank fails,the impact can spread rapidly through to other banks with potentially serious consequences for the entire financial system and the macro economy. While regulation has a role to play in ensuring robust corporate standards in banks,the point to recognise is that effective regulation is necessary,but not a sufficient condition for good corporate governance.” In this context,the RBI said,the relevant issues pertaining to corporate governance of banks in India are bank ownership,accountability,transparency,ethics,compensation,splitting the posts of chairman and CEO of banks and corporate governance under financial holding company structure,which should engage adequate attention.

Calling for a review of various banking laws,the RBI report said,“there is a strong case for reviewing all the various legislations and recasting them for a number of reasons.”