Dinesh Kamath's Editorial 'Decline in banks’ (GNPA) ratio' that was published in Newsband

Decline in banks’ (GNPA) ratio

The Reserve Bank of India’s Financial Stability Report reveals that there has been decline in banks Gross Non-Performing Assets (GNPA). Still, state-owned banks continue to have higher levels of bad loans than their private sector peers.

The RBI’s Prompt Corrective Action (PCA) framework, attracted criticism. The RBI’s report has justifiably spotlighted the urgent need to tighten the oversight framework for financial conglomerates. Regulators and policymakers need to work together to insulate the economy from the risks of similar fiascos.

As we know that In the December 2018, Financial Stability Report, the RBI acknowledged the rising performance of banks as on September, 2018. This report shows that signs of improvement have been witnessed in terms of both credit growth and deposits. While that has been highlighted when the RBI's latest report reveals that the nightmares of lenders under PCA continue to haunt them.  The PCA framework was revised by the RBI with effect from April 1, 2017. State-run banks under the Reserve Bank’s Prompt Corrective Action framework sanction will benefit from the move, according to Kotak Institutional Equities. PCA helps to increase profitability of banks through reduction of NPA. Unless, now they earns profit of it and also risk lending to big borrowers as their liquidity is less because of high NPA. So Prompt Corrective Actions helps the bank to improve their business for the foreseeable future instead of hurting their operations.

Since the economic crisis, triggered by the collapse of Lehman Bros. in USA in 2008, it roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. There has been significant pressure to Banks from the European Central Bank and the World Bank to reduce the NPA burden. To sell a portfolio of NPAs, the banks negotiate with potential buyers in the form of Asset Reconstruction Companies. Further, for the Indian public sector Banks to receive capital under the recapitalisation programme of the Government, the Banks are required to provide a specific business plan for the next two or three years, especially in helping the priority sectors of the economy, and explain how they plan to deploy the capital, for the turnaround to profitability.

The Public Sector Banks have complex, outdated lending processes. Under pressure to improve speed, many processes are short-circuited giving room to loopholes that borrowers with malafide intent can exploit. The immediate need is to strengthen systems using technology and invest in training employees to use it properly. The expense incurred will be easily offset by the reduction in NPAs caused by malafide intent.

The RBI should have a special wing to randomly scrutinize the sanctions of loans by PSBs to check if any violations rules in the sanctioning of loans especially lending for companies, to check if loans given to any letter pad companies or to clients not qualifying to apply for a loan. If they do so the NPA among public sector banks can be minimized to a possible extent.

Banks can't give any loan to the poor people but they can easily afford the risks of NPAs as well as taking high risks of huge loans by giving someone. Banks are doing these things because of high returns from others but still they are facing a lot of fraud cases. Whether due to the election or any other cause, there should be no relaxation of credit discipline. The banking sector has been through a near death experience.