RBI's Financial Stability Report : BS Editorial


Diagnosis and cure

This refers to your editorial “From bad to worse” (Business Standard, June 28) calling for market-based solutions for NPA crisis. This is a timely caution to wake up all stakeholders from slumber induced by the reassurances from the owner of PSBs (GOI) that depositors’ interests are safe in banks. Having said that, the possible scare in the public mind emanating from the analyses of data on banks’ stressed assets and NPAs, magnified by the ‘flashes’ about scams should not get blown up out of proportion. Such a situation can adversely affect the already impaired health of the financial system.
Here, a couple of observations made by former RBI Governor Dr Y V Reddy in a recent speech in Kolhapur are relevant. I quote:
“…The Non Performing Assets in 1996-97  were 17.8 percent of gross advances and 9.2 percent of Net Advances. These ratios are much higher than what is prevailing today at 11.7 percent and 6.9 percent in 2016-17.  They were brought down to 9.4 percent and 4.5 percent in 2002-03, still higher than in 2015-16…. There were weak banks, and some public sector banks needed a capital injection.  These issues were addressed quietly, gradually and systematically.  As a result, the NPAs were down to 2.0 percent and 0.9 percent in 2008-09…”
“…Bank deposits continue to be as safe as they have ever been, as far as private sector banks are concerned.  They have adequate capital.
 The public sector banks do not have adequate capital to take care of the depositors' interest, but since the majority ownership is that of the government, the deposits are safe.  These are not limited liability companies, but institutions established under the law.  However, the depositors are protected with the tax-payers money. …”
As the health of PSBs remained neglected and these institutions were mulched dry for different purposes the recent efforts by RBI to use modern diagnostic tools and ‘surgical treatment’ have brought several uncomfortable realities to the fore. These should be seen as positive signs leading to the infusion of professionalism in the conduct of banking business in India.
M G Warrier, Mumbai


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