Banks To Value Assets At Market Rates

The Reserve Bank of India (RBI) has asked nationalised banks to start marking investment portfolios to the market.

Addressing members of the Indian Banks Association, RBI deputy governor Jagdish Capoor said with the government borrowing shifting towards market-related interest rates, banks will also have to begin valuing such investments at market rates.

So far, only three public sector banks and new private banks have begun marking all their investments to the market. "Taking into account the banks' portfolio of low-coupon government investment of the past, the transition to marking a larger proportion of investments to regular category has to be gradual and smooth," Capoor said.

As a measure of prudence, banks have been advised to keep the excess depreciation due to lower yield-to-maturity as reserves, he added.

The RBI, he said, was also examining accounting standards in coordination with the Institute of Chartered Accountants of India. The RBI intends to make balance sheets more transparent by adopting best international practices.

Gross non-performing assets (NPAs) of public sector banks, Capoor said, formed 17.8 per cent of total advances in 1997 while net NPAs formed 9.2 per cent of net advances. He, however, pointed out that accretion of fresh NPAs was smaller than expansion of credit.

"The incidence of fresh NPAs in respect of advances granted after adoption of prudential norms is clearly on the downtrend," he said.

On supervision of banks, Capoor said the annual financial inspection had been recast and is now based on the capital adequacy, asset quality, management, earnings and liquidity model. On-site inspection, however, had a greater reliance on the role of external auditors, he added.

Auditors have been told to verify and certify other aspects like adherence to statutory liquidity requirements, prudential norms and financial parameters disclosed in the balance sheet. Banks, he said, had also been advised to introduce concurrent audits in major and specialised branches.

He said recovery of NPAs was crippled by the inadequate legal framework.

Accordingly, a series of measures had been proposed by the RBI and a high-powered expert committee was being appointed by the government to look into the gamut of banking regulations.

The RBI, he said, was also looking into the prescription of a broad framework for asset-liability management, taking into account variance in the business profile of banks in the public and private sector.

The RBI was looking into risk management systems and policies that need to be introduced for strengthening the banking system, he added.