Banks need to improve NPA mgmt: Chakrabarty

With lending rates rising, fears of banks’ asset quality deteriorating are gaining ground. In such conditions, banks should improve their bad loan management system, said K C Chakrabarty, deputy governor, Reserve Bank of India (RBI).

Senior RBI officials were addressing analysts and researchers a day after increasing policy rates by 50 basis points to clamp on inflation.

Chakrabarty said non-performing assets (NPAs) may increase, as interest rates rise. “We are only warning banks that their NPA monitoring system should be better. Risks can be mitigated if banks are able to identify them earlier,” he said.

Pointing out the faults in outdated systems, he said there were enough gaps in the NPA monitoring process—from identification to follow-up to recovery. The process needed to be accelerated, he said. Lately, NPA accretion has been more evident in the case of public sector banks, as they move to a system that identifies bad loans without human intervention.

Deputy governor Subir Gokarn said a rise in the cash reserve ratio would not have been beneficial. “It would disrupt normal business for banks. Since liquidity is already in deficit mode and policy transmission is better in such conditions, it was better to use a repo rate rise,” he said.

Gokarn added the cumulative impact of past rate rise actions would bring down inflation from the November-December period. In the first quarter policy review, RBI increased the inflation projection for the end of this financial year from six per cent to seven per cent. Inflation, as measured by the wholesale price index, stood at 9.44 per cent in June. Economists say the figure may touch double digits on revision.

Yesterday’s rate rise created an arbitrage opportunity for global players, which was reflected in the appreciation of the Indian rupee by 22 paise against the dollar. RBI said it did not intervene with the objective to set the exchange rate. “Exchange rates have to be market determined. If the rupee appreciates, it would have a positive impact on inflation, as imports would become cheaper,’’ said Gokarn.

On the government’s borrowing plan, deputy governor H R Khan said RBI would take advantage of the flat yield curve and continue to sell more longer-dated papers. Higher government borrowing through cash management bills and treasury bills lifted yields at the shorter end, flattening the yield curve. RBI on Wednesday auctioned Rs 10,000 crore worth of treasury bills. It is set to auction Rs 12,000 crore of dated government securities on Friday.