NPA mgmt an area of worry, liquidity mgmt to be critical: RBI

The Reserve Bank of India (RBI) today said that management of Non-Performing Assets (NPAs) by banks remains an area of concern and that liquidity management will become critical going forward as monetary policy stance responds to macroeconomic developments.

"Management of NPAs by banks remains an area of concern, particularly, due to the likelihood of deterioration in the quality of restructured advances," the apex bank said in its Report on Trend and Progress of Banking in India 2009-10 released here.

Signs of financial stress remain an important concern for the Indian banking sector in the medium-to-short-term, the RBI warned.

Loan restructuring is done to manage NPAs in the short-term, especially in the case of credit worthy borrowers who are stressed by unexpected and adverse economic developments.

Due to the global economic meltdown in 2008 and early-2009, several accounts were restructured by banks.

"The restructuring of borrowal accounts done by banks in 2009 may pose risk of losses over and above the initial diminution of the fair value of advances on account of reduction in the rate of interest and/or rescheduling of the repayment of principal amounts," the RBI said.

However, an improvement in domestic and global economic conditions would help in limiting the extent of fresh slippages in the future, it said.

To enhance the soundness of individual banks and to ensure the stability of the financial sector, the apex bank had advised banks in December 2009 to ensure that their total provisioning coverate ratio, including floating provisions, were not be less than 70 per cent.

This may provide a cushion against asset slippages, but "it may impact the profitability of banks", the RBI said.

Gross NPA ratio increased in FY10 and there was a deterioration of asset quality as reflected by an increase in the proportion of doubtful and loss assets in the NPA profile of banks in FY10, it said.

On liquidity, the RBI said that sound liquidity management involves prudent management of assets and liabilities supported by a process of liquidity planning taking into account changes in economic, regulatory or other operating conditions.

"Banks will have to put in place a robust liquidity management plan, especially through encouragement and retention of stable retail deposits," it said.

It called upon banks to a focus on deposit mobilisation with commensurate interest rates that could boost retail deposits.