Letters: Welcome move

With reference to the front-page report, “RBI tightens screws on banks to ease bad debt” by Anup Roy and Abhijit Lele (April 14), the Reserve Bank of India’s (RBI) proposed advanced risk management measures known as Prompt Corrective Action (PCA) in alignment with Basel norms are welcome. 

PCA as a corrective measure could help the RBI trim the banking system if commercial bank fails to comply with revised prudential norms or do not improve their performance. Threshold limits specified in PCA for four financial indicators, namely capital adequacy, asset quality, return on asset and leverage can help the central bank alert scheduled commercial banks. The earlier version of PCA was first imposed on a few banks due to their poor asset management.

While the RBI’s revised PCA deserves special mention with respect to survival of banks, individual banks should be proactive in managing their rate-sensitive assets and liabilities to improve earnings and augment economic value of equities.

For example, some assets are more sensitive to market interest rate movement while some liabilities are not or vice versa. Any of these possibilities affects a bank’s net interest margin and profitability, and induces portfolio risks.

While asset-liability management is a prime focus of a bank, non-performing asset management is central to sustain its operational effectiveness. That assumes banks’ risk aversion to lending in relation to borrowers’ credit worthiness.

Kushankur Dey | Odisha

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