Risk management: Not the time to drop guard for Indian banking sector

The resilience of the Indian banking sector has been reiterated by Reserve Bank of India (RBI) Governor Shaktikanta Das in recent times, particularly against the backdrop of bank failures in advanced economies.

Asset quality of Indian banks, as indicated by the non-performing asset (NPA) ratios, has been falling since 2017-18.

The banks have record-high capital with loan loss provision of more than 70 per cent. At the same time, the RBI governor added a caveat: “It has to be remembered that the seeds of vulnerability often get sown during good times when risks tend to be overlooked.”

It is against this backdrop that Business Standard organised the Risk & Banking Resilience Summit, in association with SAS, to discuss some of the issues banks face in terms of managing risks.

The tone of the summit was perfectly set by former RBI deputy governor N S Vishwanathan, who said it was early to celebrate the health of the banking sector. He emphasised that the banks should be aware of the changing sources of risks.

Vishwanathan asserted that steps like Asset Quality Review (AQR), the Insolvency and Bankruptcy Code (IBC), and provisioning for NPAs have made the Indian banking ecosystem more robust and resilient.

This was followed by a panel discussion on the liquidity conundrum facing Indian banks and lessons from the US banking crisis. The liquidity situation dramatically changed in 2022 after the RBI started raising interest rates. The surplus liquidity seen during Covid-19 came down sharply with a pick-up in credit demand. This resulted in slower growth in deposits as compared to credit offtake. The reliance on bulk deposits was one of the reasons for bank failures in the US.

The second panel discussion was on expected credit loss (ECL)-based approach for loan loss provisioning by banks, on which the RBI floated a discussion paper in January. At present, banks make provision on incurred-loss basis. These would be issues while transitioning to the ECL framework.

How much more capital will be required for provisioning?

Given that the health of the banking sector has improved with higher profitability, lower provisions and record capital — are Indian banks ready to adopt the framework?

The panel discussion on “IFRS-9-Implication for Indian banks,” tries to answer some of these questions. The final panel discussion was on Risk Decision­ing at Indian banks. The panellists emphasised on the importance of conduct and governance risks.

In the aftermath of the global financial crisis of 2008, regulators across the world focussed on ‘conduct’ risks. There is no amount of capital, which can save them from such risks, they said. In India also, the regulator has stepped up focus on the boards and is sensitising them on the importance of governance.