Treasure Trove On Banking

Since 1992, a large number of measures have been undertaken as part of the financial sector reform. The T&P for June 1996 provides an authentic reference document, chronological and subject-wise, on the reforms (pp 86-111).

The T&P provides a very brief perspective wherein it rightly signals the start of the next stage of the reform and the thrust will be on improvement of organisational effectiveness. It rightly stresses the dangers of adverse selection in lending at very high interest rates as it could eventually increase non-performing assets (NPAs). Since the objective is to improve the efficiency of the system, it advocates that banks should work towards reducing the spread and pass on the efficiency gains in the form of lower lending rates.

 

NPAs of public sector banks continue to be almost unchanged in recent years in the range of Rs 40,000 crore despite sizeable write-offs and recoveries and it can, therefore, be assumed that NPAs are being accumulated out of fresh lending. The reduction in the NPAs from 19.5 per cent in 1994-95 to 17.3 per cent in 1995-96 is of little comfort unless information is made available on recoveries and write-offs. Anecdotal information indicates that recoveries and write-offs are roughly equal.

What is disturbing is that 10 public sector banks have NPAs above 20 per cent. On the capital risk assets ratio (CRAR) eight of the 27 public sector banks have not met the requirement. While the net loss of nationalised banks of Rs 1,165 crore was entirely attributable to the Indian Bank loss of Rs 1,336 crore, it would have helped the assessment if the various indicative ratios had been also worked out excluding the Indian Bank. Admittedly, the Indian Bank loss is revealed on page 21 of T&P but the reader could have been spared painful gymnastics. The return on assets (RoA) for nationalised banks which was 0.1 per cent in 1994-95 was a negative 0.4 per cent in 1995-96. The RoA for the SBI group was 0.42 per cent in 1995-96. It, therefore, appears to be a long haul before the public sector banks could reach the 1 per cent level which, as a rule of thumb, is considered an appropriate RoA. `Per contra, the RoA of foreign banks of 1.6 per cent and of new private sector banks of 1.9 per cent could be considered as abnormal profits accruing to a relatively small segment while the overall system reflects poor performance.

There is a reference in the report to the consultants recommendation on weak banks that an asset reconstruction fund (ARF) be set up. My view is that an ARF in no way enables recovery and all that would be done is that the weak banks would be shown as meeting all the parameters without any fundamental change. The danger is that the weak bank, after a separation of the NPAs into an ARF could once again resort to unbridled lending and generate NPAs. Thus, an ARF does not appears to be an appropriate instrumentality.

The T&P provides a number of informative boxes but the one on capital standards for derivatives (box II.2, pages 28-29) deserves particular attention. While market participants urge a rapid introduction of derivatives, a reading of the box would confirm the need for caution.

In the future we could expect progressive improvement in the quality of the report. With this in mind, I have a few suggestions. First, the report could revert to what it really is meant to be i.e essentially on banking rather than monetary policy and as such, other than continuing with the full chronology of the reform in the annexure, the report could avoid a repetition of the annual report on various monetary policy and related measures and the banking data already set out in the annual report could be relegated to the appendix tables. The report could then bring upfront the performance of banks and non-banks.

Secondly, while reviewing the performance of banks there should be a full disclosure on individual public sector banks on a few indicators such as CRAR and the working results. The bank-wise data could be in the appendix tables and relevant bank-wise discussion could be set out in the text. This would be one way of the supervisory concerns being expressed openly. As I have mentioned in my column (February 14, on weak banks) there is much merit in publicising the facts about the weak banks. This would slow down the growth of the weak banks but then this should be the precise objective of policy. Such disclosure in T&P should be a precursor to the supervisors insisting on a clearly set out statement of facts being put out prominently in each branch of such banks, which fail to attain the standard set out by the regulator/supervisor.

Thirdly, the provisioning required to be made because of NPAs and depreciation of government securities should be shown separately as the two types of provisioning are clearly different; in fact a sizeable write back of depreciation is expected in 1996-97.

Fourthly, the amounts recovered and the amounts written off and the incurring of fresh NPAs on lending after March 1993, should be clearly set out. Thus, the T&P would be a pace-setter for fuller disclosure. All this information is available at the same place, but the RBI could give a stamp of professionalism to interpretation of the information in the T&P; At the present time the information is erroneously and/or incompletely analysed and thereby a panic is created or alternatively, relevant information is not made available to the depositors; the latter situation is very pertinent in the case of banks whose capital is eroded and it is a question not only of the owners stake but that of the depositor. A more open system on these aspects will also work towards a stronger system.

Finally, I would personally like to complement the RBI for cutting the lag in the latest T&P by three and half months, and I am sure that further reduction in the delay would enhance the utility of the report. Furthermore, the latest report has brought about a quantum jump in quality, and I doff my cap to Dr Y V Reddy and his colleagues for having produced a treasure trove on banking.