Comments
India adopted comprehensive banking sector reforms since early 1990s, under which banks were given greater operational autonomy under a market-oriented regulatory regime.
Notwithstanding banks’ improved profitability and productivity as reflected in key banking indicators in the newly competitive environment until early 2010s, the financial health of banks were under severe stress by mid-2010s, with high loan delinquencies.
High NPAs of 2010s and Credit slowdown Ratio of gross NPAs to advances which was subdued at around 1.0 per cent during 2005- 2011, became nearly 4.0 per cent by 2013-14, and alarmingly increased to 11.2 per cent by 2017- 18.
Initially, bulk of the above loan delinquencies was confined to the PSBs. Their gross NPAs ratio reached the peak of 14.6 per cent in 2017-18, before gradually declining to 7.3 per cent in 2021- 22.
Gross NPAs ratio of the Indian private banks witnessed surge in the second-half of 2010s, rising from nearly 2.0 per cent in mid-2010s to 5.5 per cent in 2019-20. High NPAs constrained bank credit growth after mid-2010s, despite monetary policy accommodation.
Bank credit growth of the SCBs decelerated from an average of 16.7 per cent during 2009-14 to 9.0 per cent in 2014-15, and plummeted to nearly 6.0 per cent both in 2019- 20 and 2020-21, before picking up.
Curbing NPAs
High loan delinquencies of 2010s, despite comprehensive banking reforms led to serious concerns on banking stability.
Moreover, remedial measures such as enactment of IBC 2016, recapitalisation and amalgamation of select PSBs, liberal schemes of loan restructuring, governance reforms in PSBs, etc. do not assure preventing such recurrences in the future. There is an imperative need to strengthen the preventive regulatory measures.
Such measures need to emerge from the diagnosis of fundamental causes of NPAs.
It is observed that the banks which suffered most from incidence of high NPAs during 2010s, also experienced high credit growth during the preceding economic boom. Their credit-deposit ratio was higher as compared to the industry average. Incorporating countercyclical capital regulations can effectively overcome excessive pro-cyclicality in bank lending, by moderating credit growth during economic boom, while promoting credit growth during recessions.
In this context, adoption of Counter-Cyclical Capital Buffer (CCyB) requirements is the need of the hour.
Time to activate CCyB
It may be noted that RBI’s current minimum capital and conservation buffer requirement for the banks is placed at 11.5 per cent.
Including additional requirements for domestically significantly important banks, the highest minimum requirement is placed at 12.1 per cent (for SBI). As against this, RBI’s latest Financial Stability Report (FSR) revealed that CRAR of the SCBs was at 16.8 per cent in September 2023.
Macro stress tests (as reported in FSR) suggested that the SCBs are well-capitalised and they are capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by the stakeholders. Thus, the banks’ capital position at present in India seems to be comfortable for accommodating another 2.5 per cent (maximum) capital requirement under CCyB.
However, in its circular dated April 23, 2024, the RBI said it was not activating CCyB as of now. In the absence of any other valid reason privy to the RBI, it is strongly recommended for early implementation of CCyB requirements to improve banking sector stability.
The latter is highly relevant to deter any potential threat to sustain high and stable economic growth.
The writer is Professor, Department of Economics, Pondicherry University
Comments
COMMENT NOW
