In the week gone by, senior members of the Reserve Bank of India had rounds of discussions with the heads of private and public sector banks. Some of the topics were implementation of external benchmark rates, strengthening credit underwriting, monitoring large loan exposures, and increasing recovery from written-off loans. The last point is quite interesting because the RBI was questioned recently by the apex court as to whether recovery is something that it should look at in its capacity as a central bank. This question can be extended to the other points discussed in these meetings. In today’s supervisory framework, which is round-the-clock and comprehensive, these are aspects that the central bank is aware of. If corrective steps are required on a case-by-case basis, it can be done immediately. It need not become an industry issue.
But is this what the RBI is supposed to be doing? Of course, in the growing complexity of how financial transactions are getting structured and loans are being packaged, it’s important to have a handle of the entire process. But at what point will having a handle of things remain a matter of oversight and not end up being construed as micromanagement.
Bankers may not accept it on your face, but there is a growing feeling of fatigue among them. A feeling that they get unduly questioned for even the smallest thing happening in the bank, which is taking away their productive bandwidth. What’s bothering them more is most of their responses end up being seen through the lens of suspicion of fraud or for ill-conceived purposes.
The apprehension of the central bank is understandable. We have had three bank failures in a one year, the scars of which are still indelible. The intention is to nip it in the bud. But how about also viewing deviations from the standpoint of materiality.
For instance, divergence on asset quality has pretty much become rarity because divergence beyond the five per cent threshold should be reported as part of financial disclosures. This experience could be extended across any deviation, whether frauds, interest rate related issues, end-use classification mismatches, and so on.
The underlying point here is that the deviation or non-compliance should be material. And the reason why the line between oversight and overbearing is shrinking is because banks view materiality from the standpoint of impact on profits. For the RBI the meaning of materiality is deeper. It’s the stability, capital position of a bank and the safety of its depositors. Given that there is divergence in just the interpretation of materiality, bankers’ fatigue could last longer.
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