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Banking reforms bearing fruit, but shift to global practices should be gradual, says RBI

The improved performance of banks during the year 1997-98 essentially reflects the gains arising from financial sector reforms and also successful reduction in the level of non-performing assets, according to the Reserve Bank of India.

In its report on trend and progress of the banking sector in India for the year ended June 30, 1998, the RBI said that there was clear evidence of prudent management of investment portfolios as reflected in the banks' participation in primary auctions of government securities and in significant interest income from government securities.

The focus of further reforms as suggested by the Narasimham Committee Report (1998) has to be and has rightly been on improving efficiency and accountability and on further improving the functioning of financial markets.

The meeting of higher capital adequacy ratio in the future is essential in the light of the significantly high cost of servicing of the loans, the RBI has said.

The RBI said that the recommendations of Narasimham Committee needs to be seen in the context of an emerging view that Basle capital adequacy accord is no longer adequate and needs to be modified.

The Basle accord sets a minimum capital ratio, not a maximum insolvency probability, and also is not a static framework but is developed and improved continuously as is evident from the January 1996 amendment to introduce capital changes to market risk.

In this context, the RBI said, the recommendation of the Narasimham Committee Report for recording a five per cent weight to investment in government and approved securities requires to be examined.

However, an increase in capital standards would be the right signal from supervisors to banking industry. In a scenario where banks are increasing their non-traditional banking and off-balance sheet activities substantially, capital is the only resource available to banks to absorb any adverse effects on account of such activities.

Citing the recent turmoil in southeast Asian markets, the RBI report said that lack of transparency resulted in an incentive to ''evergreen'' loans thereby impacting on the performance of assets in this region.

Transparency and availability of timely information facilitate markets to form their own expectations in a more rational and realistic manner.

Emphasising that in many respects the NPA norms in India are considerably tighter than the international best practices, the RBI said that in most of the developed nations, there was a distinction between collateralised and non-collateralised NPAs and accordingly, lower provisions are allowed in for collateralised NPAs. In India, the concept of NPA does not allow such concessions and almost all advances are collateralised.

On moving towards international norms in maintaining NPAs, the central bank said while this is desirable, it is also necessary from the point of view of stability of the financial system to move in a gradual manner.

In this context, the RBI observed that the prudential norms in India were tighter than some of the international best practices in a very substantial way and the provisions made were beyond the requirement of prudence.

Highlighting the performance of banks, the RBI said that the net profit ratio of public sector banks increased from 0.57 per cent in 1996-97 to 0.77 per cent in 1997-98 as against the fall of net profit ratio among the foreign banks from 1.19 per cent in 1996-97 to 0.96 per cent in 1997-98. The net profit ratio of old Indian private banks also decelerated from 0.91 to 0.80 per cent during the year.

The net interest income spread of scheduled banks as a percentage to assets has shown a decrease of 27 basis points from 3.22 in 1996-97 to 2.95 in 1997-98. In case of public sector banks, net interest income decreased by 25 basis points from 3.16 to 2.91 in 1997-98 while for old private banks there was a decline of 37 basis points, from 2.93 to 2.56 during the same period.

While mergers and acquisitions provide an opportunity for banks to share resources, reduce intermediation costs and expand delivery platforms and improve chances for economies of scale to operate, banks are required to develop adequate expertise in assets and liabilities management.

The experience of Asian crisis has reiterated the need for sound regulatory and supervisory system in the course of financial liberalisation. The role of supervision is to promote financial market stability and minimise systemic risks.

UNI

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