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Tuesday, Apr 27, 2004

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Raising the bar for banks

IN PUTTING OUT a detailed dividend policy for banks, the Reserve Bank of India has raised the efficiency bar for them by lifting the minimum capital adequacy ratio from 9 per cent to 11 per cent and stipulating that net non-performing assets must be less than 3 per cent. This, indeed, looks a critical move in an environment where the base capital of banks is still thin and there are talks of takeovers in the private sector. By changing the criterion from quantum of dividend to dividend payout ratio, where yearly handouts are linked to yearly net profit, the RBI has made it hard for a few old and new private banks to measure up; they will have to be more prudent to qualify.

The norms will prevent the government from demanding higher payouts from the banks it owns; a relief indeed. The urge of the stake-holders, private and public, to earn more dividend has to be balanced with the needs of a banking system in need of more capital to match fresh Basel norms expected to roll in by 2006. With the RBI insisting that banks comply with Sections 15 and 17 of the Banking Regulation Act, 1949, every banking company will have to continue to transfer to the reserve fund at least 20 per cent of the profit before declaring a dividend. With the 90-day provisioning norm in place since last year, most banks will have to provide more from profits towards doubtful assets. And a final say can be made when the annual results are in, in the coming months. Going by the numbers available for the year ended March 31, 2003, even some of the top private banks may not be able to comply with the maxim that net NPA should be less than 3 per cent. In recent months, banks have been talking of transferring loss assets to asset reconstruction companies. Is this a ruse to keep down the NPAs?

If the strong pick up in industrial growth continues, as many aver, NPA provisioning could be less of a tedious talk; with the Supreme Court okaying the Securitisation Act, banks could see defaulting borrowers paying up. There is not much to quarrel with the ways of the RBI as a few private sector bank managements have invited the move by not sticking to the laws of the game. A strong balance-sheet is the best advertisement for any banking entity and the RBI approval is not necessary for banks above the bar. That leaves a few weaker ones, mostly in the private sector and the RBI gets an opportunity to scrutinise closely their balance-sheets. With the RBI carrying intensive off- and on-site balance-sheet inspections, it should be in a position to prevent the poorly fit from splurging on dividends and even prevent the bank management from making an attempt. Does the RBI even believe in a possibility of a weak bank declaring a 33.33 per cent dividend?

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