‘Higher provisioning will make bank balance sheets more resilient’

Stressing on the need for higher provisioning, the Reserve Bank of India Deputy Governor NS Vishwanathan said the required provisioning for the NPA (non-performing asset) accounts referred for insolvency resolution is “nothing unusually large”.

According to him, higher provisioning will make banks’ balancesheet more resilient; it will also boost credit growth.

“Provisioning by banks needs to be higher to make their balancesheet more resilient and boost credit growth,” he said at an interactive session organised by the Merchants’ Chamber of Commerce and Industry here on Friday.

The central bank has directed banks to set aside 50 per cent of the loan amount as likely losses for all NPA accounts it has referred to to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC). The provisioning should be 100 per cent in cases that fail to get resolved under insolvency proceedings and are forced into liquidation.

While the common perception is that the provisioning norms stipulated by the central bank for cases referred to the IBC is steeper than required, Vishwanathan was of the view that the higher provisioning is for “expected loss”.

Stressed asset Stressed asset, in general, and the public sector banks, in particular, is a matter of serious concern, he said and added that NPA as a percentage of total exposure is higher in large accounts.

“Globally, there is a move to contain large exposure, and RBI has also aligned its policy in this regard,” he said.

A strong insolvency code will improve the long-term credit quality of banks, placing them on a firm footing.

Strong balance sheet will enable banks to deal better with the stressed assets. “Capital constraints, apart from other factors, lead to delay in recognition of stress. Sub-optimal restructuring will attenuate the problems faced by banks,” he pointed out.

Justifying the RBI panel’s recommendation of linking bank lending rates to a market benchmark, instead of base rate or MCLR, Vishwanathan said, it will bring “transparency” in the system.

MCLR is based on bank specific issues, therefore there is the need for having an external benchmark for deciding interest rates. It is fundamental to bring transparency in the system. The final rate will be a function of competition. Days of regulating interest rates are over, he said.

Responding to a query on whether the RBI will encourage use of crypto-currency, Vishwanathan said, “I cannot comment on a policy which is still in the making,” hinting at the fact that the central bank might be in the process of preparing a policy on the same.

Cryptocurrencies are digital or virtual money used as medium of exchange in many countries, including India. It uses cryptography to secure transactions and is difficult to counterfeit because of its security features.

COMMENT NOW