Make it rule-based | Business Standard Editorials–06.11.2017

While the bad loans problem in public sector banks has long been understood, some recent problematic results and associated regulatory actions have highlighted that banks in the private sector also have issues related to the quality of their assets. Under such circumstances, when the health of the overall banking sector is being scrutinised, it is essential that transparent and consistent measures are used to evaluate the quality of assets on banks’ books. Of late an impression has gained ground that the banking regulator, the Reserve Bank of India, and some of the banks that it is regulating have differences of opinion on how assets should be classified. The managing director of a leading private bank said in a recent interview that banks are like “obedient children” classifying assets as they are directed to do so by the regulator.
It can be nobody’s case that the RBI should not be pro-active in cleaning up a sector that is so crucial for the economic health of the country and that has been dealing with a bad loans problem for so long. However, it is also true that the goals of transparency and consistency are not served if the standards being applied by the regulator are not immediately obvious to all observers — and, of course, to the banks themselves. The RBI’s motives in applying its discretion to banks’ books are obvious. A previous asset quality review in 2015 had demonstrated that the RBI’s concerns that some loans on bank books were closer to being stressed than was generally admitted. There was a widespread worry that some big companies were gaming the system and ensuring that their accounts were regarded as more reliable than they objectively were. Yet the question should now be asked if the right lessons are being drawn from that exercise.
The correct lesson to draw is that uniform and objective criteria should be applied to loans to examine whether or not they are of concern. Yet the high-profile disagreements recently between the regulator and at least three private banks on these issues — on the status of certain accounts, and on the provisioning that should be made for them — do not inspire confidence. If the regulator is applying standards that are different from those that banks apply in general, then this difference is not sustainable. Equally, if the evaluation of the quality of banks’ books has taken on elements of arbitrariness, then that too is problematic. Are standard loans being reclassified as stressed assets? If so, why, and using what yardsticks? The RBI and the banks need to together explain what these yardsticks are.
Statements by reputable private banks seem to suggest that they are not in agreement with the RBI’s activist stance on some of these loans — in which case, the RBI needs to make the basis of its action clear so that all market participants and observers are under no illusion as to the red lines that move a standard loan into the “stressed” column. Private closed-door negotiations with a regulator are no substitute for open and transparent rules, of which all are aware. The latter would help all stakeholders and introduce greater maturity to the sector.

via Make it rule-based | Business Standard Editorials

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