RBI may hike provision ratio for bad loans if needed: Dy Governor

KC Chakrabarty blames rising NPAs to poor administration and risk management practices of lenders, dubs them as ‘non-performing administration’.

RBI may hike provision ratio for bad loans if needed: Dy Governor

Mumbai : RBI Deputy Governor K C Chakrabarty has come down heavily on banks showing higher profits without providing adequately for bad loans, and said if need be, the central bank may hike provision coverage ratio (PCR) levels.

“Why banks need to show profits as high as 25 %? They can show 5 % growth in their profits. If they are not doing (providing more), I will increase it (PCR),” he told PTI in an interview.

The RBI had done away with its earlier requirement of forcing banks to maintain the PCR, or the ratio of provision to gross non-performing assets (NPAs), at 70%.

The apex bank had increased the PCR to 70 % after the Lehman crisis in 2008 and this was applicable till September, 2011. While almost all private banks have higher PCR, majority of the state-run lenders could not meet this deadline.

RBI has floated a discussion paper to explore having dynamic provisioning which requires banks to keep aside money during good times for a rainy day, rather than providing after an account has gone bad.

Chakrabarty attributed a majority of bad loans to poor administration and risk management practices of lenders and went to the extent of terming it as ‘non-performing administration.’

“I call NPA as non-performing administration. We have to make the administration functioning,” Chakrabarty, who oversees banking supervision at RBI, said.

Lending rates would have been far lower if banks had got their NPAs down, Chakrabarty said.

“It is a burden on the people who are paying the money. People forget that if NPAs would have been 1 %, banks’ lending rates would have been 4 % lower with the same inflation, and same repo rate.

As per RBI data, the gross NPA ratios of public sector banks rose to 3.3 % for the fiscal ended March 2012 while the same for private lenders dropped to 2.1 %.

“Banks should improve their credit management, the follow-up skills, recovery skills, and their systems which must help them in recovery,” Chakrabarty said. On rising cases of corporate debt restructuring (CDR) in the current round of economic gloom, he said there is nothing bad with the method “if CDR can give life to the borrower”.

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