What Ails India's Financial System?
Forbes India|January 01, 2021
The Reserve Bank of India is on an overdrive to stem asset quality rot in the banking system, although now may not be the time for a ‘big-bang reform’ like allowing private corporations into the lending business
POOJA SARKAR

The last two weeks of November were hectic for India’s central bank. It first placed 93-year old lender Lakshmi Vilas Bank (LVB) under moratorium around November 17 and forced its merger with the India arm of Singapore-headquartered DBS Bank. Three days later it ordered a special audit of Srei Infrastructure Finance Ltd and its subsidiary Srei Equipment Finance Ltd; details of the audit are awaited.

Meanwhile, the Reserve Bank of India (RBI) has been monitoring India's financial system including the top 50 non-banking financial companies (NBFCs), which it considers systemically important to the financial ecosystem. In March, the apex bank imposed a moratorium on the beleaguered Yes Bank, some nine months after it did the same with the Punjab and Maharashtra Cooperative Bank (PMC). Besides, according to a report in Moneycontrol in June 2020, 44 co-operative banks had been put under the RBI’s watch list in the first half of the calendar year.

But experts point out that it could act more swiftly. “The RBI is keeping a close watch, but in my mind one should act faster,” says Ashvin Parekh, managing partner at consulting firm Ashvin Parekh Advisory. For instance, LVB had been reporting widening losses for the past two years on account of bad loans and provisioning.

Parekh, who has been working in the financial ecosystem for the last four decades, is also quick to point out how the RBI’s asset quality review (AQR) opened the Pandora’s box of non-performing assets (NPAs) that went unreported.

In 2015, Raghuram Rajan, the then RBI governor, introduced the AQR policy which forced banks to stringently recognise NPAs, and stop evergreening of books. For example, as part of the first AQR, the RBI had found a large divergence of ₹4,176 crore in the reported GNPAs of Yes Bank for 2015-16.

“After the economy started slowing down in 2014-15, the banking system started facing problems and it could not support the NBFCs. The risk weightage ratio in terms of lending changed the whole dynamics for NBFCs because they were heavily dependent on banks for their survival,” Parekh adds.

Since the collapse of Infrastructure Leasing & Financial Services (IL&FS) in September 2018, multiple banks, co-operative banks and NBFCs have come under the regulator’s scanner.

In the last three years, several massive banking frauds have been reported.

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