RBI’s Drive to Put an End to Volatil­ity in Banks’ Earn­ings

Reg­u­la­tor’s move to help in of­fer­ing a bet­ter, if not a clearer, forecast

The Economic Times - - Economy & Companies - San­gita.Me­hta @times­group.com

Mum­bai: The Re­serve Bank of In­dia’s (RBI) drive to stan­dard­ise bad loan recog­ni­tion across all banks will put an end to the decade-old volatil­ity in banks’ earn­ings, es­pe­cially when a new chief ex­ec­u­tive took charge of a bank. This volatil­ity, which used to spook in­vestors, will now come to an end, and will help in of­fer­ing a bet­ter, if not a clearer, earn­ings forecast.

The cen­tral bank plans to put in place a sys­tem wherein banks have to com­ply with the ir­reg­u­lar­i­ties pointed out in an­nual fi­nan­cial in­spec­tion (AFI) within a stip­u­lated pe­riod, or face the prospect of reg­u­la­tory ac­tion. “Go­ing for­ward, we want to move to­wards a sys­tem where once we point out cer­tain com­pli­ance lapses, there’s a clear sense of what hap­pens if you don’t ac­tu­ally com­ply,” said RBI gover­nor Raghu­ram Ra­jan last week.

In the past, there have been sev­eral in­stances of PSU banks re­port­ing huge losses soon af­ter a new CMD took charge, and very of­ten blamed the losses on higher pro­vi­sions made in com­pli­ance with the AFI re­port. While this may be so, some banks did not fully com­ply with the AFI re­port.

The cen­tral bank in­spects banks’ books an­nu­ally to as­cer­tain if they were fol­low­ing the reg­u­la­tion laid down by the reg­u­la­tor. If there are any de­vi­a­tions, banks are di­rected to take cor­rec­tive mea­sures fol­low­ing a di­a­logue be­tween banks and the reg­u­la­tor. Very of­ten, there have been dif­fer­ences be­tween banks and RBI on pro­vi­sions which took long to re­solve.

“Right now it is fuzzy. We do give them an ac­tion plan but at the end of the year, if they have not com­plied on cer­tain di­men­sions, then it is a lit­tle fuzzy as to the ac­tion we take. We are mov­ing to­wards a sys­tem of stronger com­pli­ance,” Ra­jan had said.

“With this, RBI is putting the re­spon­si­bil­ity on banks on the terms of governance. Ear­lier, there was no ques­tion of penalty if the banks did not com­ply — this move will make them more re­spon­si­ble,” said D Sarkar, for­mer CMD of Union Bank of In­dia.

RBI has pointed out in its mone­tary pol­icy that it plans to put in place a su­per­vi­sory en­force­ment frame­work wherein ac­tion against banks would be taken for non-com­pli­ance of RBI instructions. The pol­icy said RBI would for­malise a frame­work by June this year, which is “in­tended to meet the prin­ci­ples of nat­u­ral jus­tice and global stan­dards of trans­parency, pre­dictabil­ity, stan­dard­ised, con­sis­tency, sever­ity and time­li­ness of ac­tion”.

In the past, there have been sev­eral in­stances of PSU banks re­port­ing huge losses soon af­ter a new CMD took charge

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