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
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