Clipped from: https://www.thehindubusinessline.com/opinion/rbis-timely-move-to-ring-fence-banks/article66680791.ece
Banks are in a good position to make higher provisioning against exposure to top 20 business houses
Amid the rising spillover risks due to the recent spate of US bank failures and stress building up in Credit Suisse, the RBI rightly began specific actions to further strengthen banks.
Customising systemic controls to domestic banking, the RBI rightly urged banks to make extra provision against exposure to top 20 business houses that face higher external risks.
The pandemic period strengthened the banking system. The corporate sector deleveraged their balance sheets by trimming debts. Banks too recovered loans.
The renewed flow of funds to commercial sector and speedy bank credit growth during FY23, supported by the right blend of fiscal and monetary policy measures, led to steady growth of the economy.
According to RBI’s Financial Stability Report (December 2022), the banking system is strong and resilient and is well-positioned to withstand the spillover risks of the external sector.
The ratio of gross non-performing asset (GNPA) had gone down from a high of 11.2 per cent in March 2018 to a seven-year low of 5 per cent. The net non-performing assets touched a 10-year low of 1.3 per cent in September 2022.
The provision-coverage ratio at 71.5 per cent affirms its further soundness.
The RBI’s stress tests for credit risk also indicated that banks will be able to comply with the minimum capital requirements even under severe stress scenarios. A forward outlook of RBI indicates that banks will be able to maintain capital to risk weighted assets ratio (CRAR) much beyond the minimum threshold even in severe stress scenario.
Banks increased their loans to the retail, agriculture and MSME sectors and brought down the exposure to large borrowers (₹5 crore and above) a tad — from close to 48 per cent in March 2021 to 47.3 per cent in September 2022.
But banks managed to bring down large borrowers’ share in the stock of GNPAs, from 75.6 per cent of the pool to 62.2 per cent during the period.
The asset quality of the top 100 borrowers also improved considerably, as their share in GNPA declined from 6.8 per cent in March 2021 to 5.4 per cent in September 2022.
In its advisory against exposure to top 20 business houses, the RBI allowed banks to decide the quantum of extra provision while maintaining a minimum level of 5 per cent.
Depending on individual capabilities, bank boards can decide the quantum of provisions. Currently, banks are required to make a general provision for standard assets at 0.25 per cent of outstanding loans to agriculture/small and micro enterprise, and 1 per cent for real estate commercial and 2 per cent for teaser housing loans. All other standard loans to attract provision of 0.40 per cent.
Some data points could be indicative of a bank’s ability to implement RBI’s advisory. Taking the bank credit outstanding on March 2022 at ₹122.08 trillion and 17.4 per cent of it flowing to top 100 borrowers, the data on exposure to top 20 businesses will be far less than that.
Given banks’ healthy profitability level, they can apportion the additional provisions to create the buffer. The present move will strengthen credit risk management and improve resilience to withstand unexpected shocks to asset quality.
The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views e are personal