Letter to BS: Asset quality review, PCA don't always mean penalising banks

This refers to “Moody’s rating action and the Rs 28 trn push” by Soumya Kanti Ghosh (November 11). The writer wrongly sees the asset quality review of the banks and the imposition of prompt corrective action (PCA) norms as a way of penalising the banks for past actions. This is not true. This was done to know the real quality of the advances of the major, true level of non-performing assets (NPAs) and temporarily restrict the lending activities etc to conserve capital, stop reckless lending and strengthen the concerned banks. The state of affairs in the banks had less to do with procyclicality and more to do with politically induced reckless lending to dodgy borrowers. It was to protect the interests of the depositors of these banks, a fundamental duty of the Reserve Bank of India. Second, before liberally allowing NBFCs to access liquidity, it is imperative that an AQR of advances portfolio of big NBFCs/HFCs be carried out to know the quality of assets they hold and level of actual NBFCs. For too long, we have treated public tax money and central bank money as milch cows that can be milked at will to paper over serious problems in the financial system. There must be an end to band aid treatment where serious surgery is required. Third, I agree about the suggestion of monetising/privatising state assets.

Arun Pasricha, New Delhi

Soumya Kanti Ghosh responds: No one can deny that AQR has nudged banks to start recognising restructured assets as NPAs. Simultaneously, it has forced banks to start rethinking about ways to resolve the ever-growing menace of NPAs. But it is also a fact that prior to this, restructured assets were seen largely as good assets but buffeted with policy issues. And it is also true banks were restructuring such assets as per regulatory guidelines. They were not doing it on their own or flouting any regulatory prescriptions. Post AQR, all of a sudden, all such restructured assets turned NPAs and banks, especially the bigger ones, were suddenly grappling with the rising provisioning cost for such assets. Thus, intrinsically, the problem arose not because of the banks, but because of the earlier recognition methods. 

In a scenario where the growth cycle is continuously weakening, rising provisioning costs of banks help no one, certainly not the drying credit cycle. Any banker will vouch for the fact that almost all economic activities go through different growth cycles. With the right intentions and robust internal S&Ps, many are able to weather such fluctuations successfully and start growing again. As far as AQR for NBFCs is concerned, the RBI has categorically stated that as of now it doesn’t have any such proposal. But, yes, the NBFC monitoring mechanism needs to be strengthened, which the RBI is working on. Such a mechanism must include all aspects of the functioning of NBFCs including their capital adequacy, stability, their cash inflow and outflow.

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