 "Banks not spending IT budgets fully, says RBI Dy Guv Swaminathan J")
Commercial banks in India are not spending their IT budgets, Reserve Bank of India (RBI) Deputy Governor Swaminathan J said, referring to recent instances of unscheduled downtimes inconveniencing customers.
He also cautioned banks on interest-rate risks since a reversal in the interest-rate cycle could put pressure on their margins and profitability.
Swaminathan spoke at the SBI Economic Conclave on Thursday.
He said banks had to commit resources for augmenting their IT infrastructure commensurate with their business plans and also monitor them for their availability and stability.
The deputy governor emphasised the need for banks to reconsider their involvement in lending arrangements with non-banking financial companies (NBFCs), particularly those involving many lenders, sometimes going up to 40.
“This is an issue, I think, may not be solved by regulation. This is something the banking industry will have to think through. You have to decide whether you want to be one among many lenders, one among the 30-40, because by regulation, if I say that an NBFC should not borrow from more than 10 banks, it will be very prescriptive and restrictive. I think the lenders as a group will have to take a call in terms of what should be the way,” he said.
Observing that banks had become more resilient than five years ago, the deputy governor said the capital adequacy ratios of banks were at an impressive 16.79 per cent as on September 30, 2023, and gross non-performing assets (GNPAs) at 3.25 per cent were at a decadal low with net NPAs at 0.76 per cent.
“The uptrend in profitability has continued into its fourth consecutive year with returns on assets at a healthy 1.3 per cent and returns on equity at 12.5 per cent. As compared to 2018, when 12 banks were placed under the Prompt Corrective Action (PCA) framework, today no scheduled commercial bank is under PCA,” he said.
He further said during good times such as now, establishing a robust risk buffer was the key. This involves augmenting capital, creating provisions, and accumulating funds to handle uncertainties.
He said reinforcing the risk management function was crucial. Strengthening the risk management function becomes a pivotal step in fostering resilience.
He emphasised the importance of managing interest-rate risks from trading as well as banking books.
“The increasing net interest margins banks (NIMs) are enjoying may not be sustained when the interest rate cycle reverses ... External benchmark-linked loans will be repriced much faster than deposits contracted during the peak of the interest rate cycle resulting in pressure on NIMs and eventually profitability,” he said.
The deputy governor said it was found that some regulated entities violated digital lending norms, which prompted the regulator to impose business restrictions.
He also cautioned banks on interest-rate risks since a reversal in the interest-rate cycle could put pressure on their margins and profitability.
Swaminathan spoke at the SBI Economic Conclave on Thursday.
He said banks had to commit resources for augmenting their IT infrastructure commensurate with their business plans and also monitor them for their availability and stability.
The deputy governor emphasised the need for banks to reconsider their involvement in lending arrangements with non-banking financial companies (NBFCs), particularly those involving many lenders, sometimes going up to 40.
“This is an issue, I think, may not be solved by regulation. This is something the banking industry will have to think through. You have to decide whether you want to be one among many lenders, one among the 30-40, because by regulation, if I say that an NBFC should not borrow from more than 10 banks, it will be very prescriptive and restrictive. I think the lenders as a group will have to take a call in terms of what should be the way,” he said.
Observing that banks had become more resilient than five years ago, the deputy governor said the capital adequacy ratios of banks were at an impressive 16.79 per cent as on September 30, 2023, and gross non-performing assets (GNPAs) at 3.25 per cent were at a decadal low with net NPAs at 0.76 per cent.
“The uptrend in profitability has continued into its fourth consecutive year with returns on assets at a healthy 1.3 per cent and returns on equity at 12.5 per cent. As compared to 2018, when 12 banks were placed under the Prompt Corrective Action (PCA) framework, today no scheduled commercial bank is under PCA,” he said.
He further said during good times such as now, establishing a robust risk buffer was the key. This involves augmenting capital, creating provisions, and accumulating funds to handle uncertainties.
He said reinforcing the risk management function was crucial. Strengthening the risk management function becomes a pivotal step in fostering resilience.
He emphasised the importance of managing interest-rate risks from trading as well as banking books.
“The increasing net interest margins banks (NIMs) are enjoying may not be sustained when the interest rate cycle reverses ... External benchmark-linked loans will be repriced much faster than deposits contracted during the peak of the interest rate cycle resulting in pressure on NIMs and eventually profitability,” he said.
The deputy governor said it was found that some regulated entities violated digital lending norms, which prompted the regulator to impose business restrictions.