The Reserve Bank of India (RBI) governor may be making many suggestions and issuing instructions to banks for management of stressed assets now. But before anything else, he should investigate the functioning of RBI's Department of Banking Supervision (DBS). The DBS does off-site and on-site supervision of banks throughout the year with focus on large corporate loans. RBI also has a proactive role in sounding an alarm to the banks and government of India both, of the shape of things to come in the financial sector. In the past, when various populist announcements were being made by the government of India like restructuring of corporate loans and agricultural loan waivers, the central bank remained a mute spectator to the spoiling of the credit system of the country.
Banks, particularly the public sector ones, kept showing profits in their financial statements by hiding large non-performing loans and thus paid huge taxes on their spurious profits by under-provisioning of non-performing assets and staff superannuation benefits. All these years, under RBI supervision, the banks' focus remained on cross-selling insurance and mutual fund products, which handsomely incentivised their top executives, rather than focusing on the quality of assets. By projecting a wrong picture of the banking sector in India, RBI and banks alike kept the investors, rating agencies and the central government in the dark. RBI should accept its failure in effective banking supervision.
Kanan Joshi Mumbai
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