The governor of the Reserve bank of India (RBI), today, in response to requests from the industry, has said that protecting depositors’ interests and preserving financial stability of the Banking sector would be RBI’s prime concern as it is the depositors money that is being lent out. He also said that depositors run into crores in numbers, whereas borrowers are in lakhs.
There are small depositors, middle-class depositors, there are retired people who depend on bank deposits. So, the interests of the depositors have to be protected.
The governor has tried to strike a balance between spurring economic development through prudent lending and a situation where Bank NPAs would go up, thereby negatively impacting stability as well as interests iof Depositors.
He agreed that that Covid- 19 had adversely affected a large number of businesses and those Businesses that are otherwise viable but have genuine cash-flow problems because of temporary disruptions in activity need to be assisted. The Governor has also said, “Both the sides have to be matched and, in fact, the revival of such businesses will also ensure NPA levels are kept low and swift economic recovery takes place”. This calls for a scrupulously thorough and professional exercise in assessing all such businesses facing cash crunch.
The banking system and its leadership team are currently the best placed in the country to make such assessments. The difficulty that depositors face is that, the judgement of banking leadership as well as governments was previously inadequate to prevent the situation of huge NPAs sitting on the balance sheet of Banks. Depositors and citizens of the country would naturally wonder about how things are going to be done differently this time so that such buildup of NPAs does not happen. Resolution under this Framework extended only to borrowers having stress on account of Covid-19 and those borrowers classified as standard and with arrears less than 30 days as at March 1, 2020 are eligible under the Framework. If all firms eligible under these criteria were provided assistance, some firms with little or no business future would creep in. Hence the discretionary call, which still needs to be made by the creditors, is all-important. The question that needs to be satisfactorily answered is the improvement in capacity to assess business that has been added to Banks since the last episode of huge NPAs.
The Kamath report does not delve into this and only speaks of objective criteria to set the threshold below which firms would not be eligible for any assistance. Once firms qualify under the Kamath committee guidelines, we still have to deal with the same skillsets that have caused the NPA problem to go out of control. I feel that steps taken without addressing the capacity issue would result in temporary fixes and the problem would recur again and again.
At present employees with limited business sense take all lending calls. They naturally do not have the entrepreneurial talent in adequacy. Hence they are inherently limited in their capacity to take such calls. This system, if perpetuated, would not be able to help in arriving at a long-term solution to the problem of NPAs. We need a larger, deeper debate about it to change the system substantially to achieve the desired state.
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