The Reserve Bank of India may adopt the idea of a bad bank to deal with the non-performing assets (NPAs), the incumbent RBI governor has indicated on January 16, 2021. He also asked the bank and non-banks to embrace appropriate compliance culture and figure out risks.
“If there’s a proposal to set up a bad bank, the RBI will look at it. We have regulatory guidelines for asset reconstruction companies,” Das said.
NPAs are likely to increase up to 13.5 per cent by September
2021, according to the Financial Stability Report released by the Reserve Bank of India (RBI) earlier this week.
“We are open to look at any proposal to set up a bad bank,” he said.
Proposed by the Indian Banks’ Association in May 2020, the bad banks buy the bad loans and other illiquid holdings of banks and other financial institutions. The IBA had submitted their proposal to erect bad banks to the Finance Ministry and proposed equity contribution from the government and the banks.
“In this context, instilling an appropriate risk culture in the organisation is important. This needs to be driven by the board and senior management with effective accountability at all levels,” Das said.
“Going forward, it becomes imperative that fiscal roadmaps are defined not only in terms of quantitative parameters like fiscal balance to GDP ratio or debt to GDP ratio, but also in terms of measurable parameters relating to quality of expenditure, both for Centre and states,” Das said.
“While the conventional parameters of fiscal discipline will ensure medium and long-term sustainability of public finances, measurable parameters of quality of expenditure would ensure that welfarism carries significant productive outcomes and multiplier effects,” Das said.
“Building buffers and raising capital by banks — both in the public and private sector — will be crucial not only to ensure credit flow but also to build resilience in the financial system,” Das said.
“We have advised all banks, large non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of Covid on their balance sheet, asset quality, liquidity, profitability and capital adequacy, and work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others,” Das said.
“It provides independent evaluation and assurance to the board that the operations of the entity are being performed in accordance with the set policies and procedures,” he stated.