Stressed assets in the banking system rose to 12 per cent in June 2016 from 11.4 per cent at the end of March 2016, reflecting pressure on public sector banks (PSBs). Reserve Bank of India Deputy Governor
S S Mundra said on Wednesday the level of bad loans and standard restructured assets rose to 12 per cent; among PSBs, it jumped to 15.4 per cent at the end of the June quarter. As a result, the return on assets turned negative for public sector banks during the quarter and the lenders reported losses.
The net combined loss for the 25 listed PSBs was Rs 1,193 crore in the first quarter ended June 2016 (Q1 FY17) against net profit of Rs 9,449 crore in April-June 2015. Credit growth has been tepid for many quarters, he said, affecting interest income. A surge in slippages led to huge provisions and reversal of interest income.
Mundra, however, said some of the reasons for such dismal performance of the state-run banks were external and not within the control of the bank managements. An important lesson from such events was that in the absence of strong structural and governance reforms, consistency of performance would always remain susceptible to such incidents. “There is a need for structural and governance reforms,” the deputy governor said, adding that for private sector banks, such reforms have to be focused on misaligned incentives and compensation.
The overriding priority was to complete the cleaning up of state-run banks’ balance sheets. Resultant provisioning needs, coupled with requirements of Basel-III norms and migration to the International Financial Reporting Standards, would entail recapitalisation of most of state-run banks, he said. Calling for longer tenors of chief executive officers of public sector banks, Mundra said “continuity of top management is crucial.” He sought a five-year term for a state-run bank chief executive officer and added initial appointment can be for three years with certain milestones as riders for extension.
If these milestones were achieved or a satisfactory explanation was available for not achieving these, at the end of the third year, there should be an automatic extension for another two years without any questions being asked, Mundra said.
“If there is a reasonable tenure, it allows someone to prepare a strategy and see that it is implemented. If the tenure is very short, there may be an inclination to postpone the problem because it can be handled by the next generation,” he added.