Tuesday, February 16, 2016

Banking Sector – Under scanner

The Reserve Bank of India had recently directed to Public Sector Banks as well as Private Sector
Banks to downgrade the asset classification of more than 150 borrower accounts, based upon Asset Quality review, to Non- Performing Assets (NPAs). The exposure of banking sector to such borrower accounts was in the range of Rs 1,50,000 Crores to Rs 2,00,000 Crores. Primarily RBI had recently issued advisory to downgrade specific large 150 identified accounts in following categories to
Non- performing assets:

  • Accounts to be downgraded to NPA categories, with retrospective effect (in some cases going back to F.Y. 2012), although these were classified as Standard accounts till 31st March 2015.
  • Diverges observed in case of existing NPAs
  • Non achievement of DCCO (Date of Commencement of Commercial Operations)
  • CDR-restructured accounts - Non fulfillment of conditions - Additional provision recommended in March 2016 Quarter and thereafter every quarter in FY 2017.

Even beyond the current exercise, there are number of stressed cases, which are in the process of being identified by the Statutory Auditors and RBI inspection teams. The total additional provisioning requirement is estimated to be Rs 40,000 cr till March 2016.The quarterly results for most of the banks have been announced , showing significant losses or steep reduction in profitability, resulting into erosion of the Banks' market capitalization by 10% to 20%. The capital market in general has also been subject to blood bath, with widespread losses across sectors, in the range of about Rs 3 lakh crores. While the government and RBI is active in limiting the damage to the financial market, the entire economic sector and society is deeply concerned about the matter and is deliberating on the following major issues:
  • How such a grave situation has piled up over the years?
  • Why the banks management, Reserve Bank of India and other regulators ignored the matter during last couple of years?
  • Whether such loans have genuinely became bad or there was deliberate diversion of funds, willful defaults or improper or reckless financial management?
  • How such large exposures have suddenly grown leaps and bounds to certain specified groups, without corresponding promoter's contribution and adequate safeguards?
  • Multiple banks are involved in almost all large cases. How and why almost all the bank did not wake up to the call in time?
  • The country need to identify, the real conspiracy as to whether and where crucial resources of the country have been diverted?
  • Who are the real culprits? -whether corruption or gross negligence or poor regulatory supervision at the level of banks as well as at the level of Reserve bank of India?
  • Is there anything fundamentally improper in the management structure of the banks and the latest changing scenario?
  • Even significant variation in valuation for restructuring or transfer of assets from one group to another or within the group via related/unrelated Parties need microscopic preview?
It is important to undertake a detailed inquiry in all cases of Non - Performing Assets' classification where exposure is more than Rs 50 Cr - Rs 100 Cr or more. In certain cases the exposure to single group is thousands of Crores. It is important that willful defaulters are identified and also cases of the regulatory failures, issues of managements' weaknesses and need for a thorough overhaul of the Banking System can be identified and addressed. The inquiry has to be completely and very strictly
confidential so that morale of genuine businessmen and more importantly, the market sentiments do not get affected adversely and backwards.

The scope, coverage and the reporting requirements by the Statutory Auditors as well as Internal Auditors are also required to be strengthened by the council of Institute of Chartered Accountants of India. The Audit has to be deep and thorough at National level as well as at Branch and Regional / Zonal level. The profession need not wait for the Reserve Bank of India or the Government action in the matter and should issue regulatory direction, guideline in respect of scope, coverage and reporting requirements, to be mandatory followed by the banking sector, with full support of Reserve Bank of India, Securities & Exchange Board of India, and the government. It is also important to comprehensively upgrade the competence, credibility, integrity and professional caliber and competence of Bank management.The Reserve Bank has been one of the top most and successful regulators and a Central Bank of the highest order. A positively aggressive approach, with an Indian
mindset would be crucial for acceptability of regulatory and financial control framework.


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