A Reserve Bank of India study on the soundness of Indian Banks Friday said the banking industry remained relatively stable from 2008- 09 to 2012-13, but early symptoms of a fall in bank soundness began to surface in 2013-14.
A significant drop in profitability and asset quality caused an increase in the fragility and vulnerability of the banking system in the turbulent period that marked its beginning in 2013-14.
“A low level of soundness remains a challenge for public sector banks “Unmistakable” reasons that can be referred for lower governance by PSBs could be dual regulation, board complexities, slackness on internal controls, and externally imposed constraints through central vigilance agencies on PSBs,” the study said.
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It said state-owned banks maintained reasonable soundness until 2012-13 due to less provisioning on account of low NPA (bad loan) risk, better profitability, and more customer confidence in the light of implicit government guarantee and reasonable support from RBI that these banks enjoyed.
At the same time, the private banks observed relatively low soundness because the asset quality of some well-known private banks deteriorated significantly during the global financial crisis period.
After the year 2014-15, most banks, irrespective of their ownership type, have demonstrated significant progress in complying with governance provisions.
During the local NPAs crisis of 2013-14, Indian banks experienced a drop in profitability and increased liquidity stress, owing to a decline in creditworthiness, low margins due to massive bad advances, a reduction in the exposure to off-balance sheet activities and the income from non-traditional sources, and increased loan loss provisioning.
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“Overall, during the most recent years, the above-mentioned adverse developments put the banking system in its most severe period of stress and significantly endangered its overall soundness,” the report by Rachita Gulati, Sunil Kumar, S Chinngaihlian, Rajendra Raghumanda and Prabal Bilantu.
It said banks in India have made significant progress in complying with governance norms in the last few years, but the current compliance level is insufficient to label the existing governance structure as “socially efficient”.