Published: 23rd Mar, 2023
Context
Reserve Bank of India (RBI) governor Shaktikanta Das mentioned that developments in the U.S. banking sector highlight the importance of ensuring ‘prudent asset liability management’.
Background
- The recent developments in the United States’ banking system have brought to the fore the criticality of banking sector regulation and supervision.
- The ripple effects of the failure of the Silicon Valley Bank (SVB), the 16th largest bank in the US, may be seen globally.
- SVB collapsed because of poor financial management.
What is Asset Liability Management?
- ALM in banking means managing the cash flows of assets and liabilities to increase profitability, manages risk, and maintains safety and soundness.
- Simply put, it is the process whereby a bank’s total assets and liabilities are controlled and managed simultaneously in an integrated fashion.
- ALM is all about managing three central risks:
- Interest Rate Risk
- Liquidity Risk
- Foreign currency risk
- For banks with forex operations, it also includes managing,
- Currency risk
Issues with Banking sector in India:
- NPAs of public sector banks: Parliamentary committee noted that the problem of high loan write-offs and NPAs, combined with low asset growth, is more severe for public sector banks (PSBs) than private banks.
- Lowering of Capital to Risk-weighted Assets Ratio (CRAR) requirement: The RBI’s requirement of a minimum CRAR of 9%, to prevent banks from becoming highly leveraged, is 1% higher than the Basel III norms for internationally active banks.
- Performance of the National Company Law Tribunals (NCLT): Larger NPAs under the Insolvency and Bankruptcy Code (IBC) have been taking much longer than the stipulated time period of 270 days.
- Powers of the RBI in case of PSBs: RBI had stated that some powers available to the RBI under the Banking Regulation Act, 1949 are not available in the case of PSBs. These include: (i) removing and appointing Chairman and Managing Directors of banks, (ii) superseding the Board of Directors etc.
Way forward:
- Reducing CRAR: high CRAR requirement is impractical for these banks, and a relaxation would release capital and increase credit in the market.
- Strengthening NCLT: NCLTs’ resources are increased to enable them to dispose of such cases swiftly.
- Strengthening RBI: Government should constitute a high powered committee to evaluate the powers of the RBI with respect to PSBs as provided under various statutes.
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