Prudent Asset Liability management

Reserve Bank of India (RBI) governor Shaktikanta Das said that developments in the U.S. banking sector highlight the importance of ensuring prudent ‘asset liability management’.

• 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, manage risk, and maintain 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 be 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.