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18th March 2023 (7 Topics)

Prudent Asset Liability management

Context

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’.

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, 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.
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