India’s banking system needs a further gradual reduction in its statutory liquidity ratio (SLR) requirements, and the evolving liquidity requirements need to be made on par with international norms that are considered relatively moderate, according to a top banker.
Talking at a banking and investment conference organized by Dhanam Publications in Kochi yesterday, G Padmanabhan, chairman, Bank of India (BoI) and former executive director of Reserve Bank of India (RBI), also warned that given the restrictions on consortium financing and corporate loan exposures imposed on public sector banks (PSBs), there could be a shift of assets from the PSBs to large private sector banks in the near term.
“So overall we are going to witness some sort of consolidation and realigning of the banking system in the next 5 years or so,” Padmanabhan cautioned.
The veteran banker, who is also an expert on regulatory matters, called on the banks to extend the ‘cut loss’ strategy followed in their treasury to credit portfolios too as a strategy to protect the quality of credit portfolio.
Referring to the efficiency of private sector banks, he said that what differentiates the private sector banks from PSBs is their ability to cut loss and move forward.
“How do we strategise for that? In other words, the credit portfolio has to be in today’s scenario treated like a treasury portfolio where once the price starts moving against you, there should definitely be a cut loss strategy to address this. Yes, some of them could be wrong decisions in retrospect, but then we are bankers and not astrologists,” he noted.
He argued that the bank portfolios, whether in the trading or banking book, will have to be dynamically managed. The BoI chief also took the opportunity to flag the risk of banks facing tougher competition from non-bankers and ‘new competitors’ in the near future itself.
Noting that as a part of strategy every bank today wants to go retail, he expressed fear “whether we are creating another bubble in that sector”.
Highlighting the need for an efficient hedging mechanism, Padmanabhan lamented that though an efficient hedging requires a two-way interest, this is conspicuous by its absence in the Indian market.
“In a one-way street, as we have now, the unsavoury reality is that everything needs to be left to prayers,” he said in a lighter vein. Stressing the need for recapitalization of the PSBs, he cited the Bank for International Settlements (BIS) study on the topic.
“A one percentage point increase in a bank’s equity-to-total assets ratio is associated with a 0.6 percentage point increase in its yearly loan growth,” the study had found.
He quoted deputy governor of RBI, Dr Viral Acharya, as saying that if a banking system remains systematically undercapitalised and new lending is not kept under a tight supervisory watch, then the economy can suffer significantly from a credit misallocation problem, now commonly known as ‘loan ever-greening’ or ‘zombie lending’.
However, Padmanabhan refuses to subscribe to the view expressed by many in the industry that banking in India is facing graver issues. “Public sector banks are not limited liability companies (LLCs) but statutory bodies owned by the sovereign and there is no question of insolvency of the sovereign,” he asserted.