The stressed assets of Indian banking system rose to 12 per cent level in June 2016 from 11.4 per cent at end of March 2016, thus reflecting the pressure on public sector banks (PSBs).
Reserve Bank Deputy Governor S S Mundra today said the level of bad loans and standard restructured assets rose to 12 per cent while for the PSBs jumped to 15.4 per cent as of the June quarter.
He also said that as a result the return on assets for the public sector banks has turned negative during the quarter and together the public sector banks are in net losses.
The net combined loss for the 25 listed PSBs was Rs 1,193 crore in the first quarter ended June 2016 (Q1FY17) quarter as against a net profit of Rs 9,449 crore April-June 2015.
The credit growth has been tepid from many quarters, affecting interest income and a surge in slippages, warranting huge provisions and reversal of interest income.
Mundra, however, said some of the reasons for such dismal performance of the state-run banks are external and not in the control of the bank managements.
The important lesson from such events is that in the absence of strong structural and governance reforms, consistency of the performance would always remain susceptible to such events.
“There is a need for structural and governance reforms,” the deputy governor said, adding that for the private sector banks such reforms have to be focused on misaligned incentives and compensation.
The overriding priority is to complete the ongoing clean up process in the state-run banks’ balance sheets. Resultant provisioning needs coupled with meeting the Basel III norms, migration to the IFRS would entail recapitalisation of most of state-run banks, he said.
Calling for longer tenors for CEOs of public sector banks, Mundra said “continuity of top management is crucial”. He sought a five-year term for a state-run bank CEO and added initial appointment can be for three years with certain milestones as riders for extension.
If those milestones are achieved or a satisfactory explanation is available for not achieving them, then at the end of the third year, there should be an automatic extension for another two years without any questions being asked, Mundra, a career banker-turned-central banker, said.
“If there is a reasonable tenure, it allows someone to prepare a strategy and see that it is implemented. If tenure is very short, there may be an inclination to postpone the problem because it can be handled in next generation,” he said.