Stress test
The Hindu Business Line, April 1, 2009, Page 8
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The CFSA’s prescriptions will have to be acted upon sooner than later to ensure that banks are ready for the recovery.
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Four years after the Asian currency crisis of 1997, India participated in an IMF/World Bank financial assessment programme whose stress tests were formalised in 2005 for member countries. The following year, India voluntarily began a joint exercise by the Finance Ministry and the Reserve Bank of India to assess the impact of its ongoing reforms on Indian banks. The exhaustive report of the Committee on Financial Sector Assessment (CFSA) has examined the health of the finan cial system at a most appropriate time given the searing pace of growth till last year and the global shocks that followed. Its verdict is a favourable one; in these dangerous times when the developed world is witnessing the implosion of leading banks, the Indian financial structure stands virtually unscathed; a bit shaken perhaps but still in business.
The CFSA bases its “health check” on some commonly accepted parameters: Indian banks, it finds, have managed to reduce their cost-to-income ratio from 61.2 per cent in 2001 to 48.9 per cent in 2007-08; the average capital adequacy ratio is comfortable at over 12 per cent while NPAs have fallen dramatically from 7.1 per cent in 2001 to around one per cent seven years later, although the CFSA could not have accounted for the recent downtrend that may lead to a greater reneging on debt and bad loans. The question now is: what next? The CFSA provides a road map on the basis of an 8 per cent expansion in GDP. The Committee, therefore, considers it necessary for capital injection to equip banks to serve expanding needs. Treading familiar territory the Committee leaves the Government two options: one is, of course, for it to dilute majority stake so that banks can access funds from elsewhere. Since that requires time-consuming legislation, amalgamation of public sector banks provides a way of augmenting their capital base. Clearly, the first option is the better for its other advantages; greater autonomy may allow banks to modernise faster and alter outdated personnel policies to constantly attract newer talent. The Committee also considers a greater role for foreign banks. Permission to expand must be reciprocated by similar opportunities for Indian banks; also foreign banks must cater to the rural and small sector. But if they have to abide by this need, they must be allowed to open more branches than they are currently.
With elections round the corner, the Committee’s prescriptions will have to wait till after the new Government is formed. But they will have to be acted upon sooner than later to ensure that when the recovery comes banks are ready to lend more than a helping hand.
The Hindu Business Line, April 1, 2009, Page 8
--------------------------------------------------------------------------------
The CFSA’s prescriptions will have to be acted upon sooner than later to ensure that banks are ready for the recovery.
--------------------------------------------------------------------------------
Four years after the Asian currency crisis of 1997, India participated in an IMF/World Bank financial assessment programme whose stress tests were formalised in 2005 for member countries. The following year, India voluntarily began a joint exercise by the Finance Ministry and the Reserve Bank of India to assess the impact of its ongoing reforms on Indian banks. The exhaustive report of the Committee on Financial Sector Assessment (CFSA) has examined the health of the finan cial system at a most appropriate time given the searing pace of growth till last year and the global shocks that followed. Its verdict is a favourable one; in these dangerous times when the developed world is witnessing the implosion of leading banks, the Indian financial structure stands virtually unscathed; a bit shaken perhaps but still in business.
The CFSA bases its “health check” on some commonly accepted parameters: Indian banks, it finds, have managed to reduce their cost-to-income ratio from 61.2 per cent in 2001 to 48.9 per cent in 2007-08; the average capital adequacy ratio is comfortable at over 12 per cent while NPAs have fallen dramatically from 7.1 per cent in 2001 to around one per cent seven years later, although the CFSA could not have accounted for the recent downtrend that may lead to a greater reneging on debt and bad loans. The question now is: what next? The CFSA provides a road map on the basis of an 8 per cent expansion in GDP. The Committee, therefore, considers it necessary for capital injection to equip banks to serve expanding needs. Treading familiar territory the Committee leaves the Government two options: one is, of course, for it to dilute majority stake so that banks can access funds from elsewhere. Since that requires time-consuming legislation, amalgamation of public sector banks provides a way of augmenting their capital base. Clearly, the first option is the better for its other advantages; greater autonomy may allow banks to modernise faster and alter outdated personnel policies to constantly attract newer talent. The Committee also considers a greater role for foreign banks. Permission to expand must be reciprocated by similar opportunities for Indian banks; also foreign banks must cater to the rural and small sector. But if they have to abide by this need, they must be allowed to open more branches than they are currently.
With elections round the corner, the Committee’s prescriptions will have to wait till after the new Government is formed. But they will have to be acted upon sooner than later to ensure that when the recovery comes banks are ready to lend more than a helping hand.
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