A Reserve Bank of India study on the soundness of Indian banks said on Friday that the banking sector remained relatively stable from 2008-09 to 2012-13, but the first symptoms of a decline in bank soundness have begun. to appear in 2013-14.
A significant decline in profitability and asset quality caused an increase in the fragility and vulnerability of the banking system in the turbulent period that marked its onset in 2013-14.
“Low level of soundness remains a challenge for public sector banks ‘Unmistakable’ reasons that can be cited for inferior governance by PSBs could be dual regulation, complexity of boards, loosening of internal controls and externally imposed constraints through central watchdog agencies on PSBs,” the study said.
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He said public banks maintained reasonable strength through 2012-13 due to lower provisioning due to low NPA (bad loan) risk, better profitability and higher customer confidence in light of the implicit government guarantee and reasonable RBI support that these banks enjoyed.
At the same time, private banks observed relatively low strength as the asset quality of some well-known private banks deteriorated significantly during the period of global financial crisis.
After 2014-15, most banks, regardless of ownership type, made significant progress in complying with governance provisions.
During the local NPA crisis of 2013-2014, Indian banks experienced declining profitability and increased liquidity stress, due to declining solvency, low margins due to massive bad advances, a reduction in exposure to off-balance sheet activities and income from non-traditional sources and an increase in the provision for loan losses.
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“Overall, over the past few years, the aforementioned adverse developments have plunged the banking system into its most severe period of stress and significantly jeopardized its overall soundness,” report by Rachita Gulati, Sunil Kumar, S Chinngaihlian , Rajendra Raghumanda and Prabal Bilantu.
He said Indian banks have made significant progress in meeting governance standards over the past few years, but the current level of compliance is insufficient to qualify the existing governance structure as “socially effective”.