Indian central bank asks to raise NPA levels

The Reserve Bank of India (RBI) has been reported as circulating a request to banks in the country to improve their efficiency in managing so-called stressed assets. The level of non-performing assets has increased throughout the financial period at the start of the year. The announcement was issued as the first quarter drew to a close, at the end of March, and an official is quoted as saying that although the RBI has concerns about the ability of banks to manage NPA, there is no immediate alarm about the developing situation.

A number of factors have been contributing to the rising NPA levels that are being seen on the balance sheets of banks in India. These are tied to continuing difficult financial conditions on both national and international markets, with India being far from alone in coping with the stresses of slow economic growth and the effects of a global recession. Among the specific contributory factors to the situation is a slowing of economic activity that is being attributed to a policy of increasing interest rates in India. Figures seem to show that this issue particularly affects state-run banks as opposed to private institutions.

Some estimates have put the predicted NPA levels in the Indian financial system as a whole, at above three per cent for the current financial period. This is a rise from a recorded level of less than two and a half per cent previously. Among state-run institutions, State Bank of India (SBI), which is the biggest provider of loans in India, has seen a significant short-term rise in NPA levels, with a near ninety percent rise in the provision of such funds.

However, the growth in corporate debt recast, which is estimated to have tripled during the current financial period, is widely seen as the main factor behind the request for action by the central bank, as it seeks to ensure proper management of the growing proportion of NPA levels.

The deputy governor of the Reserve Bank of India is quoted as saying that the principle improvement that is required from banks lies in information systems. At the same time, he was also reported to voice concerns over the channels that a number of banks are using to sell insurance products, although he did not reportedly make a direct link between the two observations.

The central bank seems to hope that the improvements that it has requested can be achieved through use of the current systems in place, but with better and stronger database management. In particular, the granularity of data in terms of the regions and sectors in which NPA levels are recorded is said to be a concern. An enhancement is likely to lead to improved quality in the overall data that is available, and for which the RBI has a great responsibility at national level.