RBI bats for retail depositors, gets tough on bank NPAs

The Reserve Bank of India (RBI) is now getting tough on bank non-performing assets (NPAs) and the inordinate differentials between retail and bulk deposits offered by banks.

These issues came up during a meeting between the RBI and the banks earlier and even on the day of the Monetary Policy, when the central bank took stock of supervisory practices.

The discussion centred around discrimination between customers on bank deposit rates, RBI governor Duvvuri Subbarao told reporters. “The main point of the RBI was that deposit rates given to customers must be non-discriminatory, transparent and contestable. This is not micro-management; banks can calibrate deposit rates as they want, whenever they want, but all we were asking for is that they should be non-discriminatory, transparent and contestable.”

On the asset quality of banks, the governor said Deputy Governors KC Chakrabarty and Anand Sinha met the CEOs of a dozen major banks in February and while the asset quality of banks would continue to be under pressure, some banks had reported that by focusing on smaller accounts, they would be improving the quality of assets. “With the Air India restructuring being passed by Cabinet, the concerns relating to asset quality in the aviation sector seem to have been reduced,” he said.

RBI has told banks to improve the risk management practices further in order to detect bad loans even before they go bad, the governor said. The Monetary Policy has proposed that banks put in place a robust mechanism for early detection of signs of distress and measures, including prompt restructuring in case of viable accounts wherever required, with a view to preserving the economic value of such accounts. The policy also mandates banks to have proper system-generated segment-wise data on their NPA accounts, write-offs, compromise settlements, recovery and restructured accounts.

On loan restructuring, Sinha pointed out that this was often seen as necessary by banks and after recast around 80 percent of loans were standard while only 20 percent at the most tended to go bad.

On differential deposit rates, Chakrabarty said banks can offer differential rates for all deposits beyond Rs 15 lakh. “But from the day this policy was introduced, this differential rate has to be offered in a transparent and non-discriminatory manner. And we feel the banks are not following this guideline in letter and spirit.”

Chakrabarty said if there is a difference between the retail rate of deposit and the bulk rate, ideally that difference should be the transaction cost. The cost of money, he said, remains the same. “The cost cannot vary other than on the transaction cost. But for all deposits of, say, Rs 1 crore, the rate has to be the same. Banks are quoting different rates and, as a result, we feel deposit rates for bulk deposits are higher than what the market should give,” the deputy governor stressed.

Banks, he said, need to be disciplined on this in their own interest and follow the guidelines of RBI. “Make details on bulk deposits available even on your website so that all customers come to know that banks will give a particular rate for a particular maturity. Beyond that, freedom of the banks is available in all respects.”

Chakrabarty said the RBI guidelines were “almost compulsory” and RBI was flagging the issue “in the interest of the system that interest rates should come down, better transmission mechanism should prevail and the discrimination between the retail depositor and bulk depositor must end.”