N S Vishwanathan, former deputy governor of the Reserve Bank of India and chairperson of College of Supervisors, says the Indian banking system has room to improve and needs to maintain a healthy profile while preventing optimism from turning into irrational exuberance.
Vishwanathan noted at the SAS-Business Standard event ‘Risk & Banking Resilience’ that India’s banking sector has gone from “too bad to normal” due to regulatory action.
It’s wonderful the financial system is healthy. I don’t believe it’s good yet because it was horrible before. We’re getting better. Vishwanathan says this took time.
He said the Asset Quality Review (AQR), Insolvency and Bankruptcy Code, and NPA provisioning had strengthened Indian banks.
The former central bank deputy governor advises banks not to celebrate too soon and to maintain the resilient structure.
He feels preserving this was vital despite many internal and external changes.
He says that banks’ provisioning coverage ratio (PCR) has increased to 70-80% over time.
Vishwanathan claims the RBI was proactive throughout crises.
He believes RBI actions were taken during the crisis, not after it, and that the central bank was better positioned with technology and skill to foresee scenarios like YES Bank’s.
“It is important to remember that sources of risks in the financial sector are changing,” he adds, emphasizing supervisor preparation. They investigate unknowns and hazards.”
Vishwanathan says it was not “unfashionable to be rule-based” in the principle-versus-rule discussion.
He says that the regulatory system could not be principle-based when interpretations were done by the wording of the law while questioning banking sector readiness.
After Vishwanathan’s fireside talk, bankers said India’s deposit liquidity has returned to pre-Covid levels.
Indian scheduled commercial banks must meet the liquidity coverage standard.
Silicon Valley Bank, the 16th largest US bank, collapsed because it was considered a minor corporation and free from liquidity coverage rules.
Even tiny Indian banks must follow rules and be supervised.
In another panel discussion, ‘IFRS9: Implications oFr Indian banks’, bankers and industry consultants discussed the challenges of implementing the RBI’s proposed framework for making provisions based on future defaults, known as ECL, or expected credit loss.
Banks only make provisions following loan defaults.
“In the new system, I have to compute the expected credit loss based on the futuristic probability of default,” said RBL Bank chief risk officer Deepak Kumar. If provisions increase, banks product price should cover them, else we will eat into capital.”
Banks must also adapt to regional borrower behavior.
‘Risk Decisioning At Indian Banks’ discussed cybersecurity and technology issues.
“Ensuring AI model fairness is the biggest regulatory challenge,” says Shreya Paul, partner, EY India. “And ensuring fairness becomes important because the inherent data which goes into these models from a lot of different biases.”
Experts also called for behaviour codes.
“It is one risk no amount of capital can save you,” says Ravi Duvurru, founder, Duvurru & Reddy LLP.