Mumbai: RBI Deputy Governor Viral Acharya on Tuesday said initiatives like Insolvency and Bankruptcy Code and norms for prompt recognition of bad loans bode well for financial stability despite short-term pain.
In the foreword of the RBI's Financial Stability Report, Acharya also regretted that amid ongoing churning in the financial sector, governance reforms in the beleaguered public sector banks (PSBs) have taken a backseat.
Domestically, he said the economy appears to be gathering strength although global commodity price swings and turbulent capital flows are a constant reminder to our fast-growing economy that there can be little scope for complacence, if at all any.
Some of the structural vulnerabilities of the banking sector in the form of legacy impairments are finally being tackled headlong, Acharya said.
"The revised framework of February 12th for dealing with stressed assets issued by the RBI should incentivise early identification and resolution of credit risk.
"The IBC, 2016 is emerging as the lynchpin for resolving stressed assets in a time - bound manner. These developments bode well for allocative efficiency and financial stability in the medium term even if there is some short-term pain in the process," he said.
Acharya further said the ongoing churning in the financial sector following the operational-risk related incidents and the prompt corrective action (PCA) on under-capitalised banks to prevent further deterioration and gradually nurse them back to health are all inevitable, given the circumstances but need to be monitored carefully.
"At such juncture, the Government's front-loaded recapitalisation programme for the beleaguered PSBs should impart robustness to the financial sector as a whole; however, governance reforms and market capital-raising appear to have again taken the backseat at the PSBs," Acharya said.
Eleven public sector banks under prompt corrective action framework (PCA PSBs) are likely to experience a worsening of their Gross Non-Performing Asset (NPA) ratio from 21 per cent in March 2018 to 22.3 per cent at the end of the current fiscal, the central bank said in its Financial Stability Report.
The 11 banks under PCA framework or RBI watchlist of their high bad loans are - IDBI Bank, UCO Bank, Central Bank of India, Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank.