Page 40 - BANKING FINANCE November 2015 ONLINE

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fund assets. One reason for such reliance could be the
low growth of deposits not commensurate with the
credit growth. Such reliance, however, could prove
disastrous as evidenced during the crisis as the
wholesale funding sources can dry up quickly. Banks,
therefore, have to consider this in their liquidity
management. There, however, remains an issue under
Basel III about the extent to which SLR holdings can
be taken into consideration for the purpose of
calculating the liquidity ratios.
As the SLR holdings are required to be maintained on
an ongoing basis, these would technically not be
reckoned for liquidity purposes. However, it may be
reasonable to reckon, under stress conditions, at least
a part of the SLR holdings in calculating the liquidity
ratio, as the SLR holdings are primarily government
bonds against which the Reserve Bank provides
liquidity. Further, the major challenge for Indian banks
in implementing the liquidity standards is to develop
the capability to collect the relevant data accurately
and granularly and also to formulate and predict the d. Policy initiatives for improved cross border
liquidity stress scenarios with reasonable accuracy and
consistency.
c. Need for improving the asset quality of banks and
effective reduction in NPAs and improvements in the
loan recovery process
The asset quality of banks is an important indicator of
their financial health; it also reflects the efficacy of their process of signing MoUs with overseas regulators on
credit risk management and recovery environment. The
asset quality of the banking system deteriorated
significantly during last few years and there has been
an increase in the total stressed assets in the banking
system (that is, NPAs plus restructured assets). Banks
need to not only follow the various measures put in
place by the Reserve Bank and the Government of India
effectively for resolution and recovery of bad loans but
also strengthen their due diligence, credit appraisal and
post sanction loan monitoring systems to minimise and
mitigate the problems of increasing NPAs.
There is a need to improve the effectiveness of the
recovery system. Recovery should be focused on
efficiency and fairness - preserving the value of
underlying assets and jobs where possible, even while
40 | 2015 | NOVEMBER
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redeploying unviable assets to new uses and
compensating employees fairly. This should be done
while ensuring that contractual priorities are met. In
this regard, there an urgent need for accelerating the
working of Debt Recovery Tribunals and Asset
Reconstruction Companies.
It is also necessary to collect credit data and examine
large common exposures across banks. This will enable
the creation of a central repository on large credits,
which can be shared with the banks. This in turn will
enable banks to be aware of building leverage and
common exposures.
In order to upgrade the banks' credit monitoring
system, the Reserve Bank has advised banks to have a
robust mechanism for early detection of signs of
distress and to use such early warning signals to put in
place an effective preventive asset quality
management framework.
supervision and cooperation
The cross border operations of Indian banks are rapidly
increasing. In view of this, the formalisation of the
relationship between "Home" and "Host" supervisors,
by way of a Memorandum of Understanding (MoU), has
become an important channel for the Reserve Bank.
In this context, the Reserve Bank has initiated the
supervisory cooperation and exchange of information.
In the coming days, challenges before banks would
primarily lie in saving themselves from the growing
threat of money laundering. Banks have to ensure a
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