Prudent Banking

Globalization of the banking industry and increased competition have exposed our commercial banks to a number of challenges. Accumulation of NPAs and their write off require risk bearing capacity. Hence 8% capacity to the risk weight assets were introduced as prudential norm. Increased capital adequacy rate would not only enhance equity base also is a prudential norm on credit exposure.

                The economy is projected to grow at 6.8%. As the economy develops and production base widens, in the absence of a well developed capital market, there is a having lending on the banking system for credit. Despite of reforms the banking industry face similar liquidity or credit crunch and banks heavily rely on high cost inter call money market and certificates of deposits for their requirements thereby squeezing banks spread.

            Given the high growth plateau of the economy, higher credit off take coupled with liquidity or credit crunch on account of relatively low growth of deposits, the cost of funds are going to be higher for the banks. With no immediate respite from the high corporate demand for bank credit, a further increase in the demand would not only result in serve strength in profitability but may apply crake on economic growth due to possibility of credit.

            The financial sector is going through a transition phase with new player emerging, interest rate Regine getting liberalised, prime mobilisors of deposits diversifying the business activities and gearing off to formulate strategies to meet the emerging challenges.

             The banking industry at this juncture should strengthen the capital base concentrate on better asset liability management, deposit mobilisation and cost control. The prudential norm of 8% capital adequacy would compel banks to increase capital base. Boosting capital base through equity or bond issues would make banking industry more accountable, hence comparing them to improve productivity and profitability.

               A diversified capital base should be accompanied by other prudential norms like income recognition, asset classification and provision for bad debts. The bank should become more conscious towards deposit mix, investment opportunities, growth in quantity asset, reduction in NPAs consumer services, rating of instruments etc.