Can GTB episode repeat in mF?

The reasons for RBI's action against GTB are:

• the bank had a very poor capital adequacy record;
• it had huge NPAs, and it's networth had turned negative;
• a revival with huge capital infusion did not seem likely.

The point to ponder is that if this can happen in banking which is heavily regulated, what could happen in the mF sector? Is it a timebomb about to explode?

Some enlightening views:
Anonymous said...
The risks of mF sector emerge from the following reasons

a. Lack of adequate systems in most MFIs whose genesis lies in Non Government Organisations.
b. Inadequacy of capital in a few fast growing MFIs.
c. Lack of on-site and off-site monitoring.

We must remember that RBI conducted annual inspection of GTB. IT was aware of the impending danger. The merger with UTI bank was objected to by the regulator, the auditors were questioned and a continuous off-site monitoring was done unedr RBI's OSMOS programme.The industry leaders need to take an immediate review. The informal group report is out. The sector needs to understand that regulation by an independent agency serves public good. Self regulation can at best complement independent regulation.We must remember that the regulator did protect the depositors money and the employees have given 2 yrs salary protection under the upcoming merger plan with Oriental Bank of Commerce.It is really a wake-up call for mF sector. Take a leaf out of Pakistan where the State Bank of Pakistan has taken steps to regulate the MFIs. Remember regulation would be a major step towards mainstreaming.

2:05 PM
Anand said...
I would like to add on what OSMOS is:Under 'OSMOS' Banks have been advised by RBI to submit returns relating to a. assets and liabilitiesb. large exposuresc. Non Performing Assets d. Connected lendinge. Operational results f. Structural liquidity g. Interest rate sensitivityh. Capital adequacyi. Forex businessj. Working of subsidiariesk. Overseas operations, etc. These returns are submitted on quarterly basis which are critically analysed by OSMOS cell at RBI. The purpose of OSMOS is to supplement the inputs from on site examinations, pick up early warning signals relating to individual banks and/or the system as a whole and take remedial measures whenever necessary.

4:48 PM
Anand said...
I would like to add on Reserve Bank of India's approach:
1. Under OSMOS Banks have been advised to submit returns relating to assets and liabilities, large exposures,NPAs, connected lending, operational results, structural liquidity and interest rate sensitivity, capital adequacy, forex business, working of subsidiaries, overseas operations, etc. The returns are submitted on quarterly basis which are critically analysed by OSMOS cell at RBI. The purpose of OSMOS is to supplement the inputsfrom on site examinations, pick up early warning signals relating to individual banks and/or the system as a whole and take remedial measures whenever necessary.

2. The RBI is moving towards Risk Based Supervision (RBS) to increase the efficiency of application of supervisory resources. RBS enhances supervisory standards and practices in alignment with international best practices. The RBS model consists of:

(i) a formal risk assessment of the bank by producing a detailed risk profile
(ii) developing a unique supervisory action plan for each bank based on the risk profile
(iii) defining the scope and extent of supervision
(iv) setting up quality assurance and enforcement functions to maintain objectivity.

The RBS approach results in allocation of supervisory resources in accordance with the risk profile of the bank as the frequency of supervisory inspection is in inverse proportion to the the risk profile of the bank. The implementation of RBS calls for setting up comprehensive risk management systems, switching to risk based audit, compliance units, skill development, etc. RBS is being implemented for a few banks in the first pahse since 2003.

3. Prompt Corrective Action(PCA): The responsibility to identify problem banks at an early stage and to monitor the behaviour of the troubled banks in an attempt to prevent failure or to limit losses or contagion, the upervisory authorities have formulated a system of PCA with various trigger points and mandatory and discretionary responses. The key indicators for PCA will be CRAR, NPA level and Return on Assets. The responsibility to identify problem banks at an early stage and to monitor the behaviour of the troubled banks in an attempt to prevent failure or to limit losses or contagion, the upervisory authorities have formulated a system of PCA with various trigger points and mandatory and discretionary responses. The key indicators for PCA are CRAR, NPA level and Return on Assets. Thus, the action taken in respect of Global Trust Bank is an outcome of a well researched regulatory approach adopted by the Central Bank of the country