Reserve Bank of India (RBI) is the apex body of India’s banking institution. Being a watchdog of the banking sector, it co-ordinates and regulates the activities of all the banks in our economy. But there are some key problems ailing RBI and banking sector.
Let’s have a look at these issues:
1. Non-performing assets
Increasing NPAs (Non-performing assets) is a problem faced by banks. NPAs are loans which haven’t been recovered. The amount of these loans is almost Rs. 10 lakh crores and it has created a huge decline in bank profits.
To resolve this issue the government has come up with various initiatives and schemes. For instance, the Government has provided temporary relief of Rs. 10,000 crores to the banks facing bad loans. Special courts have been assigned by the government to deal with the companies defaulting on their loans. Apart from the government, even RBI has announced a list of 12 major loan defaulters like Essar Steel, Bharat Steel and has decided to assist them to run the business efficiently to clear their loans. They have been forced to find alternatives to pay their loans and if they fail to do so, they may also have to surrender their assets.
Along with several measures taken by the government to recover these loans, the banks have also reduced interest rates on customer deposits and pushed up loan interests.
But this hasn’t helped much. Currently, the biggest challenge faced by the RBI is to prevent the banks from going bankrupt, because the funds offered by the government aren’t enough for them to sustain. The RBI may also merge certain banks together to reduce the burden of these bad loans.
2. Bank frauds and cyber threats
Debit cards hacking, money laundering, illegal transactions, fake accounts have created an additional problem for banks. The issue has become more alarming since 2016. Cases worth Rs. 29,933 crores have been reported and this money has gone directly into illegal accounts. Banks are still trying to find a solution to cybercrimes as more than 35 cases of cyber frauds relating to financial scams have been reported regularly. The recent ransomware attack on Indian banks has further alarmed the banks to tighten up cyber security.
It was observed in the case of Bank of Baroda FOREX scam (2016) worth Rs. 6,000 crores carried out using fake accounts. After such major losses in bank frauds, RBI has been closely screening suspicious transactions. The RBI introduced the KYC (Know your customer) regulations which the banks have to comply with. KYC is basically a process undertaken by banks to confirm the authenticity of the account holder and monitor their account.
Despite that, some banks still have been failing to follow the rules. As, in a recent case of Union Bank, RBI slapped a strict penalty for not complying with KYC.
Meanwhile, for customers, RBI has introduced several cyber victims’ friendly provisions. Under this, if frauds are the result of an error in banks’ security system or third-party breach, then banks will have to pay the losses.
But keeping the technological challenges aside, the Indian cybercrime laws are not very strict and at times do not identify the culprits to prosecute them. This is a sign of incompetence in the system.
3. Increase in excess liquidity
Money lying in hands of the public is a problem because it doesn’t directly help the economic growth but it increases the consumer spending which leads to inflation. This money is excess liquidity in the economy and it’s the duty of central bank to soak up the excess money circulating in the market. But the current rising consumer prices have shown that liquidity in the Indian economy is at its peak, highlighting the inability of RBI to do the job rigorously.
RBI has many tools at its disposal to get rid of excess liquidity from the market. The most important among them is increasing the SLR (statutory liquidity ratio) and CRR (Cash Reserve Ratio), which is mainly the amount of money banks are obligated to keep with RBI.
The other tool is OMO (Open Market Operations) where in the RBI sells bonds to the public, causing less liquidity in the market, thus curbing inflation.
Meanwhile, OMO seems to have already dried up RBI’s inventory of government securities and bonds. It has been hunting new alternatives like introducing SDF (Standing Deposit Facility). This would enable RBI to borrow money without the need of any collateral and security. But, such policy will need an amendment to the RBI act and its stand on this is still has not been clear.
While to remove excess money from the system the government also introduced demonetization and new currency notes in 2016. But demonetisation drive has not been able to soak even 0.01% of the excess money from the market while, to print and circulate the new currency RBI has already spent around Rs. 7,000 crores. Despite spending a fortune demonetization have not helped the economy much.