Reading Comprehension Challenge - Passage on 'Better Banking'

The following passage talks about - Better banking ahead

Read the passage carefully and answer the questions given below.

It is disappointing to find so many banks in red, but a deep dive into the reasons will convince that it is necessary to clean up banks’ balance sheets once and for all, says Dr. K Srinivasa Rao. With major public sector banks posting hefty losses in the midst of rising non-performing assets, the process of cleaning up of balance sheets has reached the tipping point. Efforts to detoxify balance sheets of banks had begun in September 2015 with the asset quality review, followed by many asset quality improvement measures. Although the exercise has impacted their books, it will be eventually beneficial for them.

These banks are in the process of strengthening their fundamentals. Already 11 out of 21 public sector banks (PSBs) are resuscitating under the prompt corrective action (PCA) doctrine. Restrictions on lending imposed on Dena Bank and limited restrictions on Allahabad Bank might impact their future businesses, but these measures are in the longer interest of ailing banks.

Their woes have worsened further because of the RBI's new stressed asset resolution framework that has led to the deterioration in asset quality with its attendant provisions on newly classified non-performing assets (NPAs). The rise in bond yields, a market phenomenon that increased mark-to-market (M2M) losses, has further enhanced the burden. Besides, the enhancement in the gratuity ceiling from Rs 10 lakh to Rs 20 lakh called for additional provisions. Some banks also made provisioning for the next salary revision. Such factors contributed in varying proportion to the current poor state of performance of the PSBs, which could be temporary and, in fact, good as a one-time measure for their future sustainability. Once banks adjust to the new stressed asset resolution framework, they can prevent new NPAs.

It may be disappointing for stakeholders to find so many banks in the red, but a deep dive into the reasons will convince that it is necessary to clean up the balance sheet once for all. The PSBs that can emerge out of PCA dictum will be in a better position to focus on new businesses in the years to come while recognition of NPAs will help in tackling them with appropriate tools.

The RBI has made stressed asset resolution process IBC-centric for loans of Rs 2,000 crore and above from March 1, 2018. More banks will use the IBC to enforce recovery in the future. Hence, the experience of resolution professionals (RPs) and Committee of Creditors (CoC) in dealing with National Company Law Tribunals (NCLTs) in the ongoing stressed asset resolution process in the first lot of 12 large NPA accounts is getting mapped.

Moreover, based upon the recommendations a 14-member high-level committee, the Union Cabinet approved certain amendments to IBC now brought in force through the ordinance route. It has enabled residential flat owners to get the status of financial creditors; resolution plan can be withdrawn from the NCLT if 90 percent of creditors agree; MSME borrowers will be able to bid for own firms and vote share among CoC members for approving resolution plan is down from 75 percent to 66 percent in critical decisions and to 51 percent in routine decisions. These broad changes have the potentiality to make the stressed asset resolution seamless and bank-friendly.

Better performance is expected in FY19. Against the deposit growth of scheduled commercial banks (SCBs) of 6.8 percent during FY18, the credit growth could reach 9.5 percent, indicating the revival of demand for credit. But the PSBs struggling with higher NPAs could post a credit growth of 4.7 percent and deposit growth of 3.1 percent, lower than the industry average. However, private banks could increase their deposit growth to 17.4 percent and taking credit growth to 20.9 percent. On the whole, the banks are set to improve their performance during FY19 due to the revival of GDP growth to 7.5 percent and stabilization of the GST.  Once PSBs are able to overcome the NPA mess sometime over the next two years, they can bounce back with normal growth rates.

Therefore, keeping in view the long-term interest of the banking sector, benign performance in key parameters during FY18 should be considered as part of the transformation phase of banking operations cleaning up their balance sheets. It will enable better banking in the future.

(Source: The Tribune)

Q.1. As per the passage, factor contributed to the poor state of the performance of the PSBs, except?

(a) RBI’s new method to decide NPA

(b) The rise in bond yields

(c) The enhancement in gratuity ceiling from Rs 10 lakh to Rs 20 lakh

(d) None of these

Q.2. “It is disappointing to find so many banks in red.”

Which of the following options give the correct sense of the above line?

(a) Banks are angry with RBI

(b) Banks are puzzled

(c) Banks have spent more money than they should

(d) Banks are unorganized

Q.3. What are the steps taken to correct the balance sheet?

(A) Asset quality review and many asset quality improvement measures have been taken.

(B) Restrictions on lending have been imposed on both Dena Bank and on Allahabad Bank

(C) The RBI's has a revised framework for the stressed assets.

(a) Both A and B

(b) Both B and C

(c) All A, B and C

(d) Both A and C

Answers & Explanations:

1. (d); Their woes have worsened further because of the RBI's new stressed asset resolution framework that has led to the deterioration in asset quality with its attendant provisions on newly classified non-performing assets (NPAs). The rise in bond yields, a market phenomenon that increased mark-to-market (M2M) losses, has further enhanced the burden. Besides, the enhancement in the gratuity ceiling from Rs 10 lakh to Rs 20 lakh called for additional provisions.

2. (c); If a person or company is in the red or if their bank account is in the red, they have spent more money than they have in their account and therefore they owe money to the bank.

3. (d); Restrictions on lending imposed on Dena Bank and limited restrictions on Allahabad Bank might impact their future businesses.

Important Vocabulary:

(i) Hefty (adjective) - Large and heavy

Synonyms: Large, Massive, Robust, Colossal

Antonyms: Light, Slight, Tiny, Small

Sentence Examples:

• We have paid a hefty amount for this car.
• He aimed a hefty kick at the door.

(ii) Resuscitate (verb) - Make (something) active or vigorous again

Synonyms: Invigorate, Energize, Restore, Arouse

Antonyms: Destroy, Weak, Bore, Depress

Sentence Examples:

• May God grant that you may be able to resuscitate the old cable.
• A physician was called at once and attempted to resuscitate him.

(iii) Woe (noun) - Great sorrow or distress

Synonyms: Anguish, Pain, Tragedy, Trouble

Antonyms: Fortune, Benefit, Aid, Help

Sentence Examples:

• He listened to my tale of woe.
• He did not tell his relatives and friends about his woes.