| |
Narasimham recalled
Private sector banks in India lend aggressively to the priority sector, notably, to small scale industry. The public sector banks seem to be reticent in this regard. Even the new private sector banks which, it was assumed, would confine their lendings to the cream of the corporate sector, do not shun priority advances. This is supported by data in the latest Report on Currency and Finance. But directed lending (favouring, inter alia, small industry) is anathema to liberalisers. There is, however, profit in lending to the priority sector. M Narasimham, who has been appointed to review his report on financial reforms, please note. The astute Narasimham will also find that the asset reconstruction fund has not taken off. The reason is simple. There is no way of distinguishing between the risk associated with normal lending, and the risk that has been forced on the banks by political diktat. So how to identify the part of the bad debt that should go to the asset reconstruction fund?With his experience of
overseeing commercial banks, the ex-central banker will recognise the mess in which the banking system has got into in the bid to tackle non-performing assets. Wiping out NPAs at one go, raises the lending interest rates, and presses down deposit interest rates. This slows down credit expansion, as seen in recent years, with prime borrowers accessing external credit, and will, sooner or later, depress deposit growth. NPA reduction will have to be phased out. Besides, debt recovery is a slow process under the present legal system. To make a dent into NPAs, the legal process of speeding up recoveries will have to be prioritised. In the first flush of liberalisation, Narasimham enthusiastically opted for sharp reductions in the cash reserve ratio and the statutory liquidity ratio of banks. His review of the impact of reductions in these two key ratios will be discouraging; bank funds have not moved away from lendings to government to private credit as expected. Indeed, despite large Government
borrowings, bank funds aplenty are available for private credit, only they are not lent. Banks have become risk-averse because malfeasance is seen in every loan that turns bad. Under capitalism new firms continually come in even as many old ones go belly up. Distinguishing between normal business risk and malfeasance requires banking skill. This is where internal controls become important. Narasimham must address the issue.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
|
 |
