MUMBAI, February 19: State Bank of India chairman MS Verma has called for sanctions against weak financial intermediaries. Speaking at the Ficci seminar on "South-east Asian Meltdown: The Indian Response" in Mumbai on Thursday, Verma said that unsustainable financial institutions should be allowed to fail. ICICI chief KV Kamath also referred to the "moral hazard" of keeping the weak institutions alive. "India should take stock of the issue," he said. The South-east Asian crisis was triggered by the fact that the financial systems of the affected countries had failed in regulation. The financial intermediaries in these countries were raising huge dollar loans and then on-lending in the domestic economy to take advantage of the large spreads on these loans.Verma said that unlike in India, finance companies and banks in countries like Thailand, Indonesia and Malaysia were extending huge loans against the security of shares and property. "Most of these banks were lending to customers against the security ofproperty and shares, the prices of which collapsed," said the chief of the country's largest financial intermediary. Verma also called for legislative changes in areas like labour, transfer of properties "before we move faster".
While both Verma as well as finance secretary Montek Singh Ahluwalia said that the South-east Asian currency crisis did not have any effect on the banking system in the country since it hardly lends against property and shares, Uday Kotak, vice-chairman of Kotak Mahindra Finance Ltd (KMFL) felt that this was not the case.
"South Korea's problem was industrial lending, not property lending," said Kotak. He said that industries like synthetic fibres, steel and paper have been the worst hit since global supply of these products has far outstripped demand. "Our banks have huge exposures to these industries," said Kotak.
Kotak felt that lending against property was a far safer bet than lending to the industries, since the chances of recovery of funds against the security of propertyis far more easier.
Kotak said that the Indian financial system is not used to lending without security in the form of fixed assets. "This mindset would now have to change as business would be purely driven by cash-flows," said Kotak. "A sound financial sector cannot be built without the legal process for recovery of funds being changed," added Kotak. Kotak said that the financial sector should "bite the bullet" on the non-performing assets (NPA) front rather than postpone it to a later date. Verma, however, "defended" the banking system saying: "The NPAs are only three per cent of the GDP. Even if it is doubled to six per cent, it is much better than the banking system of some other countries. Much of the NPAs have been historic holdings as till 1991 there was no system of writing off of NPAs."
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
