The Hindu : Attitudinal change required

Online edition of India's National Newspaper
Wednesday, Dec 04, 2002

Opinion

Opinion - Editorials

Attitudinal change required

THE ANNUAL REPORT of the RBI on the Trend and Progress of Banking and Finance is the most authoritative study of the financial sector over the preceding year. This year's report, released recently, has the added virtue of being particularly well-timed and will definitely enhance the quality of the ongoing topical debates in the financial sector. Probably the most pressing issue — although several others such as the future ownership question of the large public sector banks (PSBs) will remain controversial — is the one that is very basic to the banking business — lending of money and getting it back. The larger context, of course, is the profitability of the commercial banking sector that has acquired a new edge in the reform era starting in the early 1990s. Concepts such as non-performing assets, income recognition and asset creation and capital adequacy stipulations entered the financial sector's lexicon for the first time in India. Few doubt that they have already radically altered the character of banking.

The magnitude of the change and the responses to it are best illustrated in relation to what has come to be a bugbear of bankers, the concept of non - performing assets (NPAs). Essentially the creation of new, reform-era accounting definitions, NPAs have over the past decade and with successive rigorous interpretations come to be dreaded by banks and their borrowers alike. For the former, increasing NPAs reflected poorly on their book-keeping and therefore on their profitability. Borrowers as a class have had good reasons to fear having their accounts classified as NPAs. It invited action by the lending bank, although many felt that such action — in the absence of a vibrant legal machinery — was somewhat innocuous. Hence, NPAs have kept on growing even as the increasingly profit conscious banks tried to boost their profitability levels by other means such as reducing their bloated staff. As the RBI's Report records, the profitability of all scheduled commercial banks went up by 80.7 per cent last year with the PSBs bettering the industry average by an impressive margin. However, gross NPAs have climbed steeply to nearly Rs.71,000 crores as on March 31, 2002, from Rs. 63,341 crores a year earlier. Evidently, a co-existence of burgeoning NPAs with an ever-increasing quest for profits cannot extend even over the near term.

It is in that context that the true significance of the new law to tackle the banks' recalcitrant borrowers is to be seen. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill recently passed by Parliament, significantly alters in favour of the lending banks and institutions what has hitherto been perceived to be an unequal field between them and their borrowers. There has been stringent criticism already that the pendulum has swung too far to the other side. In practice, the efficacy of the new law will be tested on many other crucial parameters as well, such as in the creation of a well-oiled machinery to implement it, but no one denies that it is a potent weapon in the lenders' arsenal. The big question however is: will it drastically reorient their attitude and bring about a marked enhancement in credit offtake by industry?

The question is relevant because over the past decade banks and institutions have become remarkably averse to taking risks, putting very large sums in "safe" Government securities in preference to meeting the requirements of industry. Last year, the level of banks' resources flow to industry actually decelerated: as against an increase of 16 per cent in 2000-01, it rose by just 12.7 per cent. At the same time, banks have been holding Government securities far in excess of their regulatory or prudential requirements. Both the anomalous situations, of a perceived unequal playing field between the lenders and the borrowers (now being redressed dramatically) as well as the perennial problem of inadequate credit delivery can be solved only by bringing about attitudinal changes. That goes far beyond the framing of new rules or legislation.

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