The Hindu Business Line : Fair request

In its second quarter review of monetary policy last month, the Reserve Bank of India (RBI) kept key rates unchanged but tweaked the regulatory environment for banks especially with regard to provisioning norms. The central bank upped the coverage ratio for non-performing assets to 70 per cent and gave the banks 11 months to comply with this precautionary measure. Now banks have asked for an extension of the deadline to March 2011 so that they can show healthy balance sheet growth. Will the RBI oblige?

So far the central bank has not agreed to a lower coverage ceiling but it has expressed willingness to consider a postponement. It should do so given the dilemmas banks confront today. Since the slowdown, the prospect of defaults on consumer and corporate loans from the period of high growth is a palpable one; so far rescheduling has helped while the availability of cheap global money has allowed companies to retire some of their expensive domestic debt. That same inexpensive dollar debt also keeps large borrowers away from domestic credit; small businesses need working capital too but only when business is booming and the recovery today is still tentative. The result is evident in a lowly 4.2 per cent expansion in credit in early November compared with 11 per cent in November 2008 and nearly 30 per cent in the year before that. With interest-based incomes now under a tight squeeze, is it any wonder that banks want time till March 2011 to raise their NPA coverage ratio? Perhaps that is why RBI Governor, Dr D. Subbarao, recently advised banks to get into more fee-based services; reductions in intermediation costs, he also felt, would help both banks and customers. But to do either systematically, public sector banks need the freedom to cull non-performing staff, hire top professionals from the market, consolidate to build competitive strength and find non-deposit sources for capital expansion. The equity and bond markets offer banks enduring sources to augment deposit-based resources. Those funds would enable core sector lending without the current asset and liability mismatch that the RBI Governor bemoans. A sustained economic growth would, of course, solve many of the problems for banks with credit growth reviving but they should not bet on early success.

Global capital will remain an attractive alternative for some time with other central banks more willing to play with easy money than the RBI. To prepare banks for the longer term, North Block needs to augment the RBI's efforts at preserving their health with policies that can turn them into far more competitive and aggressive players.

Related Stories:
No spike in bank NPAs despite loan recast: RBI
Banks asked to increase NPA provisioning coverage to 70%

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