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Bangalore , Dec. 3

MOST domestic public sector banks in the country are expected to completely wipe out their outstanding non-performing assets (NPAs) between 2006 and 2008.

Speaking at a seminar on `Risk management in Indian banks' here on Wednesday, Dr Dalbir Singh, Chairman and Managing Director of the Central Bank of India (CBI), said: "Most banks including mine will reach the zero per cent NPA within the next five years." So far only the public sector Oriental Bank of Commerce has managed to reach this mark.

He attributed this to the implementation of the Securitisation Act and improvement in the functioning of the Debt Recovery Tribunals. Despite these trends, the banking sector is expected to face major challenges, especially over the pricing of deposits. Bankers tend to treat demand liabilities as a cheap source of long-term funds.

However, he said if all costs were taken into account, inclusive of transaction costs, both savings and current accounts were not really cheap. "The effective cost is far higher than what is actually estimated," he said. Besides, on the assets side banks are likely to face major risks, though derivative tools are available for hedging. Mr Singh said: "The best way for banks to protect themselves is to identify the risks, accurately measure and price it." Above all, they would have to maintain an adequate level of capital and reserves in both good and bad times.

Mr R. Ravimohan, Managing Director of Crisil (Credit Rating Information Services of India Ltd), said banks' future profits were likely to come under pressure as some of the investment books got reprised and yields on investments dropped. However, almost all the domestic banks had sufficient cushion. This was in view of the unbooked profits estimated at Rs 69,000 crore.

He suggested that given the emerging financial sector environment, banks should seriously consider, securitisation as an alternative for managing the capital and the assets. Mr Ravimohan said that these deposits had been affected in the past in view of the stock market conditions, when almost eight per cent of the household sector moved into the equity markets.

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