Drowned in red

| Updated on January 20, 2018

Banks need to tighten their lending processes to prevent a recurrence of the bad loans problem

There is a sea of red in the banking sector. New records of the dubious kind have been set — Punjab National Bank, for instance, announced an overwhelming ₹5,367-crore loss in the fourth quarter of 2015-16. Gross non-performing assets have risen by ₹2.5 lakh crore in the last two quarters alone; they could go up further in the coming quarters as banks drain the venom of bad loans completely out of the system. The scale of losses that banks have disclosed warrants a closer look at what has gone wrong. Corporates bear some responsibility for over-assessing demand during the boom years and investing borrowed funds in capacities that proved to be excessive. The excess capacities created then are yet to be fully absorbed, which shows how much they had got carried away by the boom conditions.

But banks have to equally take the blame for not being diligent enough. The quality of credit appraisal, subsequent monitoring and periodic assessment of emerging risks on their part has obviously left much to be desired. The practice of restructuring debts when borrowers fell on hard times only postponed the inevitable. And this sorry state of affairs would have continued were it not for the pressure from the Reserve Bank of India to begin the clean-up of this mess through its Asset Quality Review. For once, both the RBI and the finance ministry have been on the same page on this important issue — that the time has come to end the pretence of ‘all is well’ and the practice of ‘evergreening’ stressed loans. This alignment of views has helped in no uncertain measure to unmask the true picture in banks and for this both deserve kudos.

The Centre has initiated a set of institutional reforms to provide greater autonomy to banks and improve corporate governance. The setting up of a banks board bureau is one example of that. This will hopefully help insulate banks from political pressures especially in the appointments to top posts in public sector banks. Such appointments in the past, based on political considerations, obviously had a role in building up the bad loans problem. Public sector banks should review and tighten their lending practices even while ensuring that they don’t err too much on the side of caution, which will end up smothering the incipient growth in the economy. For its part, the Centre should make good its recapitalisation promise, and if necessary, go beyond the ₹25,000 crore that has been set aside in the budget.

Published on June 03, 2016

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