The Hindu Business Line : Banking better

THAT THE PUBLIC sector banking industry has succeeded in trimming the absolute levels of non-performing assets in the fiscal just gone by, as an analysis by this newspaper has shown, is without doubt a significant development. Of even greater significance is the fact that this has been achieved in the face of an overall increase in the quantum of bank advances to the commercial sector. Since public sector banks account for a substantial portion of flow of commercial credit in the economy, the development augurs well for the stability and growth of the financial sector. In retrospect, it would be fair to say that it is not just the Indian banking industry that has evolved over time but the average banker too has acquired an edge in appraising credit risks that he did not possess when economic reforms were just ushered in.

Those who castigated bankers for bringing the industry to such a pass through inadequate professional skills did underestimate the difficulties involved in working out the precise contours of the economy as it emerged from the era of tightly regulated supply of goods and services to one of abundance in internal and external competition. In hindsight, it would be easy to say that some of those credit decisions in steel, petrochemical or power sectors, which accentuated the problem of NPAs, should never have been taken. But, then, the benefit of hindsight that the critic has, was unfortunately not available to the one who had to make the credit decision with little or no empirical support data. True, there were excesses and the initial reform years saw some of the worst manifestations of crony capitalism that the country's political class indulged with the acquiescence of the bank managements. Yet, it would not do to discount the operational difficulties confronting the banking industry at that time.

As Indian enterprises acquired greater confidence in taking on internal and external competition, some of the structural rigidities in the financial system began to go, though they are yet to disappear completely. A bulk of the bad loan problem still remains hidden under the label of `on going' projects whose repayments terms are jigged and re-jigged. How far these projects can carry the baggage of accumulated debt and interest burden and still be viable in the face of local and international competition still remains to be seen. The poor legal environment for enforcing creditors' rights and the consequent credit diffidence that it has spawned among the bankers are certainly adding to the cost of credit for eligible borrowers.

The silver lining in all this is that the Supreme Court has upheld the constitutional validity of a special legislation on enforcement of creditors' claims against borrowers. Also, it has implicitly recognised the need for management takeover through asset reconstruction companies for restructuring companies in financial distress. These two elements together should lead to a vibrant secondary market for business assets. The resulting improved sentiment for credit decisions should provide a fresh impetus to latent investment impulses in the economy.

More Stories on : Editorial | Non-Performing Assets | Public Sector Banks

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