The Hindu Business Line : Bankable trends

BANKS, ESPECIALLY THOSE in the public sector, are doing well having "significantly" cleaned up their balance-sheets even while improving the spreads. The Reserve Bank of India's Report on Trend and Progress of Banking in India, 2003-04 is sure that interest rates in the current year will hold firm or be on the rise snapping a three-year-long low-interest regime. The treasury income has moved up from Rs 9,541 crore (32 per cent of operating profit) in 2001-02 to Rs 19,532 crore (37.1 per cent) in 2003-04 to help banks make loan loss provisions and trim the net NPA (non-performing asset) ratio from 5.5 per cent in 2001-02 to 2.9 per cent in 2003-04. Such windfall may not come their way as interest rates rise, and the Report recognises this when it says that "in future an increasing proportion of banks' income would emanate from the traditional business of lending."

Credit growth in the first half of 2004-05, which is usually slack, has been one of the best in recent years though the central bank is a trifle uncomfortable with the quality of assets that have come into the books of the banks. The share of housing loans in the total non-food bank credit has moved up from about 3 per cent in 1992-93 to about 7 per cent in 2003-04 while the retail portfolio is put at 21.5 per cent of the total outstanding advances as on March 2004. As of end-March 2004, the housing loans that went sour (net NPAs) are placed at 1.4 per cent of outstanding advances and that of other retail loans at 2.5 per cent. Farm credit is robust. For the small and medium enterprises a loan-pricing scheme is being worked out by the Credit Information Bureau of India Ltd. But banks do not have details of the unhedged forex exposures of top corporate clients. So where does the banking system go from here to catalyse and fund investments in the economy? One is not sure.

The Report skims over such contentious issues as corporate governance making it difficult to guess the mind of the banking regulator. For instance, the RBI could have elaborated on the status of the rural credit delivery system which is too leaky to sustain a continued flow of bank credit. The central bank has promised a revised discussion paper on the contentious rule that seeks to restrict equity holding (direct and indirect) and voting rights to 10 per cent in an Indian private bank and deters any group from taking over a bank. The RBI has not tabulated the compelling reasons for the move as it indeed is going to be hard to monitor equity stake migrations in private banks. And is it not then unfair to allow the government to hold 51 per cent stake in public sector banks including the State Bank of India? There is little evidence to favour a government bank over a privately-run bank board. Again, the central bank is not enthused over using forex reserves for infrastructure but has not set down its argument.