More power to banks

The banking sector is expected to be stronger in the new year with the news of stressed loans dipping from record highs for the first time and the government proposing to recapitalise banks by infusing '88,000 crore this fiscal. The total recapitalisation planned is '2,10,000 crore. This will not only enable banks to clean up their balance sheets but also increase their lending capacity, meet the Basel III regulatory capital norms and improve their financial risk profile. They will also have to put aside less funds to meet the stiff provisioning requirements for NPAs. The government’s seriousness in tackling the menace of NPAs is welcome and is underscored by its move to set up specialised monitoring agencies for loans above '250 crore and for tackling NPAs through sale of non-core assets.

However, the government would do well to provide funds predicated on the performance of the banks so that good money does not chase bad money. It is encouraging that under the Narendra Modi government the rampant practise of politicians directing banks to lend to their favourite businessmen has been curbed to a significant extent if not eradicated completely. Going forward, banks also need to hone their skills in assessing borrowers and in this they can take the assistance of institutions like the IDBI bank. There have been various mechanisms like sharing information about borrowers by banks as many of them borrow simultaneously from several banks; and having a risk profile of various borrowers to help banks in making decisions whilst dispensing loans. This skill is particularly needed when lending to corporates who borrow simultaneously from several banks. It is an irony that it is the bigger corporates that account for major loan defaults.