NON-PERFORMING LOANS- A PRACTICAL SOLUTION

Govt Banks and Capital Adequacy

This has reference to the news item 12%by 12: Govt banks lineup for cash-loading(ET dated 14th Sep 2009).It has become a fashion among Govt Banks to look forward to Govt for capital support to maintain the capital adequacy ratio prescribed/expected by the Regulator to ensure soundness of banks' functioning in terms of the risks they build up.
The real risk coverage has to come from within and not by induction of Govt funds ie public money. Banks have to learn to expand business and capital through effective and efficient management of their credit portfolio,investments and off balance sheet items. The very system of subsidizing bad credit by all stakeholders of banks particularly by depositors and shareholders which include Govt has to be necessarily stopped and there should be a way out to take care of formation of non performing loans and to stand on banks own legs without depending on Government or other stakeholders in case a situation of build up of bad loans more than reasonable limits,write off of loans,more provisional requirements and lowering of profits arise due to internal reasons or external factors beyond the control of banks.
Since Non-performing loans are inevitable in banking business,it is better to have a fund mobilised from all borrowers,banks themselves and if unavoidable from Government and RBI by way of small premiums based on certain norms having relevance to healthy and acceptable practices. Dependence by banks on Govt funds to support their capital base only reflects on their inefficiency in running the business.This fund which can be styled as Precautionary Margin Reserve Fund(PMR), on accumulation over a period, can take care of future NPLs,discipline credit portfolio and strengthen the balance sheet. Implementation of this idea will turn out to be a win-win situation for banks,their stakeholders and the government.


Dr.T.V.Gopalakrishnan.

Foreign Investors

This refers to your edit 'Attracting foreign investors' (ET,Sept11,2009).
The inflow of foreign funds in manufacturing and infrastructure can be augmented considerably if the Government acts with right earnest in this direction.This requires appropriate environment with friendly rules, regulations,procedures and positive governance,
It is high time the Government set up an International Information centre from where prospective foreign investors can have complete information regarding the economy, the potential areas which require investments, laws to be adhered to, infrastructure available, institutions to be contacted for various types of investments and facilities available to take care of investors various requirements etc.

(This appeared in ET,14/09/09)

Dr.T.V.Gopalakrishnan

Portfolio Inflows

No doubt our economy requires capital flows,but the funds should help to strengthen our capital market and they should not in any way bring in undesirable effects in the money supply,inflation,exchange rates and unmanageable volatility in the capital market.The suggestion to curb portfolio inflows through a staggered programme of phasing out P-Notes in this context is very apt and SEBI Should be in a position to identify the nature and source of funds flowing into the market with appropriate records and procedures.
It is time to curb undue volatility in the market influenced by the strategies of FIIS to exploit and make money taking advantage of our economy's dependence on foreign inflows. What the economy needs is FDI and funds which are of semi permanent nature and definitely not funds which can disturb the stability and order in the stock market.

This appeared in ET, 10/09/09

Dr.T.V.Gopalakrishnan

Global Banks

There is certain inevitability for Indian Banks to evolve themselves as global banks as soon as possible.it is time now that India has one or two banks in international financial system to benefit out of globalisation of economies and justify its own strength as a fast growing economy in every sense of the term. Indian banking system is very sound and stable and our regulatory system has proved to be the best as per the recent international experience. When our IT can command the world market why not our banking which has strong foundation and history of sound working cannot make its presence in international markets is something surprising and it only indicates that adequate attention has not been given to give a push and thrust towards consolidation of banks to achieve the global standards in terms of size and methods of operation.Since we have large sized public sector banks with reasonable international presence, it is high time Government being the owner takes the initiative and provides the logistical support to merge one or two public sector banks with State Bank of India and develop it as a global bank. Merging subsidiaries with SBI can help only to increase the size of SBI domestically and will not serve the purpose of making SBI a global bank which requires acquistion and mergers of banks which have international presence.
This is the best time to acquire some banks abroad with due diligence and expand our banking internationally.

Dr.T.V.Gopalakrishnan