Mumbai: Financial services secretary R. Gopalan on Friday cautioned banks on rising bad debts, advocating a return to focus on their main functions of lending and taking deposits.
Banks must keep a close watch on the asset quality of the funds disbursed, he said.
“It seems in the recent past we have not been careful enough on this count, which has led to stray incidences of burgeoning of the NPA (non-performing assets, or bad loans) portfolios of the banks,” Gopalan said. “Now is the time to go back to basic banking and aim to create a robust financial system for India.”
His criticism comes in the wake of the recent bribes-for-loans scam involving some officials of public sector banks.
In his speech at Bancon, an annual banking conference, Gopalan said banks should be on guard “against the processes (of selecting borrowers) being subverted by undesirable business parties, as has come to light recently...”
Bankers agreed with Gopalan on the problem of bad loans, but maintained the monitoring system was healthy.
“NPAs are an unavoidable phenomenon when banks are lending and when credit decisions are being taken. But it is important for a bank to manage its risk well,” said Nupur Mitra, executive director of Indian Overseas Bank (IOB).
Last year, IOB’s bad loans were at more than 4% of its advances, higher than the sector average of 3-3.5%.
Since then, the bank’s ratio of bad loans to advances has improved to 3.74%, said Mitra.
Concerns on bad debts are also emerging from relatively new borrowers such as microfinance institutions (MFIs), which are facing the heat with Andhra Pradesh, the most active state for these lenders, moving for tighter regulations.
“I am not concerned about MFIs because exposure to them is only Rs 600 crore off my Rs 69,000 crore loan book,” said Ramnath Pradeep, chairman and managing director of Corporation Bank.
“For real estate, my exposure is Rs 16,000 crore, but it is all secured,” Pradeep said.