Chennai: The finance ministry is wary of a possible increase in defaults on bank loans, especially on advances to the infrastructure sector.

The asset quality of banks is showing signs of deterioration and a further decline cannot be ruled out, Union minister of state for finance Namo Narain Meena said at a banking conference in Chennai on Friday.

In the case of some banks, asset quality is a “matter of concern", he said. “Retail loans need monitoring" and “there are some signs of deterioration in asset quality in the infrastructure sector, which needs to be monitored."

Sensing a decline: Union minister of state for finance Namo Narain Meena. (PTI)

The government will take up the matter seriously after the second-quarter results of all banks are announced so it can gauge the stress, now visible only in certain pockets, he said. The conference, Bancon 2011, was hosted by Indian Overseas Bank.

Meena added that most banks in India are well-capitalized to meet Basel III norms, a new international standard that requires banks to hold top-quality capital totalling 7% of their risk-bearing assets.

Finance minister Pranab Mukherjee has approved 14,000 crore this fiscal year to recapitalize Indian public sector banks, he added.

Banks had demanded 18,000 crore for 2011-12 and 19,000 crore for the following financial year.

• • •

Keep up with latest news/ views on the livemint Facebook page

• • •

Meena criticized banks for not lending enough to small industries. These industries contribute 45% to the gross domestic product, but banks’ share of credit to the sector was only 11% in 2007-08.

• • •

Follow livemint on Twitter for latest news / views / full coverage

• • •

The ratio has not changed in three years, Meena said. “I urge all banks to improve the credit flow to this vital arm of the economy."

K.C. Chakrabarty, deputy governor of the Reserve Bank of India, said the trigger point for the banking sector in this decade will be recruitment.

About 60% of bank employees will retire in this decade and banks should take the opportunity to hire a talented and skilled workforce, he said.

Financial inclusion, consolidation and globalization are the key drivers for banks in this decade, he said.

About 60% of India’s population does not have bank accounts. The industry should ensure that every household has access to banking services at affordable costs by the end of this decade, Chakrabarty said.