The rise in the default of loans disbursed by state-owned banks appears to have set the alarm bells ringing in the Finance Ministry.
The Finance Minister, Mr Pranab Mukherjee, on Saturday said the asset quality of banks' is a cause for concern.
Pointing out that during 2010-11, non-performing assets (both gross and net) had increased compared with the previous year, Mr Mukherjee emphasised that banks should constantly monitor and bring it down to lower levels as in the previous years.
“I am happy to note that the annual financial results of banks have generally been good…..There is one area though, where I am a little concerned. It is the issue of asset quality,” the Minister said at the annual general meeting of the Indian Banks' Association.
Some of the public sector banks that saw an increase in NPAs (gross) in 20101-1 include State Bank of India (up Rs 5,791 crore to Rs 25,326 crore); UCO Bank (NPAs up Rs 1,484 crore to Rs 3,150 crore); Punjab National Bank (up Rs 1,165 crore to Rs 4,379 crore); and Union Bank of India (up Rs 952 crore to Rs 3,623 crore).
Analysts attribute the increase in bad loans to banks implementing the system driven NPA classification for accounts above Rs 10 lakh.
Until last year, banks had the discretion of “accommodating” a borrower if he was facing liquidity crunch for a couple of days and not classify the account as NPA. Analysts caution that if interest rates inch up further then borrowers could fall behind on payments, leading to an increase in bad debts. Banks are seen going in for aggressive recoveries in the current financial year.
Mr Mukherjee observed that getting people with adequate skill and knowledge is the need of the hour.
“One of the key areas where banks have to give proper attention is human resources. As banking becomes more sophisticated, there is a need for improving the skill set of the employees,” he said.
The Government has set up a committee to look into the HR issues of state-owned banks with a view to improving the HR policies.
Referring to the scheme finalised by IBA for common recruitment of personnel for nationalised banks, the Finance Minister said, “I am sure the new scheme would take into consideration the needs of the banking industry.”
Inflation
Price rise is one of the major challenges in the short-term. The other challenge, according to the Minister, is to sustain the growth momentum in the medium to long term, which requires pursuing a path of fiscal prudence along with implementation of reforms, including in the financial sector.
“Inflationary pressures persist both from higher global commodity prices and domestic structural demand-supply imbalances in several commodities. The Government and RBI have taken measures to bring down inflation to acceptable levels,” he explained.