Banks show rising exposure risks

A study conducted by npasources.com finds the net NPA in 39 listed commercial banks at Rs 92,825 crore - a rise of 51 per cent for the fiscal year March 2013 over previous year fiscal. In state run banks, only 9,324 accounts with more than Rs one crore per account have generated bad loan of Rs 1.8 lakh crore as on March 31, 2013.

According to the rating agency (ICRA) the non-performing loans in the banking system are set to double by June 2015 from 3.3 per cent in March 2013 to 6.5 per cent in June 30, 2015 if banks reclassify toxic assets as per new RBI guidelines. Toxic asset accumulates in financial sector across the world due to injection of capital in weakening streams of economic activities, poor project appraisal and creation of artificial demands in sectors which deal with the basic needs of majority of people. 

Politicians and market forces create bubbles in basic necessity sectors for quick financial gains and compel majority of people to borrow in order to meet their basic needs.  Persuading people to spend more beyond their means with easy credit is a kind of financial delinquencies which has given extreme sufferings to millions of people across the world. Lusty spending erodes away people’s surplus and does not allow long term asset creation.  It has piled up irrecoverable toxic assets which are ultimately met with governments’ stimulus.

Many state governments earn up to 40 per cent of their revenue by simply doubling the price of land in every two to three years. The inflated cost of building material adds to the cost.  It increases debt burden of the house buyers, encourages farmers to sale their agriculture land and erodes people’s surplus.  Here we need practical economic thinking to prevent looming debt burden on people and save urban centers turning unlivable. There is a growing realisation in Central Banks that financial sector has little solution for every real sector problem.

Subprime crisis

Banks, mortgage brokers and real estate agents persuaded home owners to borrow beyond their means which lead to subprime crisis in USA.  According to US Senate's Levin-Coburn Report, the crisis was the result of high risk, complex financial products; undisclosed conflict of interest; the failure of regulators and the credit rating agencies.  Interestingly, what mistakes the developed nations commit, India reenacts it with glee. The dotcom bubble, housing bubble, education loan bubble and credit bubble etc are closely reenacted in India to put unnecessary stress on financial sector.
Education loans are given to students for studying in any technical collages which have little potential to produce employable workforce. In spite of agriculture scientists’ repeated warning, thirsty cotton crop was financed in dry land of Maharashtra, Andhra Pradesh, Karnataka and Madhya Pradesh which caused farmers’ crisis. Last year, 9352 farmers committed suicide in those four states.

Though Central Bank from time to time introduces the best international practices like Management Information Mechanism to give early distress signal, norms to classify assets, Rick Management Techniques and investment norms, banks with their herd mentality always fail to read the bubbles in economy which are blown with policy stimulus.  In fact, it is the advanced economies which threw massive toxic assets, need to correct themselves and not the Indian financial system which is not yet fully exposed to global market risk. But Indian financial sector’s transition in to globally integrated system may invite huge NPA risk if Banks fail to manage its investment portfolio well or mismanage its risk assets.

Though huge capital requirement under Basel III is estimated to absorb shock from possible financial sector collapse, it is not a full proof mechanism to protect the financial sector from a 2008 type financial tsunami. While treading the global financial path, Indian banking system must quickly transform itself into a knowledge capital as a safeguard to prevent capital erosion due to external risks.  Sound Audit system, state of the art Management Information system, qualified board of directors who can contribute, an efficient CEO and dedicated potential study can give resilience to banks in a highly volatile global environment.

In spite of the best banking practices, banks cannot perform without sound policy back up. Sound policy back up with good governance and financial sector performance are two sides of the coin. Quality banking emerges from good ethics, character of bankers and human sensitivity which always helps banks achieve social and business objectives. Indian banking system still lives the best practices to protect the depositors’ interest and to win investors’ trust.

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