Finance Minister Pranab Mukherjee cautions banks on asset quality

Pranab Mukherjee cautions banks on asset quality
India's Finance Minister Pranab Mukherjee has warned PSU banks and financial institutions in the country on the declining asset quality .The minister asserted that state run banks must find solutions to adequately manage their gross nonperforming assets (NPAs) ,which have increased by 24.5 percent from Rs 59,927 crore to 74,617 crore between March 2010 to March 2011.

The minister said that , the Rs 4.17 lakh crore government borrowing programme lined up in the current fiscal , would not crowd out the private investment in the country and gave assurance to the PSU banks of adequate liquidity in the banking system.

Though, the finance minister was happy with the 22.44 percent growth registered in PSU bank advances in 2010-11, he appeared less satisfied with the moderation in credit growth in the April-June period of the current fiscal. Credit growth during the first quarter, 2011-12 slowed down a bit following hike in lending rates by many PSU banks on the back of continued monetary tightening by the RBI.

He said that, banks need to increase its credit flow to India's infrastructure sector. The credit outflow from state run banks to the country's agricultural sector in 2010-11 was over Rs 4, 46,000 crore against the targeted 3, 75,000 crore. Leading PSU banks such as SBI, BOI and PNB have targeted a loan growth of 18 percent, 23 percent and 25 percent, respectively during 2011-12.

Banks have been exerting due diligence in lending to the Real Estate and power sector on account of rising NPAs in these sectors. The chances of bad loans increase in a rising interest rate regime. The minister advised PSU banks to align their capital adequacy ratios with the Base III requirements.

View: This was a good reminder to the banks. They will not be bailed out for their poor decision making. Even the PMO and planning commission should now fall in line and accept that while, high growth rate is desirable it should not achieved on steroids. The net effect will be undesirable for all economy.   

Read more about: economy, finnance minister, bank, asset
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