Banks can combat NPA growth

Politicians and market forces create bubbles in those 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. Spending beyond the means to acquire basic necessity erodes away people’s surplus and does not allow long term asset creation. It has piled up irrecoverable toxic assets for banks which are ultimately met with governments’ stimulus. Many state governments earn up to 40% 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 the looming debt burden on people and save urban centers turning unlivable.

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 emulates 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, asset classification norms, Risk Management Techniques and investment norms etc, banks with their herd mentality always fail to read the bubbles in economy which are blown with policy stimulus. Over the year there has been a growing realization in Central Banks that financial sector has little solution for every real sector problem.

Indian financial sector’s transition in to globally integrated system may invites huge NPA risk if Banks fail to manage its investment portfolio well, lose sight of its risk assets, make poor credit appraisal and show laxity in monitoring the end use of credit. 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 man made financial tsunami. While treading the global financial path, Indian banking sector must quickly transform itself into a knowledge capital as a safeguard to prevent capital erosion due to external risks. Quality credit, state of the art Management Information system, qualified board of directors and efficient CEO can give resilience to banks in a highly volatile global environment. Quality banking emerges from good ethics, character of bankers and human sensitivity which always helps banks serve public good through banking business.