Tuesday, October 31, 2006
How far Banks are safe
It is really a matter of concern for all fiancial experts and administrators who are responsible to safeguard financial insitutions that over the last one year in particular and one decade in special households have absorbed a higher portion of the credit growth . It is true that individual loans for home have seen a growth much more than that for industry. It is easy to disburse loan for house than for industry. Similarly it is easy to achieve target for credit growth through home loans than through other commercial loans including that for industry. However in a country where repayment of loan is beyond the control of the government our all policy for disbursal of loan are deceiptive and suicidal .Borrower come to beg money from banker once but banker has to beg repayment hundred times at the door of borrower. It is because there is no repayment culture at all .Even a shopkeeper/businessman who sells his product on credit faces the same music. Ultimately a shopkeeper whose sell is more in credit compared to cash sell succumbs to sundry debtors and it is known to all that such shops finally fails and become bankrupt.Banks should therefore take lesson from the balance sheets they analyse and businessmen they finance .It is universal truth that credit sale is always harmful for the growth and even sustainance of the business.It is worthwhile to mention here that outstanding credit to individuals are Rs.324491.00 crores while that to the industry is at Rs.448494.00 crores. Obviously consumption/unproductive credit growth is more than productive credit.Industries if grow generate employment opportunities whereas on the contrary home loans hardly generate such opportunity.It is more painful when circulation of money is slowed down due to non-repayment of loan by the borrower. Bankers feel cheated when even government machinery fails to recover the money from defaulters.There would be increasing provisionig every year because rise in default rate is unstoppable. NPA in retail sector particularly home loan is growing fast.It is different that repayment period is too large and bankers are clever to manage and conceal the facts of Non-repayment in such loans.But is undoubtedly true that actual NPA is far more than what is declared by the bankers. Lastly such loans will definitely affect adversely the profitability of the banks. Government or RBI may be in deep slumber but none can stop particularly PSU banks facing capital erosion in the near future only due to unmanageable growth in NPA. I stress on PSU banks because they have become more ambitious to compete with Private and Foreign banks without developing infrastructure and manpower. They are increasing profits by curtailing expenses on manpower and infrastructure. They are even unable to monitor existing business with existing quality and quantity of manpower but they are busy in credit to retail sectors including home loans without caring for repayment.Such banks are exploring the business in stocks, insurance,mutual fund to increse non-interest income with the existing manpower jeoperdising the credit they disbursed. They hardly earn Five paise through non-interest income compared to loss of hundred rupees due to growing NPA.It is surprising that RBI governor also knows that the non repayment of laon in banks is deterimental for banks but he finds himself handicapped to do something only because of vote-bank policies of our politicians. Mr. Reddy said that there have been bad experiences in certain economies like Hong Kong and Korea where the growth in credit card lons and unsecured loans have been allowed unregulated.To avoid a replication of this in the Indian economy the central bank s rightfully concerned in this regard. But the concern is only from higher growth in credit delivery but they never bothered for growing tendencay of borrowers not to repay loan they avail from banks .Governor should keep in mind that even courts are unable to ensure repayment as per stipulated time. Police authorities are not interested to execute warrants issue against defaulters because they work only for those who pay them bribe.Advocates also devote much time for borrowers because they receive more fee from defaulters than banks. That is why I say that as long as recovery of loan is not taken seriously all talks of disbursement of loans is nothing but harmful for the health of the financial institutions.