Tarapore flays narrow banking critics

The colloquium was organised as part of the fourth anniversary celebrations of The Financial Express, Kochi. As a member of the Narasimham Committee on banking reforms, Tarapore reiterated the panel8217;s suggestion that a restructuring commission be set up to deal with the problem of weak banks. quot;There should be no great shame in being identified as a weak bank,quot; he said flaying the opponents of the restructuring commission. quot;The critics of narrow banking must realise that rejection ofnarrow banking implies acceptance of the principle of closure and if this also is not accepted then a dangerous contagion effect spreading through the entire banking industry is a strong possibility,quot; he cautioned the gathering of bankers.

He also called for reforms in the Indian payments system in which borrowers do not realise their receipts on due dates. quot;Large industry throws its liquidity burden on small industry and public sector units throw their liquidity burden on large industry; but above all the government is always in arrears to industry and so a chain of delayed payments becomes a drag on the production cycle,quot; Tarapore said.

He suggested a radical solution. At present the prescribed norm is two quarter or 180 days plus 30 days past due which means that the advance is considered an NPA only after 210 days. quot;It should be possible to move over to a one quarter norm with past due being 90 days from the year 2000, 60 days from 2002 and 30 days from 2004,quot; he said urging the authorities to get outof the present bind with decisive action.

The Federal Bank chairman K P Padmakumar said that there is an urgent need to look into the structural assymmetries implicit in the banking sector reforms before going ahead with more reforms. Making an implicit call for removing the structural rigidities, Padmakumar pointed out, quot;with the directed lending accounting to almost 22 per cent of the total NPAs with little recovery prospects and a tardy legal system which takes a minimum of 17 years to come even for hearing8230;quot;, the operating efficiencies of the banks is largely affected, the Federal Bank chairman said.

He said, while the anxiety and the need to conform to international standards are understandable, the time has come to think about the effectiveness of the existing structural reforms to leverage the growth of a healthy banking system, Padmakumar said.

He said, the policy makers should give their ear to these hazards and should offer Indian banks a well controlled regulatory system which would enablethe Indian banks to catch up with the international standards.

Addressing the colloquium, the managing director of the State Bank of Travancore Vepa Kamesan said if there is any area that would be undergoing vast changes, it will be the whole subject of asset/liability management. A sound asset/liability management will enable the banks to review interest rate outlook and product pricing on both assets and liabilities to examine the loan and investment portfolio, to manage foreign exchange risk and liquidity risk and to review net profit, interest spread and other balance sheet ratios.

Speaking about the prospects in the coming century, chairman of the South Indian Bank Maurice D8217;Souza said that banks in India have enjoyed far too long almost the exclusive monopoly of financial intermediation 8211; acting as a link between savers and users of funds. He saidin the days to come there will be greater degree of financial disintermediation. Larger number of NBFCs, DFIs and corporates will poach into thetraditional areas of bank business like mobilisation of house hold savings and dispensation of credit. Many corporates will approach the markets skipping the need of the banks to meet their needs by way of credit limits.

Thomas Mathew, general manager, of the Dhanalakshmi Bank called for comprehensive reforms in the relevant legal and administrative norms for the effective management of NPAs. He said the banks are facing several major hurdles in their debt recovery efforts. He also called for the amendment of provision of Income Tax Act pertaining to bad and doubtful debt not exceeding five per cent of the income and 10 per cent of aggregate average advances of rural branches as allowed as deduction.

In a paper sent to the colloquium, Fredy George, general manager of the Thrissur-based Catholic Syrian Bank called for setting up an asset reconstruction fund ARF to tide over the problem of mounting NPAs as suggested by the Narasimham Committee. The committee had suggested, among other things, setting upof an asset reconstruction fund ARF, to release banks locked up resources following the provisioning for NPAs for productive purpose. The ARF will purchase loss, doubtful and substandard assets from the bank at a discount. The level of discount will be determined by independent auditors on the basis of clearly stipulated guidelines. However, the transfer of doubtful debts will be on phased manner to ensure the smooth and efficient functioning of ARF. The setting up of AFR is to provide a breather to the banking sector by releasing substantial amount of resources now locked up following the provisioning for NPAs.