The strong gets stronger

If the business world was looking for positive signs that public sector banks are overcoming psychological obstacles to credit disbursement...

If the business world was looking for positive signs that public sector banks are overcoming psychological obstacles to credit disbursements, it would have found the annual meeting between the Finance Minister and bank chiefs somewhat depressing. Try as the Reserve Bank Governor might to pump more funds into the system, force interest rates down and thus compel banks to take to the market with more aggressive credit policies, many still seem reluctant to get their feet wet. It was found they would be happy enough to go on lending to large corporates if only more of them were banging on the door which, as it happens, they are not. Towards other borrowers, medium and small-scale industries and trade, the approach continues to be one of cautious avoidance. Furthermore, the old love-hate relationship with the government was once again on display in the plea for immunity from investigation whenever commercial judgments are faulty, in the demand for exemption from reserve requirements for funding infrastructure projects and in the pious hope that the government will forever shore up weak banks.

The whole picture is by no means bleak and it is good to hear other bank chiefs say they are ready to rise to the challenges of the marketplace. It is against this background that the autonomy measures announced by P. Chidambaram can be judged as a process of separating the wheat from the chaff. The latest set of freedoms have to do with staff recruitment and appointments, and decisions about opening and closing branches. These seem fairly obvious steps towards giving bank boards greater administrative flexibility than they have enjoyed so far. But other measures are bound to follow. The important thing is that there should be clear-cut rules and norms and they should be kept to the minimum essential for prudence, accountability and to mesh with international banking standards. These criteria have been met in the conditions set for enlarging the area of autonomy for banks. What are required are the Basle capital adequacy norm of 8 per cent, minimum net worth of Rs 100 crore, net profit for the last three years and net non-performing assets below 9 per cent. It is high time healthy, well-performing banks were freed of a plethora of nit-picking rules that tie the hands of their boards, prevent rational decision-making and encourage dependency. With bank deposit rates freed, administrative shackles removed and the freedom to design their own individual policies, the strong can only get stronger.

In the shorter term, worries about credit offtake remain. Not for nothing does Chidambaram go on urging banks to look vigorously for new ways of expanding credit. Or Rangarajan encourage risk-taking, promising the while to set up institutional arrangements to protect banks in the course of that endeavour. Industry and the capital markets urgently need a shot in the arm. With narrower margins to work within, banks have no option but to increase commercial credit operations to keep their bottom-lines healthy. But first, the old buck-passing mind-set has to be broken.