Pranab advises PSB chiefs to undertake a comprehensive capital planning exercise

Union Finance Minister Pranab Mukherjee on Friday exhorted chief executives of all public sector banks (PSBs) and financial institutions to contain the downward trend in asset quality by devising suitable strategies for curbing and rolling back their non performing assets (NPAs).

Addressing the CEOs of banks and financial institutions at a review meeting here, Mr. Mukherjee lauded the significant credit growth of 22.44 per cent posted by the PSBs during 2010-11 but also pointed to a moderation in the last quarter while sounding a note of caution to all in respect of asset quality.

“Of course, [asset quality] is an area of concern as gross NPAs have increased from March 2010 to March 2011. Gross NPAs have increased from Rs.59,927 crore to Rs.74,617 crore,” Mr. Mukherjee told the media after the meeting. “Growth of NPAs was one item on which detailed discussions have taken place and I have suggested to the public sector bank CMDs that you must not only apply your due diligence for the fresh sanction of loans but also ensure the mechanism through which the NPA growth could be stemmed,” he said.

The core CRAR (capital to risk assets ratio), also known as capital adequacy ratio (CAR), of scheduled commercial banks as on March 31, 2010, stood at 10.1 per cent under the Basel-II framework. This, Mr. Mukherjee said, was much above the Reserve Bank of India's stipulation of 6 per cent and underlined the core capital strength of the Indian banking system. He was also happy to note that the RBI had reported that stress tests of credit risk exposure of banks revealed a reasonably comfortable position and their resilience to withstand unexpected deterioration in credit quality.

To gear up for the future, the Finance Minister advised the PSB chiefs to undertake a comprehensive capital planning exercise, particularly in view of the Basel-III capital adequacy benchmarks which have to be adopted. Also, considering the increasing investment needs of the infrastructure sector, he said banks need to sustain and improve the flow of credit and they should gain more headroom for lending to such projects by availing of ‘Takeout finance' facilities from IIFC.

With regard to MSMEs (micro, small and medium enterprises), Mr. Mukherjee said that although banks have achieved 35 per cent growth in credit to the sector against the target of 20 per cent, there was a decline in the number of micro enterprise accounts and the lending agencies must proactively extend credit to this sector. Likewise, the performance, under the one per cent ‘Interest subvention scheme for housing loans and interest subsidy for housing urban poor' (ISHUP), he said, has not been up to the desired level and banks need to increase credit disbursement in this segment, he said.

As for the farm sector, Mr. Mukherjee said that while the credit flow momentum seen in 2010-11 had to be maintained and the overall progress of agricultural credit was a matter of satisfaction, many banks had failed to meet their obligations. These banks, he said, must focus attention on this important aspect and show visible signs of improvement in their performance.

Mr. Mukherjee also pointed out that there was a wide gap between the number of farm loan accounts and the ‘Kisan Credit Cards' (KCCs) issued, which suggested that there were still a large number of inactive cards. Banks, he said, should put in place a system for renewal of these cards on an on-going basis and ensure disbursement of credit through these cards.

The Finance Minister said the task force under the chairmanship of Nandan Nilekani in its interim report had recommended a general, unified, platform called ‘Core subsidy management system' for direct subsidy and entitlement transfer. The UIDAI, he said, had empanelled 64 banks for opening ‘Aadhaar' enabled bank accounts along with Aadhaar enrolment, which is in consonance with the financial inclusion agenda of the Finance Ministry.

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