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“Rise in NPAs, slippages need to be urgently addressed”

Special Correspondent
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RBI Deputy Governor attributes problem to aggressive lending

Anand Sinha, Deputy Governor, RBI ( third from right) releasing a IDRBT's book at the valedictory function of BANCON in Chennai on Sunday .( From left ) B. Sambamoorthy, author of the book and Director, IDRBT, M.D. Mallya, Chairman of IBA , M. Narendra, CMD, IOB and A.K. Bansal, Executive Director, IOB are in the picture. Photo: R.Ragu
Anand Sinha, Deputy Governor, RBI ( third from right) releasing a IDRBT's book at the valedictory function of BANCON in Chennai on Sunday .( From left ) B. Sambamoorthy, author of the book and Director, IDRBT, M.D. Mallya, Chairman of IBA , M. Narendra, CMD, IOB and A.K. Bansal, Executive Director, IOB are in the picture. Photo: R.Ragu

Deputy Governor of Reserve Bank of India Anand Sinha on Sunday flagged the steep increase in Non Performance Assets (NPAs) and slippages as two issues that the country's banking sector needed to urgently address.

In his valedictory address at ‘BANCON 2011' hosted by the Indian Overseas Bank and the Indian Banks' Association (IBA), Mr. Sinha said while part of the up-trending of NPAs could be attributed to the fallout of the global financial crisis, the bulk of the problem had its roots in very aggressive lending during the boom period.

While ruling out a systemic issue because of this, Mr. Sinha pointed out that while gross NPAs have been going down — in spite of inching upwards slightly in percentage terms — in absolute terms, the stock of NPAs had been going up in the last four to five years despite the ratio coming down.

In fact, between March 6 and 10, the NPA stock grew by 63 per cent, Mr. Sinha said. While overall profitability had helped peg the net NPAs at a respectable level, this measure of management was more akin to putting a lid on the garbage, he said.

“The fact is that there are a lot of unproductive assets lying underneath and that needs to be resolved,” he said.

The other area of worry was the substantial increase in slippage — from 1.8 per cent during 2007-08 to 2.2 per cent in 2009-10. As a result, slippage outsized recovery despite heavy write-offs, he said.

Mr. Sinha urged banks to tone up credit management to contain slippage, mobilise recovery and reduce NPA stock.

The RBI would be issuing draft guidelines on Basel III capital adequacy norms for the banking system by December and put out a final version by March 31, 2012, Mr. Sinha said.

Stating that the Basel norms were not a regulatory product, he said the RBI sought a smooth transition to the Basel III norms. It is important for senior management of banks have to understand the nitty-gritty of specialised niche products as the complexity of products coupled with excessive risk-taking had led to the governance failure that triggered the global financial crisis, Mr. Sinha said.

Mr. Sinha advocated appropriate standardisation of the Know Your Customer (KYC) norms to make them a one-time or single-point procedure.

While new accounts are largely in adherence with the KYC norms, there is a lot of deficiency with regard to older accounts, he said.

Pointing to projections that the Indian banking system could become the third largest in the world by 2025, Mr. Sinha said the focus should not be on size but on sustaining “excellence in responsible banking”, through an advocacy of corporate governance, higher productivity, product innovation and financial inclusion.

Responsible banking was no longer a choice as it was an obligation to the nation and the world in a globalised economy and banks should combine their pursuit of profits with a balancing of the interests of all stakeholders, Mr. Sinha said.

Mr. Sinha also launched a handbook ‘Holistic CRM and Analytics' authored by B. Sambamurthy, director, IDRBT. M. Narendra, IOB chairman and managing director, M. D. Mallya, IBA chairman and A. K. Bansal, IOB executive director, also participated.

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