State Bank of India (SBI) chairman has called for a change in non-performing assets' (NPAs) norms, and reiterated the need for ending the practice of banks keeping reserves with the Reserve Bank of India (RBI).
"There is a need to change the norms relating to NPAs. We should not see a ghost in everything," said Pratip Chaudhuri.
"For instance, a company has taken a two-year loan to install a machinery. If it fails to repay in two years, just because the repayment has been stretched beyond its original schedule, we should not consider it as an NPA. Nowhere in the world such a yardstick is applied. We need to see if the machinery equipment is sound and capable of generating good output." The bank chief made these comments to reporters on the sidelines of a banking seminar organised by the Federation of Indian Chambers of Commerce and Industry.
The country's largest commercial bank saw a surge in bad loans in the first three months of this financial year. The bank added close to Rs 7,500 crore of bad loans on a gross basis during the quarter, prompting investors to sell its shares. Its gross NPA ratio was at 4.99 per cent, while net NPA ratio was at 2.22 per cent at the end of June 2012.
Chaudhuri also said concerns over SBI's credit quality was "largely overplayed" and the bank will see an improvement in the health of its assets from the July-September quarter. "Our quarterly profit was more than most public sector enterprises' but our stock got a huge battering because of our NPA. We have done an analysis of the situation. NPAs are largely in the mid-corporate and SME sectors. But with a little consideration, a little understanding and stretching the repayment period, most of these accounts can be upgraded," Chaudhuri said.
The chairman of the banking behemoth said there would soon be an improvement in the NPA numbers. "We accept the reality, but still, I think, NPA concerns are largely overplayed. In the next two to three quarters, our NPA management will be much better. Current trends do not indicate any increase in our NPAs. In fact, there could be a contraction in our NPAs in this quarter," he added.
The bank has asked some of its borrowers to sell non-core assets to improve cash flow. If a company is short of capital, SBI is ensuring that the firm takes steps to strengthen its capital base. "If the company is asset-rich but cash-poor, we are positioning more loans to them," said Chaudhuri.
SBI has also appointed 20 senior executives from various public sector enterprises to review the technical aspects of industrial projects before sanctioning fresh loans against them.
No need for CRR
Chaudhuri said RBI must phase out cash reserve ratio (CRR) as it is increasing banks' cost of funds and preventing lenders from reducing interest rates to revive the slow economic growth. He said the statutory liquidity ratio (SLR) was adequate to ensure solvency and liquidity reserve of banks.
"There are compelling reasons to have a re-look at the CRR. As the RBI does not pay interest on CRR, this acts as a tax on the banking system, placing banks at a competitive disadvantage vis-a-vis NBFCs and mutual funds. As a result, resources are being transferred from the tightly regulated banking sector to the more lightly regulated financial institutions," Chaudhuri said.
CRR, which is at 4.75 per cent, is the portion of net demand and time liabilities that banks have to keep with RBI.
The lenders do not earn any interest on this reserve.
"The rationale for a CRR, strong though it was at one time, has, however, lost much of its validity.... Additional pre-emption towards CRR is largely superfluous. The original logic of the CRR has been diluted over time and no longer applies," he said. If CRR is not abolished, he said, RBI must pay an interest on these funds.
Also, CRR must be made mandatory for insurance companies and debt mutual funds to ensure a level playing field. "RBI needs to consider paying interest on the impounded funds at a rate corresponding at least to the savings bank rate if not the repo rate or the reverse repo rate. Our contention is that CRR be phased out as this would allow banks to lower lending rates, helping industry."
Around Rs 3 lakh crore bank funds are parked as CRR, more than the aggregate loans of large lenders such as ICICI Bank and Punjab National Bank, Chaudhuri added.