Banks and corporates have entered into a cozy relationship: FM

Says working capital loans to companies have hit growth of corporate bond market

Finance Minister P Chida-mbaram on Saturday said non-performing loans (NPLs) in the banking system were on the rise, as banks and companies had entered into “a very cozy relationship”. He added lenders had been asked to “get cracking” on recovery and avoid extending loans to companies for working capital needs so that companies tapped the corporate bond market.

“NPLs are high, as the recovery mechanism had stopped. Banks were tardy and, to some extent, soft on recovery. We have failing companies and prosperous promoters. We have to recover these loans,” Chidambaram said at a panel discussion organised by the National Stock Exchange (NSE) on the occasion of its 20th anniversary.

“Now, bankers have been told in no uncertain terms, by both the government and the regulator, that they have to get cracking on recovery,” he added.

The finance minister said the NPL figures appeared exaggerated compared to 10 years ago, as banks had moved to system-based NPL detection. “2004 (NPL) numbers don’t compare with 2013 numbers. These are the true numbers; these are not exaggerated. The earlier numbers were suppressed numbers,” he said. “From the 2004 NPL identified by managements of banks, we now have moved to system-detected NPL. Bank manager can no longer hide NPLs.”

“At least, we now know the size of the problems. We have to tackle these,” he said.

“Banks and corporates have entered into a very cozy relationship. It’s very convenient for corporates to go to a bank, even for working capital. It is unheard of in any other developed economy. It is very convenient for a bank manager to lend working capital to a highly rated corporate...The corporate bond market is not developed because corporates think banks are ready to give money to them. It is only when the banks say no to corporates, will they be forced to go to a bond market. Today, (lenders) are happy to lend,” he said.

The finance minister suggested the existing infrastructure of the stock market be used more effectively to develop the corporate bond market.

Earlier this year, the three stock exchanges in India had set up a separate debt segment for trading in corporate bonds. However, volumes in this segment haven’t seen a pick-up yet.

On whether the government, which is the promoter of several big banks in the country, should be blamed for bank behaviour, Chidambaram said the government didn’t interfere in banks' affairs. “Ask any bank managers whether I have, in eight years of being FM, ever told them to lend to somebody. And, even if I told them, (ask) whether they listened,” he said.

He said the blame should fall on the bank's board, not on the government. “On the board, the government has one nominee. But there are also independent directors, a chairman and a managing director; there is a regulator. If the banks and bank boards have not performed their duties, the blame should stop at bank boards, not the government.”