Be alert on bad debts, FinMin tells banks

The country continues to undergo a high-inflation spell, owing to the developed world’s policy response to the global meltdown, the government said on Thursday. It asked banks to be alert to the bad debts that may rise due to the RBI’s tight monetary policy to cool price pressure.

A commitment to moderate levels of price rise too has led to higher interest rates, Finance Minister Pranab Mukherjee said here. “In this environment, banks need to keep a strong vigil on their asset quality,” he added.

The minister said globalisation has its benefits, but said it also posed challenges — one being the global financial crisis. “These are turbulent times. We should watch every step we take. But this should not prevent us from taking bold and innovative steps.”

Back in India, gross non-performing assets (NPAs) of all scheduled commercial banks now comprise two per cent of the advances compared to 15 per cent in the late 1990s, Mukherjee said.

According to an Assocham study, though banks have shown improvement in asset quality over the years, fast changing macro-economic scenario has thrown up renewed risks of accounts going bad in certain vulnerable sectors like telecom, airlines, small and medium enterprises, and agriculture.

The study said gross NPAs of all scheduled commercial banks now comprise two per cent of advances, compared to 15 per cent in late 1990s. The RBI has raised policy rates 11 times to tame inflation and the resultant rates rises by banks may make some of their advances go bad.

The UPA government’s slew of financial sector reform bills are pending in Parliament, including pension reforms, insurance bill to hike FDI, banking reglation amendment bill and the constitutional amendment bill to roll out Goods and Services Tax and Direct Taxes Code.

With the Parliament session expected to end tomorrow, these bills could be taken up in the next session only — that, too, on the arrival of a broad consensus. This is particularly so in the constitution amendment bill for GST, since it requires to be passed by a two-third majority in each House, after having gained the consent of at least half of the country’s states.