Excess liquidity to create bad assets, warn bankers

Too much of liquidity in the market might lead to an increase in bad assets in the coming months, warn experts.

In such a situation, banks need to beef-up non non performing asset (NAP) management with renewed interest.

According to Neeta Mukherjee, president of Arcil, the asset reconstruction company (ARC), "In view of the ongoing financial crisis, the banks are faced with challenge to manage the NPAs, and there is an expectation that bad debts would rise in the coming months."

With overseas borrowing drying up in the recent days, corporates have increased their dependence upon domestic banks.

A senior official at one of the leading foreign banks with operations in India, who wished not to be named, said, in the last six months, many triple-A rated corporates are now seeking banks loans in India.

The official said, in Kolkata alone, the total credit disbursement till last month was Rs 14,000 crore, against Rs 10,000 crore the same period last fiscal.

About 40 per cent of corporate funding last year was through foreign investment, direct or indirect.

However, now domestic banks had to provide bulk of the funding, the official said.

Recent steps to reduce the cash reserve ratio (CRR) and repo rates though have eased liquidity situation, but banks could find the proportion of bad assets increasing in the coming months, said speakers.

According to K C Chakrabarty, chairman and managing director of Punjab National Bank (PNB), retail loan clients should gear up for high interest rate regime.

Also, with increased credit outflow, possibility of deterioration on asset quality of banks could not be ruled out, he admitted.

Renu Challu, managing director of State Bank of Hyderabad (SBH), said banks needed to ensure that corporates did not have stressed assets while lending in future.

T M Bhasin, executive director of the United Bank of India (UBI), said, "We are passing through tough times, and have to take adequate measures for risk management."

The Union fianace ministry had asked public sector banks to submit a five-year capital plan.

The bank would submit its capital plan for the next five years to the Union finance ministry shortly.

It would inform the ministry about the business, asset and deposit growth projections in the plan.