10-12% Car Must For Banks With Substantial Global Exposure

Financial sector reforms committee chairman M Naransimham has suggested that banks with exposure to international business be prescribed 10-12 per cent capital adequacy levels, divided equally between Tier one and Tier two capital.

Addressing a plenary session on Globalisation and financial services - role of government at the CII partnership summit on Saturday, Narasimhan said to project a strong image, banks exposed to international business should aim for a zero level of net non performing assets (NPAs). This will also help provide credibility and indicate the quality of the banks portfolio, he said.

Although NPAs, as a proportion of total assets have declined sharply from what prevailed in 1992, it is still high and stands at 9 per cent, net of provisions and other deductions. This average, however, conceals wide variations between individual banks, for some banks it is even now as high as 20 per cent.

Another positive fall out of the reduction in NPAs is the increase in average net profitability of the entire banking system. Once again the average glosses over some disconcerting performances and hence the need to explore the concept of narrow bank as suggested by the Tarapore committee, as a means to limit the spread of NPAs.

Capital adequacy related to risk assets should also be accompanied by improvement in asset quality. For this, non-interference by authorities in credit operations of banks is a must. Macro credit guidance is acceptable but micro credit direction is not, he said.

The banking system in India was over administered but under regulated, he added.

Meanwhile, Harvard Institute of International Development director Jeffrey Sachs said Moodys should be wise-enough to wait for the new government to announce its policies before undertaking to downgrade Indias credit worthiness.

Any downgrading of India now will be unjustified and reflects a misunderstanding of the reforms process, the political situation and the state of the Indian economy, Sachs said while addressing a special plenary at the CII partnership summit.

The political support for the reform programme is wide-based and hence there is no threat of liberalisation going off the rails post-elections, he said.

He then went on to draw a distinction between India and China and believes India will benefit in the long run from its well-established democratic process.

In China, the political system is not consistent with its economic policies and sooner rather than later, the stresses and strains on the countrys political fabric will begin to appear. And, it is in this aspect that India has a clear edge over China as the economic and political processes move together in tandem and naturally.

India, according to Sachs, is not vulnerable to the kind of crisis that has engulfed the Asean region simply because the country has negligible short-term debt.

Sachs came down heavily on the International Monetary Fund and says the international body is pulling out a general medicine that is not specific to the patient (south-east Asia) or the illness (the financial crisis).

This is because the IMF, he says, has no experience in dealing with the crisis such as that is now afflicting east Asia.

The fundamentals of these economies are strong and the problems relate more to the financial sector whereas institutions like the IMF are used to handling situations where there is unbridled inflation and government deficits are ballooning.

Thus, when banks in the affected countries needed to re-capitalised they were being closed down and instead of credit expansion the reverse was on.

Such wrong diagnosis and treatment has meant although close to $100 billion has already been pumped into the region, there is no sign of recovery. In fact, the sense of panic has only increased.

On the southern region, he said states like Tamil Nadu and Karnataka had all the elements to take them to a higher growth trajectory. Tamil Nadu which has been recording an annual average of 6 per cent in the past few years, can even reach 7 per cent and sustain growth at this level.

The institute he heads so jumped at the chance when the Tamil Nadu government came forward with a request to help formulate long-term economic policy that will be investor friendly. The policy will also look at ways and means to improve the states infrastructure facilities.

Increasingly, with globalisation, the states will individually play a more important role than federal governments, as has been the case in the past.