Private, Foreign Banks To Be Told To Lend More To Cos

The government may ask private sector and foreign banks to step up disbursals to industry, after having directed state-run banks to do the same to help increase the flow of credit in the economy and boost liquidity in the market, a finance ministry official said.

Private sector and foreign banks have shied away from expanding their loan books for fear of accumulating bad debt in a slowing economy.

During the last fiscal year to March-end, private banks’ credit disbursals grew 10% while it was still lower for foreign banks at 4%.

State-run banks by contrast reported a 25% increase in advances, cementing their position as the biggest providers of credit to Indian industry.

“The issue (of asking private and foreign banks to lend more) is expected to come up for discussion at the meeting of finance minister Pranab Mukherjee with bankers on Wednesday,” said the official.

The poor credit growth record, especially of Indian private banks, is causing some heartburn among executives of state-run banks.

The chief of one state-run bank said while the reticence of foreign banks operating in India was understandable given the losses faced by their parents, Indian private sector banks were strong enough and could lend more.

The finance ministry official said the recapitalisation of banks was also on the agenda for Wednesday’s meeting with bankers.

Recapitalisation has become important in the wake of pressure on banks to step up lending while adhering to minimum capital adequacy requirements.

The government is of the view that public sector banks are adequately capitalised, whereas banks feel that the government needs to pump in more money in them as capital so that they can lend more. As on March 31, the average capital adequacy of the state-run banking sector was around 12%.

The finance minister is expected to direct banks to focus on lending to the infrastructure sector, given the huge funding requirements of the sector.

The new UPA government has already identified this sector as a priority area in last week’s presidential speech, which spelt out its strategic priorities.

The credit outstanding to infrastructure by public sector banks increased 27% to Rs 2,40,799 crore in 2008-09. This is expected to rise sharply in the coming years given the huge funding needs of the sector.

Source : ET

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