Banks need to erect firewall for sustainable growth

The happenings in recent times - beginning from the Hall-Mark loan scam to the latest appointment of an 'observer' for one of the country's 'oldest' large private sector banks (PCBs) - give some disturbing signals about the country's financial sector. The large state-owned commercial banks (SoCBs) and other financial institutions in the public sector are not alone at fault. The situation in some of the PCBs is also unpropitious. Bad or problem loans, along with various kinds of irregularities in the sector, are thus turning out to be quite worrisome. Certainly, this should not have been the case now. The monetary watchdog is otherwise better equipped today than what it was two and a half decades back. Discharging its oversight role properly should thus be less problematic now.
However, it would be unfair to blame the central bank squarely for the current state of affairs in the country's financial sector. It (the central bank) has itself played a pro-active role in unearthing or detecting many recent striking irregularities and malpractices, involving both public and private sector banks. Furthermore, it has, at least, demonstrated its will to streamline operational matters of some 'errant' banks. In doing so, it has withstood multi-faceted pressures from powerful quarters who do otherwise exercise strong political clout.
Some critical observers have meanwhile expressed fears about the country's financial sector bracing itself now for its old syndrome - 'money is no problem' - in the late 1970s and until the late 1980s. But a large chunk of such loans or credits had later turned 'sour' in course of time. As a result, the banks and specialised development financing institutions, then mostly in public sector, had to bear the load of bulging non-performing loans (NPLs). Frolicking with bank credits by the 'delinquent' borrowers helped neither to foster entrepreneurship nor to promote, what was then paraded in the late 1970s as, investment-oriented ventures. In the process, a great mess was created that had to be addressed later, quite painstakingly, to help restore a modicum of discipline in the financial sector.
Against this backdrop, the present situation in the country's financial sector - a sensitive one, of course - provides no scope to consider it a time for any blame-game. It reflects some deep-stead malaise about lending or other related operational activities of some banks and non-banking financial institutions. The situation in the sector is still not alarming. But it is disconcerting to a considerable extent. The current signals thus give an early warning or wake-up call. It is time for all concerned to make concerted efforts for doing the needful in order to enforce proper discipline and take firm and decisive measures at the earliest to remedy the situation. This will go a long way towards averting any possible, major future shock. A stitch in time, as the proverbial saying goes, saves nine.
In this context, it will be relevant to note that there is now a heavy concentration of aggregate bank credits, particularly those of PCBs, among a very small number of 'large borrowers'. A similar picture of concentration is also conspicuous about their area-and sector-based credit disbursements as well as loan recovery positions. The consequential effects of such factors are not difficult to understand. Jolts to any bank under such circumstances can cause jitters across the wider sector. On their part, the banks, if they are to be well-positioned to weather any possible future storm, will require to follow standard accounting rules and norms while preparing their periodic profit-and-loss statements. They will have to cushion, by way of proper provisioning arrangements as and where necessary, against 'bad' loans or NPLs and to help strengthen their respective capital base. They will indeed have to erect a firewall to protect themselves against any looming threat, real or perceived. This is a critical need. It must not be glossed over, either by default or by design, by the management authorities of the country's financial institutions.