Address the root cause Necessary, not sufficient

The editorial “Financing a recovery” (April 25) brings out a stark fact that multiplicity of lending institutions may not necessarily accelerate financing recovery. In building a robust ecosystem of lending, recovery and lending to support growth, it is essential to address root cause issues. Banks should have asset liability matching system that calls for allowing access to liabilities of similar tenure for which they are supposed to lend. Mismatch in the tenure of liabilities and assets leads to liquidity risk which again adds to lending cost of the banks. Currently commercial banks are allowed to access short- to medium-term liabilities whereas they are supposed to finance every conceivable need of the borrowers irrespective of tenure.

The proposed new set of wholesale and long-term finance (WLTF) banks will have difficulty in generating matching liabilities. As far as expertise in processing large credit is concerned, banks have enough talent pool and experience of decades but for the external interference in credit decisions that injects toxicity right at the inception. Hence, if new/old banks are to be transformed into efficient lending institutions, they should have complete autonomy to (i) access funds at a rate they can raise funds; (ii) be allowed to professionally dispense credit at a rate that is line with markets; (iii) recover loans by invoking suitable provisions of law. The Centre and the states should work in tandem to create fear in the minds of borrowers against delinquency.

Unless the supporting infrastructure is effective to curb the menace of bad loans and banks are left free to scout business opportunities on their own, it will continue to be ‘assisted banking’ in the form of capital infusion and creation of state owned entities to take over chunk of bad loans from banks. The role of new entities will be limited to create competition for some initial years till their assets turn sour. Hence tackling causes of symptoms is more important than treating the symptoms and blaming the banks for the fallout.

K Srinivasa Rao Noida While the editorial, “Financing a recovery” (April 26) correctly raises the concerns involved in setting up of wholesale and long-term finance (WLTF) banks and rightly suggests the widening and deepening of bond markets for financing of infrastructure and other long gestation assets, the core issue that needs attention is that commercial banks (CB), including State Bank, have continuously failed in developing the capabilities and a culture of safe financing of the infra projects, leading to current almost insurmountable crisis of non-performing assets. One misses the expertise developed by previous term lending institutions in this context.

The promoters over years have taken advantage of inferior project appraisal skills of CBs by withholding back whatever little skin in the game they had after habitually inflating capital costs and continuously siphoning off funds when the going was good mainly due to poor monitoring/oversight by CBs.

The system of offering personal guarantees, not allowing dividend declaration under certain conditions, conversion of debt into equity and right to recompense in rehabilitated projects was simply given the go-by by the CBs, many of them lacking the historical perspective of the evolution of these well established practices. The policy and completion risks involved in long gestation projects were almost incomprehensible to CBs who for decades always boarded the projects last with working capital funds. Even sector/industry specific desks were not set up (one is not sure if this is a normal practice even today).

WLTF banks, certainly not ideal, but shall be much better alternative to CBs for future infra financing if past toxic assets are not transferred to these.

Private sector promoters must bear the commercial rates of interests whatever monetary authorities dictate. If it is okay for a micro loan borrower to pay 24 per cent per annum, any thing below should be alright for infra projects if it market driven. Thus concerns for subsiding these new entities as indicated can be taken care of.

More importantly, WLTF banks can help to save the commercial banks from future infra financings which they are not competent to handle. Authorities must keep in mind that CBs will keep on avoiding long-term financing on one pretext or another, thus slowing the economy down which the country can ill afford.

Y P Issar Karnal