FM tells banks to step up lending

Finance Minister P Chidambaram today asked bank chiefs to deploy more capital to lending activities as options were fewer to park funds in government bonds.

This is because the Centre may reduce its borrowings by at least Rs 6,000-7,000 crore to match last year's fiscal deficit of 4.1 per cent of gross domestic product.

A lower target of 3.9 per cent of the GDP would mean a drop in central borrowings by around Rs 15,000 crore, Chidambaram told bankers during a review meeting here.

The government's net borrowings for the current fiscal is budgeted at Rs 1,10,000 crore and fiscal deficit at 4.3 per cent of the GDP. Briefing reporters after the meeting, Chidambaram said the government would sign a memorandum of understanding (MoU) with public sector banks by the first week of July.

Setting an agriculture lending target at Rs 1,41,000 crore for 2005-06, against Rs 1,15,000 crore disbursed last year, the minister told reporters that a road map for enhancing credit flow to small and medium enterprises (SMEs) would be announced by the end of the month.

Expressing satisfaction at the pace of lending to the infrastructure sector, the minister said the outstanding debts of core sector projects amounted to Rs 80,436 crore at the end of March 2005 against Rs 48,672 crore last year, representing an increase of over 65 per cent. Chidambaram said banks had been asked to focus on lending to warehouses and godowns, which received 25 per cent subsidy.

The government had fixed a target of reducing the level of net non-performing assets to "close to 2 per cent" against 2.98 per cent at the end 2003-04, he said.

While most banks have improved the level of NPAs, Punjab & Sind Bank and Dena Bank have been asked to submit a detailed plan to the finance ministry for tackling bad and doubtful debts. Five other banks have also been asked to adopt a multi-pronged strategy to bring down NPAs.

While Chidambaram parried questions on consolidation of public sector banks, he said the government holding in nationalised banks would not drop below 51 per cent.

He said the government would go ahead with the consolidation of regional rural banks (RRBs) in nine states and the process would be completed by the end of August.

The annual MoUs will list each bank's minimum assurances on business performance with projections for the next year on returns on assets, returns on average networth, capital adequacy ratio, earnings per share, priority sector lending, net interest margin, NPAs, intermediation costs and profits.

Qualitative targets on compliance with Basel II norms, use of technology, product innovation, improvement in risk management practices, human resources development and career planning will also be covered.

The performance of banks will be reviewed based on the commitments made by them on a quarterly, half-yearly or annual basis. Banks will be required to explain any failure on meeting their commitments. Mid-term corrections in the MoUs will be allowed if the banking division of the government is convinced that it is necessary.

While banks have been given managerial autonomy, the areas where they cannot get any relaxation are: dilution of government stake to below 51 per cent, corporate governance compliance, appointment of chairman and executive directors and adherence to MoUs signed with the government.