Letters: Address the root cause

The proposed new set of WLTF banks will have difficulty in generating matching liabilities

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

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