The timing of your edit analysing the banking sector’s negative indicators is significant since it comes soon after the Reserve Bank of India’s reassuring Financial Stability Report 2011 (“Fearing financial feedback,” December 28). The regulator’s optimism stems from the robust numbers generated by banks over the last four quarters. But banks have been resorting to window dressing to cover their operations despite RBI’s repeated calls to stop such practices. Three sectors – real estate, infrastructure and power – contribute to 85 per cent of the total non-performing assets (NPAs). RBI has agreed to the restructuring of those exposures since such restructured loans do not figure under the NPA data. This greening practice has helped both the banking sector and the regulator.
Some time ago, RBI mentioned the problems at the individual bank level, but it should be noted that over-leveraged sectors are a potential threat to the banking sector on the whole. So far, we have had only over-leveraged companies but now we have over-leveraged sectors, too. For instance, look at the aviation sector — promoters can simply walk out, while banks stand to lose everything.
The growing disconnect between accounting profits and real profits is likely to ruin the banking sector. The remedy lies in surprise audits of bank branches with large corporate exposures on a random basis in addition to regular year-end audits.
K V Rao Bangalore
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