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The setting up of a working group for suggesting measures to revive the weak public sector banks helps focus attention on a critical issue facing the Indian banking system. The presence of weak banks enhances the possibility of contagion in the financial system, and the sooner these banks can be turned around, the lower will be the risks. Earlier committees, such as the panel on capital account convertibility, the first as well as the second Narasimham panel, and the Khan working group had all made their proposals about the weak banks. While the first Narasimham panel had recommended the setting up of an Asset Reconstruction Fund, the Khan panel recommended the adoption of universal banking. The Tarapore panel adopted a novel approach, and recommended that the weak banks be converted into narrow banks.
Suggestions for mergers between banks have also been thrown up from time to time.
While Tarapore has been advocating the narrow banking solution, the fact remains that it is a radical approach not so fartried anywhere. One problem would be the fact that although the risk of acquiring NPAs would be eliminated, the structure of deposits in India may not be conducive to narrow banking. The pre-ponderance of term deposits and the lack of control on interest rates may lead to mismatches between assets and liabilities, as well as severe pressure on spreads. That doesn't however mean that the narrow banking approach is faulty. All that may be required is a broader interpretation of the term, so that some restrictions on the quality of assets to be acquired by weak banks are put in place. Securitising some of the bad loans and making a market in them would also help. Add to this approach a judicious policy of allowing strategic acquisitions, perhaps by foreign banks anxious to expand their network in the country, and the financial system could be significantly strengthened.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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