Banking On An Offensive

Updated: Dec 29 2002, 05:30am hrs
Promulgation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002, marked the year for the banking system. The landmark legislation could not secure parliamentary approval in the monsoon session, but saw a speedy passage in the winter session. While it provides for safeguards against defaults in the future, its instant utility lies in the framework of procedures for retrieving funds lying locked up as sick assets at presentan estimated Rs 85,000 crore and more. These can now be transferred or sold to asset reconstruction companies, too. The law also frees creditor institutions from arduous litigation, even as it offers settlement opportunities to defaulters.

Banks and financial institutions (FIs) have issued more than 10,000 notices under the ordinance. The results have begun showing, though, as relatively smaller borrowers rush to the negotiating table. The corporate world, however, is upset with the summary powers endowed on creditors, to counter which the government has promised a lenders liability bill as well.

Meanwhile, Indian Bank came back into the black, even as the largest private sector bank and the countrys second largest bank emerged out of a merger of ICICI with ICICI Bank Ltd. As small private banks continued to face the heat, Punjab National Bank has been asked to take over Nedungadi Bank. Centurion Bank, Global Trust Bank, IDBI Bank and UTI Bank, too, seemed poised for sale or merger.

Other significant developments included consolidation of views on foreign investment in Indian private banks. Up to 49 per cent stake has been allowed to foreign banks having branch presence in the country, and Indian banks can raise 25 per cent of their unimpaired tier-I capital from overseas markets.

FIs, too, remained in the limelight, with the IFCI restructuring package giving creditors sleepless nights. They were finally persuaded to roll over their Rs 12,500 crore debts at 0-6 per cent coupon rate under government guarantee, which was also extended to keep its foreign lenders at bay. As for the Industrial Development Bank of India (IDBI), much debate and speculation preceded a bill in the winter session for converting it into a bank with access to retail deposits in order to perform its primary functions more efficiently.

There was large scale activity on the government securities front as well. Indeed, income from G-sec trading formed over 35 per cent of the operating profits of banks in 2001-02. However, where the cooperative sector was concerned, following the broker scam in G-secs, irregularities in 18 urban cooperative banks came to light. It also strengthened the case for scrapping duality of control over these entities.

Norms for housing activities were eased during the year, and banks also took to offering floating rates on housing loans. Rates saw cut-throat competition, with cuts being effected virtually every other week. Lending and deposit rates, too, travelled southward consistently.

Banks renewed access to the capital markets with Punjab National Bank, Allahabad Bank, Canara Bank, Union Bank, etc., bringing out public issues. However, the year passed without the parliamentary standing committee taking a view on the bill allowing less than 51 per cent government equity in nationalised banks, referred to it in December 2000.