As a major repercussion of India’s biggest banking fraud to the tune of over Rs 13,000 crore, as banks turn cautious of pursuing lending activities, Industry body Assocham on Sunday said that overreaction by banks and the investigative agencies could hurt essential credit disbursement to the trade and industry hampering growth expectations. Notably, in the last one month, the lending premium has climbed by 10-50 bps on the Indian paper, top bankers told PTI. Further, unidentified bankers told the news agency that the banks are now cautious in issuing Letters of Undertaking (LoUs) and this has affected the ability of traders to raise capital especially from abroad via this route. We take a look at three key concerns of Assocham, and why the body sees increased risk to lending activity of banks.
A huge loss on confidence
According to a statement by Assocham Secretary General D S Rawat, there is humungous public pressure post the major fiasco that has led to the the banks becoming cautious and the regulators to act tough. Further, Rawat also points to the fact the the news constantly grabs media attention, and while the level of noise may be justified taking the scale of problem into consideration, it could cause a huge loss of confidence. The industry body has asked to limit the collateral damage from the major fiasco.
Inadequate systems- vital steps needed
Assocham says that it is time to show immense restraint and use the opportunity systemic issues, like the US’ did after the global financial crisis of 2007-08, where the authorities worked at the root of their banking system and have put in place some robust risk mitigation and prudent system. Further, Assocham says that while the debate on reducing government stake to below 50% should be encouraged, some immediate and vital steps should be taken for building capacity in the PSU banks such that they are able to prevent and detect frauds.
Put in place systems in line at par with current technology
With new technology evolving at a rapid pace, Assocham says that it is vital to put in place robust systems, which are well beyond compromise. Further given the technological disruption, Assocham has called for need to develop expertise in specific business verticals, with the help of RBI. Bringing out the need for a rehaul of the systems, D S Rawat said that lending to infrastructure projects is not the same as lending for retail trade, transportation or operating in the bond market, and hence a new approach is needed for technological and human resource upgrades.