Golden rule for bankers: “Don't lend to anyone who needs money.”
1The paper is based on a lecture delivered at National Institute of Bank Management at Pune on 13 November, 2005.
The post-reform period has been marked by (a) considerable market orientation of banks along with switchover to a regulatory regime in line with Basel I; (b) substantial liberalisation in the spheres of production, trade and cross-border capital flows; and (c) increasing integration of domestic and international markets for goods and services as well as financial products. These developments opened up a wide array of business opportunities for banks; but the manifold increase in various types of risk also posed a serious challenge. Judged on the basis of financial indicators like non-performing assets (NPAs), capital adequacy and profitability, performance of banks during this period has been quite impressive. However, some of the developments are far from healthy and these include drying up of funds for long-term including infrastructural capital accumulation; sharp rise in investments in government securities at the expense of credit to the commercial sector; and grossly inadequate supply of loans to farmers, SMEs and other borrowers in the unorganised sector. While part of the reason for this is structural or policy related, there have also been major lapses in operation of banks themselves. In particular, banks have failed to acquire optimum size; develop an adequate system of assessing creditworthiness of borrowers and pricing rules on the basis of the risk-return calculus; and come up with financial innovations for exploiting the vast, untapped market potential.
