Liquidity Crunch may return
By Vaibhav Aggarwal
Nov 10, 2008
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Top bankers in the country depict a comeback in the liquidity crunch in the coming quarters. Even though the monetary regulator, Reserve Bank of India has taken several measures to raise the money supply in the system, coming times are yet to observe a significant rise in the non-performing assets (NPAs).

Economic growth in the country has become a latest focus of the regulators so the bankers feel it is essential to have a strong risk management system, adequate capital infusion, and regulatory reforms to keep the growth intact in medium and long term.

SBI's Chairman, O.P.Bhatt feels, "India's future is extremely bullish in the medium to long term, but we need to revisit the regulations and balance the agricultural and infrastructural growth to ensure a continued growth of over 7.9 percent. Much of India's growth will depend on infrastructure developments, which requires an investment of about $500 billion in the next five years."

"The recent turmoil has been caused due to massive leveraging, greed and innovation without proper risk-taking abilities. Despite the crisis, India continues to grow at 7.9 percent. Liquidity is a big issue on Thursday. There is not enough liquidity for flow from one bank to another. We also need to develop the corporate bond market," added Mr. Bhatt.

Presently the banks are facing liquidity pressure both on the domestic and global front. This was due to a gradual fading of resources from the economy that was hit the global financial meltdown. Banks are not in the situation to lend each other in the global markets.

ICICI Bank Joint Managing Director Chanda Kochhar said, "We need funds to fill the gap arising from absence of trade credit and global liquidity. Resources are also needed to keep up India's growth and investments. Liquidity impacts the interest rates prevailing in the system. Source of funding from the capital market is also not available."

Over the past few years, the domestic financial institutions have improved global resources and therefore Ms Kochhar cautioned India's connection to the global crisis.

Commenting on rising NPAs, Kochhar said, "Lending standards in India is different from those in the US. Here, banks lend against the borrowers' income, whereas in the US, the banks lend against assets. Indian banks operate at a much lower leveraged level, almost half as compared to their global counterparts. Also, one-third of Indian banks' assets are parked in government securities, which reduces liabilities and risk."

"We will see higher NPAs in the coming days with Indian financial institutions, due to their credit derivative, counterparty and concentration risks. NPAs should rise across the sector. Statistically, it is inevitable that NPAs would go up as the asset growth of the banking industry has been over 30 per cent in the last four years," said Bhatt.

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