�Public sector banks could�ve been more circumspect in lending during 2002-2012�

GUWAHATI, Nov 15 - Economist and former Indian High Commissioner to the UK, Dr Jaimini Bhagwati, today said that public sector banks could have been more circumspect in their medium to long maturity lending between 2002 and 2012 when credit expansion was high and the volumes of funds allocated to infrastructure projects and large capital expenditure projects boomed.

Dr Bhagwati, who was delivering the Second Banikanta Kakati Memorial Lecture on �Stresses in India�s Financial Sector & on the Trade Front� organised by the Krishna Kanta Handiqui State Open University (KKHSOU) at NEDFi House, said, however, that given the encouragement from its majority shareholder, namely the Central government, public sector banks were at the forefront of risky lending, particularly for public-private partnership (PPP) projects.

�India�s financial sector is dominated by the banking sub-sector. That is, for the financing needs of longer gestation projects, it is banks which provide the bulk of the funding, not corporate-municipal bond markets or the pension and insurance sectors. Among banks it is the public sector banks which have been in the lead to provide funding for infrastructure, power and steel production projects. Indian private sector banks have limited their exposure to shorter-term working capital and consumer loans, usually no longer than five years in maturity except for housing in urban areas with property as collateral,� he observed.

Dr Bhagwati, who is currently the RBI Chair Professor at the Indian Council for Research in International Economic Relations, said that the proportions of stressed assets and non-performing loans (NPLs) on the balance sheets of public sector banks were higher than those on the books of private banks. These high volumes of impaired assets on the public sector banks� balance sheets had sharply reduced their ability to provide fresh lending, he added.

Referring to the setting up of the Asset Reconstruction Companies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Legislation (SARFAESI Act), which was approved by Parliament in 2002, Dr Bhagwati said that in the last 16 years, ARCs had grown in number and size but the capital at their disposal was dwarfed by the size of NPLs on bank balance sheets.