The banking sector in India faces a crisis. The total gross non-performing assets of all banks are estimated to touch Rs 1,50,000 crore by end March, 2012. This is nearly three times the total NPA in 2008 amounting to Rs 56,000 crore. That year witnessed a financial crisis in India caused by the collapse of Lehman Brothers but Indian banks were better off then. The RBI has said that much of the stressed assets have been created by lending to infrastructure and priority sectors. But these sectors will need greater inflow of funds in the coming years. According to the government, infrastructure projects will need $1 trillion over the next five years. The power sector has caused the greater part of the stress. As on September 2011, banks’ total exposure to the power sector was Rs 3,00,752 crore. Roads and commercial real estate do not pose such a problem. They account for one-third of the amount. Lending to the power sector post 2008 has triggered double digit credit growth. But the power sector is saddled with a plethora of problems.
It is time to depoliticize the power sector. The regulatory mechanism needs total revamping. State governments have to readjust their policies. Otherwise the banking sector will be hit hard. By March 2012, it will account for Rs 56000 crore in bad assets. Lending to infrastructure has to be long term, 15-20 years. Bank deposits however have an average maturity of 18-20 months only. Banks can but provide working capital finance. There is need for developing a corporate bond market as well.