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Finance minister Yashwant Sinha had stern words for the chairmen and CEOs of India's banks last March. During their gathering at the Indian Banks' Association in Mumbai, he thumped home the message: "One of the major problems of those who depend on the financial sector is the high cost of money. Indian industry, services and agriculture cannot be globally competitive if the cost of funds is this high."
Four days later, India's central bank, the Reserve Bank of India (RBI), announced a I cut in the bank rate to 7%. It also declared a 1 % cut in the cash reserve ratio of banks in two stages - 0.5% each on April 8 and April 22 - in order to inject Rs72 billion ($ I .65 billion) of additional liquidity into the system.
Interest rates have now been on the slide for three years, and the sharp fall in inflation over the past 12 months has made it almost impossible for the banking system to justify high rates. For years, high interest rates and fat lending margins have allowed publicly run Indian banks to hide inefficiencies, high transaction costs and a heap of non-performing assets (NPAs) that now amount to Rs580 billion.
NPAs are seen as the deadliest minefield in the Indian banking system. IBA chairman AT Pannir Selvan believes their total value may rise to Rs 1 trillion if the Board of Industrial Financing and Restructuring (BIFR) - in which defaulting companies seek refuge - is not wound up.
Indian banks have been trying to reduce their historical NPA...