Former Reserve Bank of India Governor Y.V. Reddy on Saturday said the major problem of the Indian banking sector is the burden of investing 25-30 per cent of its deposits in government securities.
“The real problem for the banking sector in India is that 25-30 per cent of its deposits must be invested in government securities. Nowhere in the world is that much of burden put,” said Reddy in an interactive session at the Times Delhi Lit Fest 2017 held here.
“Second, there are other obligations as well. So you have to look at the totality of the system. But as far as few non-performing assets (NPAs) are concerned, NPA becomes a problem when the tax payer has to pay.”
Giving an insight into the problem of NPAs, Reddy explained that NPAs do not mean that the money has been robbed from the bank.
“NPAs do not mean that somebody is stealing the money. If there are NPAs in ICICI Bank, or HDFC Bank, that NPAs losses have to be borne by the shareholders,” he said.
Quoting his autobiography ‘Advice & Dissent: My Life in Public Service’, Reddy said NPAs are a bigger problem due to lack of proper provisions for collecting the lent-out money in the country’s legal system.
“NPAs is a big issue because the lender is not able to collect the money from the borrower. That is the big problem. As I have explained in my book, in India the legal system is such that the borrower repays out of moral compulsion,” Reddy asserted.
“Legally, there is no way in which the bank can collect the money, till recently. But the good thing is that the insolvency code has come. Number of fundamental things have happened (in the banking sector).”