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RBI asks state banks to cut loan defaults

Indian central bank governor Bimal Jalan on Monday urged domestic banks to plug gaps in their financial systems which have resulted in billions of dollars worth of loan defaults.

He said the South-East Asian financial crisis three years ago had shown how a widespread mismatch between debts and loans could result in illiquidity and insolvency, damaging the whole economy.

"You have to monitor these every day, and if there is a problem or crisis, then it should come to your notice that evening," Jalan told a meeting of bankers in the Indian capital.

Jalan said that internal controls of banks must span a wide range of systems to prevent the bad loans which have accumulated to a total of about $12 billion.

The central bank governor said legislation was being framed on "prudential norms" which would help maintain a debt-loan equilibrium and make it easier for banks to press legal charges against defaulters.

Jalan stressed that unless such non-performing assets were whittled down, the banks would not have the trust of global business firms.

"In at least the next two to three years, we should be able to come to a level where all the banks feel comfortable with the level of non performing assets.

"We should not be working on it only because the Indian parliament has directed us."

The central bank governor said state-run banks should try to tap into the gigantic retail networks and make them more efficient to match steps with global competitors.

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