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FM cautions banks on falling asset quality
November, 12th 2010

Finance minister Pranab Mukherjee on Thursday cautioned against deteriorating asset quality in banks and said the sector needs to support the growth momentum in the economy following prudent lending . Banking sector needs to support the growth momentum in the economy while giving due attention to the asset quality and prudent provisioning to balance emerging returns and risks, he said at the 92nd foundation day of Union Bank of India here.

Mr Mukherjee cautioned that the asset quality of banks has deteriorated and the coverage ratio of provisions showed a fall at the aggregate level reflecting a weakening cushion to meet NPA losses. He pointed that banks profitability had also declined in 2009-10 in terms of all the major indicators.

India with growth trajectory heading towards 9% or more in the coming years is placed at a critical juncture. The banking sector needs to support this growth momentum , he said.

The finance minister emphasised the need to step up the efforts towards financial inclusion and indicated that the percentage of people having any kind of life insurance cover is just 10% while the percentage of non-life insurance is merely 0.6%.

Banks, therefore, need to step up efforts towards financial inclusion using the instrument of scale neutral technology as this would help in bringing the vast population into the ambit of formal finance and also boost future economic growth coupled with equity, he said.

According to the RBI, of the six lakh habitations in India only about 30,000 have commercial bank branches. On an average there are less than three bank branches per 100 sq km of land area and this ratio is worse for rural areas and for the north-eastern region.

In 2009 deposit mobilised in rural bank branches was merely 9% of total deposit mobilised by banks and the share of rural credit in total credit of banks was even lower at 7%, he said.

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