[MUMBAI] India's government is set to overhaul annual targets for public sector lenders this month, ending a focus on size that has long encouraged banks to inflate their loans and deposits at the year-end to hit growth objectives.
Banking and government sources said the new targets, to be discussed at meetings with top state bank officials this month, would focus on efficiency, with objectives set around return on assets, or return on equity, and controlling bad debts.
Overhauling India's bloated and often sluggish state banks is critical for the government, which needs to rekindle credit growth to reboot an economy that remains slow to recover, even if official statistics have it growing faster than China.
The shift, the government hopes, will also put a stop to widespread "window dressing" of state banks' financial accounts at the end of the fiscal year, the time at which the health of their balance sheets is officially assessed.
That practice, official data shows, moves billions of dollars in the last two weeks of March as banks boost loans and deposits - only for more than half to reverse in the first two weeks of April.
This can threaten financial stability, analysts say, and could be obscuring the real state of India's financial sector, including the level of stressed debt.
For many banks, "window dressing" involves accepting short-term loans or encouraging customers to draw down on credit lines at the end of the fiscal year, parking cash in their current accounts only to then reverse the move in the new month.
Banking sources said some also encouraged consumers to shift their term deposits into the current account, then compensated them for lost interest.
One finance ministry source said the government could consider punitive action to back up its push. "The whole incentive structure needs to be changed," said the finance ministry official.
This year, data from the central bank shows the volume of loans made at the end of March that then reversed in April, an indication of "window dressing", hit levels unseen since 2012.
Some 2.3 trillion rupees (US$35.96 bln), or 85 per cent of the loans raised in the last fortnight of March, reversed in April. Similarly, nearly 60 per cent of the 3.3 trillion rupees (US$51.59 bln) of deposits reversed. "We do not want banks to present unrealistic projections while signing annual agreements with the government," said a second finance ministry official who deals with state banks. "We are not going to allow any window dressing."