Thursday, August 20, 2015

567 Indian Public Sector Bks should not be asked to cut lending rates. भारतीय प्रभुत्व बैंकों को ब्याज रेट्स कम करने के लिये दबाना नहीं चाहिए। భారతీయ ప్రభుత్వ రంగ బ్యాంకులను వడ్డీ రేట్లను తగ్గించమని వత్తిడి చేయటం ప్రమాదకరం.


RBI Governor, Mr. Raghuram Rajan, seems to be a courageous person, when news reports indicate that he is resisting constant continuous nudging + prodding by the Finance Minister & the India Inc. to cut lending rates. Simultaneously, we see him his nudging the Bank chairpersons to cut Bank lending rates, probably to show that he is pressing the Banks, but Banks are not heeding to RBI and the Govt. One gets an impression that he does not want to keep the blame for himself.

As a Finance expert, he may also be aware the present turmoil and tumult which the Indian Banks, particularly the Indian Public Sector Banks are going through. He may also be aware, that Indian Public Sector Banks operate with a very narrow spread between the interest rates paid on deposits and the interest rates charged on their lendings. He may also be conscious of the great difference between the roles expected to be played by Public Sector Banks and the Private Sector Banks. It is true that an RBI Governor is not expected to be a pugilistic punching bag for the Govt. and the Finance Minister. Nor is he expected to be an extremely empathetic agony aunt for the chair persons of Public Sector Banks. It is unfortunate that Finance Minister and Finance Ministry are not paying enough attention to the health of Public Sector Banks, which if they burst can cause irreparable damage to Indian Financial System. Providing funds to sick banks, is just one measure. There are numerous other things which deserve immediate attention from the Government, particularly the Credit Recovery Arrangements.

As the communications between the RBI Governor and the Finance Minister at top level are confidential, it is very difficult to gauge whether RBI is adequately representing the problems faced by PSBs to the Govt. of India. At least there is one reason to believe that he is conveying the pathetic problems of the Indian PSBs, as can be deduced from the willingness of Govt. of India to provide additional Capital to Public Sector Banks. This alone may not be adequate to say that everything is being represented upwards. Besides, the Government of India, may be either through RBI, or even directly under pressure from Institutions such as IMF, World Bank, Bank of England or Federal Reserve Bank (America's Central Bank), BIS (Bank for International Settlements) to increase the Capital(s) of Indian Public Sector Banks quoting some BASLE Convention or something else. Govt. of India seems to wilt relatively easily to international pressures, when compared to its understanding the domestic needs.

Some quotes dated 20th Aug 2015, at SBI Economics and Banking Conference, which are attributed to Mr. Raghuram Rajan, RBI Chief:
"...There is a need for banks to cut their lending rates anticipating the benefits which will be accruing from the central bank's rate cuts. ..."

"...I think there is something to be said for the fact of the slow pace of transmission, that some front loading by the banks themselves may be useful. ..."


Some other valuable quotes related to this subject attributed to the Banks:
"...A 75 bps cut translates into 40-45 bps cut in cost of funds for banks. You've already seen a 30 bps cut. Transmission will never be a one-is-to-one correlation with monetary policy rates. ...--Ms. Chanda Kochhar"
ybrao-a-donkey's humble views. I shall not insist that you agree with me. वैबीराव एक गधे के विनम्र वचन. आप मुझ से सहमत होने के निर्बंध नहीं है। వైబీరావు గాడిద వినమ్ర అభిప్రాయాలు. నాతో ఏకీభవించమని మిమ్ములను వత్తిడి చేయను
1. Interest Rates prevailing in Indian Financial Markets where individuals, firms and Corporates lend to one another have mostly remained over 24% and rise even upto 120% p.a. depending upon security perceptions, need of the borrower, repayment program, etc. etc. Considering this hard reality, even a lending rate of 18% p.a. should not be considered as high. It is strange that India Inc. makes a hue and cry when Banks charge rates as low as 12% p.a. and demand large reductions in rates. It is really detestable that they ask for cuts in lending rates.

2. Indian Banks both Private Sector and PUblic Sector, have very poor credit appraisal, delivery, supervision, and recovery mechanisms. It is common for Corporates both industrial and non-industrial to divert borrowed funds for purposes other than the intended purposes. For this reason only we see hoarding of essential commodities, speculation in real estate, gold, silver, stock market speculations, cricket betting, with funds diverted from Bank borrowings. Once, the amounts leave the Corporates to their affiliates and subsidiaries or to the family members of the promoters, there is very little which Banks can do, to bring them back into the main stream of Finance. What the Corporates, both Indian and the MNCs operating in India, seem to want, apparently are cheap funds for short, medium and long term speculation. Else, except for those goods and products which have long production cycle, or stagnating markets, there should be no need to carry huge stocks, and pay interest to Banks. Corporates will not tell, but the interest amounts they pay, are for the moneys they block themselves in their hidden real estate or speculative investments, or in inter-corporate ventures. The best example we can get for this type of behaviors we can see from King Fisher, or the defunct Satyam Computers. In case of Satyam Computers, fortunately Mahindra came to the rescue of the Govt. and bought the I.T. dud. In case of King Fisher nobody knows what is happening and what is going to happen. I am also unable to recollect what happened to the dues of Indian Banks recoverable in case of Dabhol Power Project, Maharashtra.

I feel that it is high time for RBI Governor and the Finance Minister to ENABLE the Public Sector Banks to recover all their dues from the large Commercial and INdustrial borrowers. Court processes are cumbersome and time-consuming. Recalcitrant borrowers will use the time gap of nearly five years taken in courts for issuing decrees, to use the funds for their own purposes, though there is a procedure for attachment before judgements, it seldom works. Besides, attachments before judgements are intended as a sort of emergency method rather than as a recovery or loss minimisation proceedings.

Efforts made by banks with police help to forcibly take possession of secured assets where borrowers were non-coperative, were shunned by the court indicating that Banks cannot take law into their own possession. Even courts are unable to execute their own decrees, because they do not have staff or police of their own, and they depend on advocates appointed as Receivers/Assignees who ask Bank Staff to arrange transport and food for them. It is hightime for the Central Government and the respective State Government to constitute to post additional special Armed staff with crime and law & order powers, at, at least, Sub-Division Headquarters to help Banks in taking possession of securities, and their sale. Besides, RBI can ask Public Sector Banks, to set up a common Armed Security Force for enforcement and sale of security assets, by pooling funds and make Armed teams available to needy Banks when they need such services, and the Maintainer of the Security Force levy charges for providing the Security Enforcement and Recovery Armed Guard Services. Perhaps, it may be necessary to make some amendments to the Indian Penal Code, Civil Procedure Code, Criminal Procedure Code, Evidence Act, to make these things really work. Debt Recovery Tribunals alone cannot serve this monumental and monstrous task.
It is imperative that RBI treats and should treat Public Sector Banks differentially and preferentially from Private Sector Banks. This is simply because Private Banks and Public Sector Banks have different goals, different approaches, and different problems.

RBI should encourage Banks to mobilise their own lendable funds more and more from public and not depend on RBI's REPOS, by paying attractive interest rates to customers. Repos are intended to be emergency help, and not as primary lendable source of funds for Banks. Govt. or RBI or Banks or Industrialists should not have that impression that Banks will borrow from RBI at Repo Rates and add a measly margin for thier services.

If, under pressure from industrialists -> Govt. -> RBI, in case Banks reduce their lending rates and automatically, obviously, deposit interest rates, public will go elsewhere i.e. to unorganised sector or money-laundering institutions. Or they will buy gold or indulge in speculation. Not reducing interest rates on Bank deposits is particularly important, considering that Govt. is levying income tax on meagre interest which Banks pay on Bank deposits and insisting on TDS on Bank Deposits which are already low-yield investments owing to Deposit interest rates not matching with inflation.

(To continue. और लिखने का है। ఇంకా వ్రాయాల్సింది ఉంది.

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