Sunday, January 1, 2017

867 Pressurising Indian Public Sector Banks to reduce their lending rates does not appear to be proper


News: From 1-2-2017, State Bank of India, India's largest Bk., cut its marginal cost of funds-based lending rate (MCLR) across all tenors by 90 basis points (bps)., the steepest cut in several years. The six-month MCLR is now 7.95% and the three-year rate stands at 8.15%. PNB has cut its one-year MCLR rate by 0.7% to 8.45% from 9.15%. Union Bank of India has reduced its MCLR by 0.65-0.9% to 8.65%. The revised one-year MCLR stands at 8.65%. Link: Click here to go to Livemint.com, to study this Report. Indian Public Sector Banks seem to be under substantial pressure from Reserve Bank of India, Government of India-Ministry of Finance, to reduce their lending rates. Chair persons of Indian Public Sector Banks, though are supposed to be experts in Banking and Finance, though are supposed to act autonomously in consultation with their Boards, cannot really say anything, because their positions are precarious and at the mercy of our Rulers of India 2014-2019. Besides the Chairpersons have their own shortcomings and weaknesses, which place them in 'glass-houses' and the adage 'people in glass-houses cannot throw stones' comes to their mind. Persons can act with steadfastness and uprightness only when they are strong ethically and emotionally. Besides, most chairpersons of Public Sector Banks will be approaching their retirement age, and they may develop a thinking 'Anyway, we are going away. Why should we become unpopular with our bosses and the industrialists?'. Apart from that, their minds may be engaged on 'how to search for greener pastures. 'Which industrialist is going to appoint me in some sinecure job?' thus reverberates their inner-self.

SOME RELEVANT TELUGU PROVERBS/MAXIMS


1. tummitE UDe mukku. (A nose which gets severed and drops down, when a person sneezes. It will not last long anyway, because someday or other a person has to sneeze).

2.evariki puTTina biDDa, vekki vekki EDva. (When their own child dies, people sob and wail ceaselessly. When an orphan child dies nobody will weep. Purport: Nobody will show much concern, when the problem is not their personal.)

tinu, tina nivvu. (Eat and let others to eat. Purport: Live, and let live. This is a worldly wise advice. 21st Century additional meaning: Be corrupt, and allow others to become corrupt.

Additional inputs from ybrao-a-donkey, which are not intended to be imposed on Readers

1. Indian Public Sector Banks operate on a very slender spread (Difference between lending rate, and deposit interest rate = spread, that is their profit margin). This spread must remain consistent and stable, if Banks are to stay in existence, without becoming bankrupt.

2. Considering the very very low spread which the PSBs in India operate on, they will be constrained to reduce their deposit interest rates paid to public on Savings and Term Deposits, in proportion to the cuts they make in their lending rates. In India, public sector bank depositors are an unorganised lot. They do not and cannot form pressure groups, to press the Govt. and Banks to keep the deposit interest rates stable.

3. Deposit interest rates should not only compensate the Bank Depositors who lose the real value of their money owing to inflation, but also provide a reasonable return on their deposits. Aged persons live on income earned from their deposits with Public Sector Banks. Besides, they are forced to pay Income Tax on this meagre interest income on deposits, if the interest exceeds Rs. 10,000 p.a. That Rs. 10,000 was fixed at a time, when Rice was some Rs. 15 per kilo, but now the rice is Rs. 50 per kilogram.

4. The steep increase in deposits of Public Sector Banks after July 2016, is not owing to attractiveness or competitiveness of Public Sector Banks in the Market. It is by legal coercion. People had no alternative. Not only that. Post demonetization, people have lost their trust in the PROMISSORY NOTE GIVEN BY RBI, with RBI Governor's signature, "I promise to pay the bearer a sum of Rs. ...". Earlier, as far as currency note was concerned, Government was their Supreme God, and sometimes more than the Supreme God. Now, that confidence is shaken.

LIQUIDITY PREFERENCE THEORY OF INTEREST



5. Liquidity Preference Theory of Interest of the Economics Text Books, is operating now in full vigor. In spite of loss of confidence on the currency note, people are still queueing before bank counters and ATMs because, people want to take back their money from the Banks, and keep it at their homes, to meet transactions both foreseen and unforeseen. Apart from that, during the period 8th Nov. 2016 to 31st Dec. 2016, they have postponed some of their expenses, repayment obligations, which required liquid cash. Now, they have to meet all such commitments.

The liquidity preference of depositors was low earlier, when they had confidence in Banks and ATMs, the confidence of the type "Why should I draw cash and keep in home, exposing myself to thieves and robbers? Even at the last moment or one day prior to the event (e.g. marriage, funeral, house repair etc.) we can draw the amount." Now, that confidence has been replaced by an eagerness and wisdom to keep money at hand.

Small and Tiny businesses will keep all their currency notes at the homes of proprietors' and partners', and everyday they will carry cash to their shops. Reason: Once bitten twice shy.

Ques: There is some ambiguity in what you write. You are contradicting yourself. You say people have lost their confidence in currency notes. You also say that people will hold all their currency in homes.



Ans: No conflict or contradiction. You can visualise two situations:

TRANSACTIONAL DEMAND



Till substitutes develop as PAYMENT TOOLS (not necessarily digital, as per Rulers of India 2016's wishes), e.g. minuscule sized gold coins and silver coins (without Government emblems), without Rupees denomination printed on their face, their value determined on the basis of their weight mentioned on them, currency notes will have to be used for daily transactional demands.

GOVERNMENT CANNOT SEARCH EVERY HOME EVERY DAY



Once people decide what part of their money should be kept in 'cash-currency' to meet daily and short term transactional demand, they will keep that separately.

For the remaining surplus, they will not hold currency. Depending on the type of business/occupation/family conditions, the ratio between Cash & non-cash may be in the ratio of 20:80. People may part with the currency, in exchange for something which is slightly liquid, but which is more inflation-proof, and Government-proof. People may prefer to buy more gold and silver coin equivalent metal pieces as STORAGE OF VALUE, which Govts. cannot take away, by making speeches on TVs. In spite of numerous controls which Government may impose on Gold Dealers, parallel unorganized markets will develop. Richer people may purchase more Fire & Barglary Resistent safes (FBR Safes) and install small lockers at their own homes.

GAME OF DONGA - POLICE

External appearances of houses may become 'poor' and 'simple' so as not to attract to draw the attention of Income Tax Search Teams, roaming with metal detectors and scanners. There will be a technological race between the Government and the People, a game of 'donga-police' (Thief and Police in English). Who will play the thief? Who will play the police? Who will be onlookers? This will be the subject of our forthcoming blog posts.

To continue. सशेष. ఇంకా ఉంది.

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