Recapitalisation pf PSBs

This refers to your editorial ‘Recapitalisation of PSU banks must be based on performance’ (business Standard dated 24/6/2015). The need to strengthen the capital base of public sector banks in the context of ever increasing business and business risks is paramount but driving good money after bad money particularly tax payers money needs to be given a serious thought in the background of banks’ continuous bleeding thanks to staggering non performing loans and deteriorating performance of non professional boards. As rightly observed, the money distribution should be based on performance and the  performance criteria should be on the basis of banks contribution towards GDP growth, capital formation in the country, capital output ratio, industrial and agricultural expansion, financial inclusion, gross non performing assets and loans and the Customer service efficiency ratio. The boards’ performance cannot and should not be simply assessed based on the balance sheet size which often and invariably gets lavishly window dressed. Also, the banks cannot and should not take for granted the capital support from the budgetary sources and this needs to be achieved through their contribution to improve the over all economic development and inclusive growth. Make the Banks’Board professional and fully accountable before support is extended.

Dr T V Gopalakrishnan

The gap between the Government and the RBI

Government has a political cum economic agenda whereas RBI has only the economic agenda. The Government takes half hearted measures to keep a balance between Politics and Economics and the RBI takes measures based on the possible results of the Government action  on the economy. The fact of the matter is that the economy has not picked up strength as the Government believes and talks and this RBI has boldly brought out in its recent credit policy perhaps for the Government to get a clue. Despite this, RBI cut the repo rate by 25 basis points is only to pacify the Government and satisfy the market sentiments. No doubt Government has lot of very good intenstions to take the economy forward and has been taking all possible steps , but it has its own limitations as there is an opposition, there is a bureaucracy and  there are fiancial constraints. RBI maintains its stance and will always be supporting the growth with price stability.The environment should be conducive and for this the Government has to take the initiative.  

Dr.T.V.Gopalakrishnan

(This comment sent to ET dated 5/6/2015)

Window Dressing, Human Brain and Technology

Window Dressing of Banks' Profit and Loss accounts and balancesheets has been in vogue for decades and gets highlighted, criticised and  banks are warned every now and then without any tangible result.Top management and the auditors have an understanding and they decide what should be the size of Balance sheet, the profit, the level of NPAs, the growth in deposits and advances. Creative accounting , it is believed will end when technology got into banks but Indian Brains are superb and manipulative mind works wonders to outsmart technology. The balance sheet consists of only 11 itmes or so and all these 11 items except perhaps the paid up capital  and cash are all adjusted figures to suit the top management to provide an impressive picture to the RBI, Government, investors,competitors and anybody who keeps a watch on banks' performance. It is an age old practice and there are specialists accountants and auditors who are very clever to camouflage what is not good and project and look impressive what is really bad. No bank can be an exception is the reality and the NPAs disclosed are not the real picture. One can easily double the figure. Hidden NPAs are the products of banks'inefficient and unprofessional management. While stake holders bear the brunt, the management gets the incentives by way of bonus. More they hide NPAs, more they get as bonus. Is the Government really serious to fix the issue of window dressing? In that case  a lot will have to be done right from the appoinment of banks Board of Directors to the finalisation of auditors who finalises the final accounts.  

Dr .T.V.Gopalakrishnan

( Comment sent to BS)  

Banks fail to pass on the rate cut

The reluctance to pass on the rate cut is due to 1) Presence of high level of NPAs in banks and the loss on account of these NPAs has to be made good by good borrowers and they have to be charged very high rate of interest.2) Lack of professionalism in running the banks ' operations and blindly charging the good borrowers to loot them. and make them also NPAs over a period 3) The management of assets and liabilities is non professional and the greed to maintain the NIM at a high level 4)The raising of deposits and lendings are on mechanical lines and no efforts are there to reduce banks borrowings which are costly 5) The awareness of the objectives of monetary policy and fiscal policy does not percolate down below the top Executives and this affects the transmission mechanism adversely. Even many of the Board Members are not fully aware of the rationale behind monetary policy objectives is a reality.6) The good borrowers have not resisted on the high rate of interest charged to them because of the enhanced cost of funds of banks thanks to the presence of high npas.Only goodie goodie talks cannot bring the desired results. Action wiith close monitoring and accountability for lapses only can bring in some results.

Dr.T.V.Gopalakrishnan  

RBI prefers to be cautious, neither conservative nor aggressive.

RBI prefers to be cautious, neither conservative nor aggressive.

RBI’s latest policy signals caution and sounds a bit diffident on the economic recovery. RBI has reduced the GDP growth forecast from 7.8% to 7.6 % for 2015-16 and enhanced the inflation expectation to 6%.  However, to be fair to the Government and the market, RBI decided to reduce the REPO rate by a quarter percentage   and   gave a psychological boost to the sentiments all around though there are uncertainties and risks to have a very sustainable and favorable economic environment. The uncertainties highlighted are the IMD’s prediction of a below-normal southwest monsoon. needing   an   astute food management  to mitigate possible inflationary effects,  firming up of crude prices seen amidst considerable volatility and  presence of geo-political risks  and  uncertainty  in the external  economic environment  having impact on  inflation.

What the economy needs now is investments supported by active demand and consumption which is definitely not under RBI’s purview. Credit is only a contributory factor and credit alone cannot create the atmosphere needed to attract investments. The fiscal and administrative policies of the Government, strong institutions and widespread acceptance of the policies for effective and speedy implementation are needed to attract investments from all over. The mood of the country has changed and   the expectations are very high, but there are several bottlenecks and the implementation of policies and good intentions of the Government   do not unfortunately get easily translated into action   is a reality and the old mindset to drag and tinker with policies and their implementation continue to prevail not allowing the economy to move forward.        

This is visible even in Banking. In fact this is for the third time RBI cut the rate since January and the transmission of the earlier two cuts effected in quick succession in Jan March quarter has not been felt in the market and banks by and large continued  to remain   even insensitive to the advice to pass on the benefits to the borrowers. Not only did the banks fail to cut the interest rate on advances but they have also failed to contain the growth of non performing loans. The banks effected cuts in their deposit rates and managed to post a good net Interest Margin for the year end. The failure on the part of banks to pass on the benefit of rate cuts is something which needs to be thoroughly investigated. Banks fixation of base rate and cost of funds do not reflect the correct position have been suspected for quite some time and the way they run their credit port folio leaves much to be desired. The message of credit policy and the rationale behind the credit policy do not get percolated at all levels of banks’ management, their officials, auditors and their clients particularly large borrowers is a fact which needs to be addressed by the RBI and top management of banks. The awareness of economic policies and the objectives behind the fiscal ad monetary policies in particular at all levels of officials would go a long way in achieving the policy objectives is a serious matter which the RBI and the Government cannot afford to ignore if they are very keen to transform the economy and take it on a growth trajectory.          

Dr T.V.Gopalakrishnan

Stop hide and seek game

India Inc should fight with bankers for a reduction in the rate of interest as banks have been reluctant to pass on the benefits to borrowers. Further, Industries' Association  has a moral responsibility to help bankers to reduce their non performing loans by advising its members and educating them that banks lend the deposit funds raised from public and banks are answerable to the depositors and other stake holders. Chambers of Commerce and industry have never appealed to their members to behave well with banks and conduct their loan accounts satisfactorily. Banks with all their problems are bent upon maintaining their NIM high at  around three percent which is not logical and needs to cut down drastically and pass on the benefits to borrowers. Banks should also learn to discipline their bad borrowers and award their good borrowers.A lot can be done if banks and borrowers open a free dialogue and find ways and means to come out of the NPA menace, high cost of funds, and find ways to ensure efficient transmission mechanism to pass on RBI's policies in letter and spirit.The present approach of hide and seek game adopted by RBI banks, Government and Borrowers needs to come to an end.    

Dr.T.V.Gopalakrishnan