Push Financial Inclusion, Fast

Apropos your editorial on Financial Inclusion from RBI (ET dated 31/12/2015), the Mohanti Committee on Financial Inclusion has done its best to make the Financial Inclusion  a reality by bringing families including girl children particularly from the rural and agricultural segment under some institution or other engaged in the field of Finance. The highlight of the report is perhaps the thrust given to link Aadhar Card with the subsidy distribution  through the fast spreading mobile usage with an intention to cut graft, reach of cash subsidy to all without leakage and loss of time.  As rightly observed the approach to   enhance the much needed interconnectedness of popular access to formal Finance with the Institutions and practices relating to the real economy, Land records, agricultural subsidy and the tax treatment of securitization vehicles is really commendable. The coordinated approach from all institutions engaged in Financial Inclusion utilizing the services of Business correspondents along with a thrust to improve Financial Literacy would definitely go a long way in achieving the inclusive growth and improving the rural environment to attract investment, agricultural production and distribution of wealth in an equitable manner. As is said the taste of pudding is in eating the success of Financial Inclusion depends on the implementation of the Committee’s recommendations in letter and spirit  which essentially calls for a mindset to fulfill the aspirations of poor segment of the population.

T V Gopalakrihnan  

(Modified version of this letter is published in ET dated 1/1/2016 )      

Make the Institutions strong Independent and accountable

Apropos your editorial a wake up call for our Political Leaders (ET dated 28/12/2015),

It may be observed that major institutions of the country do not enjoy autonomy is a fact and  unfortunately the Political Masters seldom exhibit  the wisdom to initiate action to  make them strong and accountable.

The need to have a strong healthy, sound and Vibrant financial system to put the economy on the fast growth track is paramount and the fact that the financial system   which is the backbone of the economy has stresses and strains due to poor health of both banks and their borrowers does not augur well for any of the stake holders of the economy. The Reserve Bank as the regulator and supervisor of banks has no full autonomy in practice to effectively control the banks because of Government’s interference on various policy issues and the appointment of Board of directors particularly in Public Sector Banks. Similarly the SEBI which Controls the corporate borrowers has its own limitations to discipline them all, the way the banks and the Reserve Bank desires. The Governance standards in the country by and large are weak and the Institutions which do not enjoy full autonomy have lots of escape routes for being not accountable for any of the lapses seen and felt in the financial system. Since the ultimate sufferers on account of lack of autonomy for these vital Institutions are the economy, the Government, depositors tax payers, banks, large Corporate borrowers and the people at large it is time our political masters realize the seriousness of the issues and provide the much needed legislative and Government support to make the Institutions strong and independent to discharge their allotted functions effectively and make them accountable. The major beneficiary will be the politicians themselves indeed.

T V Gopalakrishnan

Sustianble Finacial Stability is the need of the hour.

The so called financial stability is not that easy to  be achieved as long as the public sector banks continue to slog with the problems of bad debts and the borrowers continue to grapple with the slow growth, lack of investments and evasive ease of doing business.The Indra Dhanush approach to solve the problems of PSBs will not be of any use as long as the borrowers are not allowed to be disciplined both by the banks and RBI  because of direct and indirect interference from the Government  and the cross subsidisation of the banks ' losses by the tax payers and the depositors among the other stake holders exists.. The Government should ensure that the banks are highly professional and their credit portfolios are run strongly with the business and commercial approach and for that RBI should have a free hand..Banks cannot be expected to be run only with the depositors and tax payers support backed by the Governments unlimited guarantee. Their business is lending and  not investing in Government and other safe and unsafe  securities. Investments are part of their commercial approach and the investment climate should be congenial. The Credit market and bond market are weak and with this back ground the expectation of a sustainable Financial stability would be a far cry. The capital market dominated by investments from PSUs,and other institutions also is weak and this also needs a total revamp by attracting maximum retail investors at least a minimum of 51%  of the paid up capital of Listed Companies. The Credit rating of Companies should be done by banks based on their conduct of loan accounts.among other things.  The recycling of funds in banks is weak and unless they are able to have fast churn out of funds which is dependent on the repayments and recoveries of loans, banks cannot be expected to have a healthy balance sheets. The economy can be said to be strong  and fast growing only if its Financial system consisting of markets, institutions and instruments (they bring out in the market for mobilising funds, deploying them and liquidating the instruments freely ) is sound, dynamic, stable and vibrant.  

Dr T V Gopalakrishnan    

(this comment is sent to Business Standard)

Accept the ground reality of Financial Stability

The observation that While bad news about banks can be hidden, bad news about borrowers is visible to all is totally wrong. The bad news of both the banks and the borrowers are hidden by the ingenuity of the accountants and auditors from everybody is the truth as accounts are liberally fudged and balance sheets and Profit and loss accounts are conveniently window dressed to suit the requirements of those who read them except perhaps by the  retail share holderswho lose their investments for ever.What the system permits, follows and practice is accounting for convenience and not for exhibitig the true sate of affairs .Examples are Global Trust Bank and Satyam Computers. There are others like Air India , King Fisher like that. The story is slightly different in PSBs as they enjoy unlimited government guarantee and enjoy the depositors and tax payers support perennially though not out of smpathy but out of inevitable compulsions. Finanscial Stability would be a far cry as long as banks , privilged Corporate borrowers in particular are not disciplined by certain inbuilt mechanism and the accountants and auditors are not made accounatle for all their known lapses in presenting the correct state of affairs.

RBI is also unfortunately helpless in setting right the situation  except perhaps making some noises here and there when the situation is reaching some dangerous levels. 

Dr T V  Gopalakrishnan

(This comment in a modified manner appeared in Business standard dated 25/12/2015)

Transparency, RBI and RTI Act.

This refers to the Editorial ‘Why Turn the RTI heat on the RBI (ET dated 18/12/15). The Supreme Court’s ruling that the RBI should disclose the names of defaulters to people seeking such information under RTI Act though strengthens the RTI Act but definitely weakens the RBI Act, 1934 and BR Act 1949 in terms of which RBI has a role and responsibility to protect the interests of depositors who hold their hard earned savings in banks and provide the economy the badly needed capital support. While the need to maintain the health of banks by containing the bad debts formation is paramount and undisputed, and from this angle the staggering growth in the number of defaulters in banks is a cause for worry demanding stringent action both on banks and RBI as a Regulator and Supervisor of banks, but  the solution definitely does not lie in making the RBI weak and   compelling it  to make its Inspection Reports and other findings to public on demand  as such an action  will have  other consequences on the running of banks and maintaining financial stability which is very essential to support the growth and the development of the Economy and its Financial system. By and large RBI has been very fair and competent in discharging its responsibilities is a widely and worldly recognized fact and the weakening of banks particularly Public Sector banks if at all happens is apparently due to various extraneous factors which perhaps can be sought under RTI instead of the names of defaulters which are any way available with Credit Information Bureau (India) Ltd.. The Public Sector Banks’ Boards like Cooperative Banks' Board are weak and non professional and they are technically under the dual control of both the Government and RBI which is the major cause for all their weaknesses and definitely how they are made weak can be sought from RBI under RTI act instead of seeking for the details of defaulters. .           

Dr T V Gopalakrishnan)

( Comment sent to ET )

RBI is not at fault

With reference to the editorial, "RBI must give clear guidance on rates" (December 23), the transmission ofmonetary policy and its influence on the rates of interest in the market seldom take place due to inherent and historical weaknesses in the banking system. This cannot be attributed to the Reserve Bank of India's perceived lack of clarity on policy rate guidance and communication to the banks on the need to transfer the benefits of rate cuts to borrowers.

Price stability has always been the core objective of the RBI's monetary policy. Of late, this has been well articulated in the form of an inflation target among other things, and presented to banks to adhere to. While the need to reduce the interest rate and cost of funds is paramount to boost investment and growth, banks are not in a position to cut the interest rate due to some compulsions. These pertain to maintenance of high net interest margin of around three per cent - unheard of in advanced countries - and lack of professionalism in the overall conduct of business, taking into account the dynamics of both domestic and foreign markets that have a bearing on their profitability and availability of automatic cross subsidisation of losses by depositors, the government and other stakeholders.

As the current base rate is not based on a scientific calculation and is far from being aligned with the Wholesale Price Index and the Consumer Price Index, banks have the excuse to not fully transmit the RBI policy rate because the dynamism expected of them is practically absent and they have not graduated to adopt the modern and scientific calculations of various parameters. From this angle, the RBI's proposal of marginal cost of funds-based lending rate is an intelligent one. Over time, banks would be compelled to turn professional to remain in business.

A beginning has to be made somewhere. Perhaps the marginal cost approach to lending can become the game changer. Banks may have no option but to fall in line to comply with the transmission of monetary policy in letter and spirit.

T V Gopalakrishnan Bengaluru

(This appeared in Business standard dated 25/12/2015).

Banks and Marginal Cost of Funds

The transmission of monetary policy and its influence on the rates of interests in the market seldom happen due to certain inherent weaknesses in the banking system and unless and until they are removed, RBI cannot expect its monetary policy to be as efficient as envisaged. There is a paramount need to reduce the interest rates of bank loans and reduce the cost of funds in the economy to boost investment and production, but the fact remains that banks are not in a position to effect any reduction in interest rates due to some compelling reasons. Their Net Interest Margin hovers around 3% which they do not want to touch what ever may be the compulsions. Historically, banks get subsidized by depositors and the government and the borrowers get subsidized by all stake holders.  Since the base rate presently in vogue is not based on a scientific calculation, its alignment with Whole Sale Price Index and Consumer Price Index is a far cry. In such a scenario, the Public Sector Banks cannot pass on the monetary policy changes as the dynamism expected of them is missing and from this angle the approach to marginal cost of funds is really good and appreciable and perhaps over a period the banks may be compelled to accept professionalism to come out of their weaknesses and remain in business in a healthy and dynamic manner. Some beginning has to be made some where and perhaps the marginal cost approach conceived by the Reserve Bank now can be the game changer. This is an intelligent move and the banks will have to come around to comply with the transmission of monetary policy in letter and spirit over a period.

The assumptions behind the proposed guidelines that the rates of interests on various categories of deposit are true and reflect the correct position of actual costs cannot stand scrutiny on scientific lines. The rates of interest offered on Savings Bank deposits and other deposits (though historic) are arrived at on a realistic basis cannot be true as these rates do not reflect all the costs on an on ongoing basis and there are several inbuilt costs which cannot be defined, identified and arrived at easily. Besides the unhealthy competition among the  banks compels them to offer rates which cannot be entirely based on actual costs. The NRI deposits rates and the whole sale deposits rates are based on competition, undercutting, and the concessions offered on the advances rates and cash expenditures by way of incentives and other forms to mobilize the deposits. The banks incur several costs on  fast fluctuating fixed and variable nature and their true position which should be reflecting in the cost of funds i.e. deposits and borrowings is not reflecting is a ground reality. The major example is the SB rate of interest. The banks seldom change the SB rates of interest what ever may be the changes in the overall costs is a known factor as despite deregulating the SB interest rate in the year 2011, the rate has not changed in any of the PSBs. There is absolutely no correlation between the real rate of return, inflation, and the rate of interest on deposits. The equity capital which is comparatively cheap subsidizes   the rate of deposit to a great extent and this does not get into the calculation of cost of deposit at least once in a while in our banking system. Similarly the banks incur lot of expenditures in maintaining cash balances other than  CRR balances with RBI and carrying heavy accumulated bad debts  which do not appear to have been given any weight age in arriving at the marginal cost of funds although it may appear to be there under unallocated expenditures. But the banks in reality do not have any such calculation to fix the base rate as it is always linked to the NIM in practice.

 The one issue which cannot be ignored today is that 38% of the term deposits are for a maturity of one year or less as per source of funds mentioned in the notification. If we add 7% of Current Deposits and 21 % of Savings bank deposits, the total deposits of tenor one year and less would work out to 66%. A deeper study will bring out the distortion that the profile of deposits is still skewed towards short term, whole sale and high cost deposits. If one studies the Liquidity Risk in the Risk Profile Templates submitted to the Supervisory Committee on Risk Management of the Board of Directors of Public Sector Banks, this aberration would be clearly visible. The bodies offering such deposits do lot of arm twisting of bank officials and instances are not rare where the latter have succumbed to paying as high a rate as 11% for short term deposits when “aamaadmi” is paid lower rates for deposits of the same tenor. Banks do incur other hidden costs as well to get these short term and whole sale deposits. It is felt that such opaque aberrations only derailed the recommendations of the Mohanti Committee Group on base rate. The situation would not improve if the concept of marginal cost is introduced unless measures are in place to capture all the actual costs to mobiles the deposits. It would therefore be desirable to evolve a system to factor into all costs  and then  go in for the weighted average cost of all deposits up to and including one year instead of card interest rate of retail and whole sale deposits.

The cost on borrowings also needs to take into account domestic borrowings cost and external borrowings cost separately as the composition between the two varies and the complexities differ. While the cost on domestic borrowings can be easily compiled, the cost on external borrowings can vary inter-alia depending on the Exchange rate and Libor fluctuations. It is doubtful as to whether all our banks have graduated themselves to have an assessment of the volatilities in the markets and factor them into the calculations while arriving at the cost of raising both deposits and borrowings.

The other point that should be considered is the negative carry in CRR and SLR, which again may tamper transparency for the ordinary borrower trying to understand the intricacies of how his lending rate is fixed. A study could be made on the impact of 7 % Current Deposits having no interest cost and 21% of Savings bank deposits where the effective cost to the banks is less than 3% and whether or not it will match the negative carry on CRR and SLR.

The inherent weaknesses which need to be recognized and minimized if not totally eliminated from the banking system to get an actual marginal cost broadly relate to preferred and favored credits, administered rates of interests for certain categories, write off of loans under political compulsions and otherwise  based on contacts, influence and interference from various corners, lack of understanding the concept of monetary policy and its objectives particularly at operational levels, fudging  and window dressing of balance sheets with the active involvement of top managements and auditors, general laxity in the professionalism in the conduct of Asset- Liability and risks management, regulatory forbearance and supervisory relaxations taken for granted and the human resources management with adaptability to the technological changes to ensure efficient customer service taking into account the external factors of competition in the whole business of banking. This definitely calls for an immediate, careful and very serious consideration so that the banking becomes responsive and sensitive to changes in monetary policy. The presence of Payment banks now licensed and small banks in the offing may again change the landscape making the position extremely difficult for PSBs in particular to be in a healthy business environment.    

Thus Base rates should be fixed on the basis of:

1)Weighted average cost of all deposits arrived more or less on a dynamic basis and of tenor one year and less.

2)Unallocatable overhead cost with transparency and justification

3)Average return on net worth with transparency

4) without  having any linkage with the NIM already fixed.

Lending costs charged by banks to borrowers should be fixed on the basis of:

1Base rate

2Product specific Operating cost

3Credit risk premium and

4Tenor premium

Basically, base rate should reflect the actual cost of funds, the risk margin and the rate of return to the bank but its sanctity lies exactly in arriving at the exact cost of funds and the transparency in its computation and application. The computation of base rate is expected to be on a uniform basis and apparently it leaves no scope for manipulation to be fair to the borrowers .NIM should be the end result based on operations and efficiency of the management.

Dr T .V.Gopalakrishnan

Discipline both the banks and borrowers to bring down NPAs

If a borrower is having multiple banks and the borrower is classified as non performing by one bank, it is essential that all banks should treat the borrower as an Non performing. This will enable to bring in discipline on the part of the borrower and helps all banks to recover the interests and part of the principal amounts. The ultimate problem in respect of bad debts is that both the banks and the borrowers do not act professionally and treat the borrowed funds as Depositors money and need to be fully accounted for.Indiscipline is the crux of the matter and it should be dealt with appropriately. The approach to get the loss on account of NPAs suffered by banks subsidised by the innocent stake holders of banks ie depositors and shareholders who incidentally include tax payers needs to be discouraged and the loss should be made good by banks and borrowers for their failure in conducting the loan portfolio.The accounts often turn into NPAs because of failure of banks in extending timely credit support, in not properly monitoring the accounts etc and to set right this, the banks also needs to be penalized by forcing them to make additional provisions. From this angle the present policy is an excellent move.

Dr T V Gopalakrishnan

RBI and RTI Act.

The Supreme Court's ruling to make the Reserve Bank to provide information under RTI Act without reservations weakens RBI,  RBI Act 1934, BR Act 1949 and does not serve any purpose particularly in understanding the weaknesses in the Regulation and Supervision of banks and the reasons behind ever increasing bad debts of banks particularly in the Public Sector Banks. The Reserve Bank has a unique role and responsibility in maintaining the stability of the Financial system and the  rupee value which essentially calls for the continued maintenance of trusts among the saving community in the banking and financial system. While the need to have the details of all defaulting borrowers is understandable and this in fact is available with the CIBIL, why the RBI should disclose the names and  findings of Inspection reports is not understandable.Many of the borrowers turn bad and the reasons if any for such a state of affairs are the requirements under RTI act, the banks and the Government Directors on the Banks Boards who are having the information can be compelled to disclose the information under RTI Act. The RBI can at best be asked to provide as to why the credit portfolio is becoming weak and the role of banks Boards and the role of Government and other individual nominees in weakening the credit portfolio.

Dr T V Gopalakrishnan

bad debts will continue to haunt,

• The intention of RBI in introducing Marginal Cost based lending rate instead of the base rate now in vogue is to make the banks effectively transmit the monetary policy objectives and reduce the rates of interest on loans, but the banks and borrowers particularly the bad ones know how to hoodwink and continue to do what they have been doing in maintaining very high interest rate margin, lowering the deposit rates, favouring the borrowers they want and exploiting the innocent and quality borrowers. The man made bad debts problems will continue to haunt  unless and until the RBI the banks and the Government take stringent disciplinary action against erring defaulters,
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Regulate Ola and Uber and Improve public Transport

Ola and Uber are major cheats to enter the market and there is no semblance of any ethics in their business models. They charge three to four times at peak hours and are  taking advantage of the helplessness of travellers at some critical times . The weakness of administration is the reason for that. If administration can improve public transportation system and ensure auto to run as per meter and for any distance, the traffic  on the roads would drastically come down and the competition for such cheats can be severe to tame them down.  Ola and Uber are organised cheats in the merket and earlier they are controlled and effectively regulated, the better for the people and the country. It is a whole sale racket and needs to be watched. 

Dr T V Gopalakrishnan  

Is it not the responsibility of IRDA to protect the Insured?

Why Insured should look into such fine prints when IRDA can be an effective regulator and take care of the insured. The Insurance area itself is a fraud prone area and people are always taken for a ride. Doing business ignoring ethics and values has become the order of the day and the insurance companies whether they deal in life or other insurance are outsmarting all other businesses in taking the people for a ride. Even the educated and well informed people are duped by the insurance Companies and many silently suffer .Many are fighting endlessly to get justice. It is time IRDA conducts some surveys and get enough feed back on the need to be more effective in regulating the insurance companies.

Thiscomment appeared in Financial express dated 7/12/2015)