Banks and Liquidity Crisis. It is their own mess

Apropos the edit “RBI waits for FM” (March 12), the central bank’ move to cut the cash reserve ratio by 0.75 percentage point a week ahead of its policy review was quite unexpected. This indicates that the Reserve Bank of India (RBI) recognises the liquidity tightness in the market because of large borrowings by banks. The present liquidity crunch is partly owing to banks’ inefficient management of assets and liabilities. The slowdown has affected banks’ credit portfolio since there is no credit expansion or repayment of loans. With high non-performing assets (NPAs), it is only natural to be more impacted by the liquidity crunch because of lack of recycling of funds. More NPAs mean less profit since there is no repayment of interest. Given the high inflation rate, banks raised interest rates on short-term deposits and deployed resources in long-term government securities and long-term advances. There is a mismatch between banks’ short-term liabilities and short-term assets. Adjustment of interest rates will enhance demand for credit and banks will see more liquidity tightness. The escape route is to drastically bring down NPAs but that, again, is dependent on several other factors. Things can improve only after the government announces the Budget.

T V Gopalakrishnan Mumbai

(This appeared in Business-Standard dt14/03/12)

Discipline borrowers and minimise NPAs

This refers to your edit ‘credit where it is not due’ (December 26,2011).The NPA menace which was kept under some check for a few years has again been raising its ugly head. More NPAs mean, more resources the banks have to find to maintain capital adequacy. The loss to the economy on account of NPAs is unfortunately made to bear by tax payers as the Govt loses its revenues on account of reduction of GDP because of non performance of assets and also is made to contribute to capital through budgetary provisions to enable the banks to maintain the capital adequacy standards as per Basle norms. Further, the cost of NPAs is unknowingly borne by all stakeholders of banks other than by the bad borrowers is an unfortunate reality. The fact that banks can camouflage NPAs and keep them under the carpet is well known and the hidden NPAs are difficult to be identified. Added to this, the permission granted by the Reserve Bank in August 2008 to restructure some of the unsatisfactory accounts and treat them as standard assets if found viable, has helped banks to keep the NPAs down artificially.
It is for the Govt and the Reserve Bank to seriously view the NPA menace and introduce a lasting solution perhaps acceptable to all stakeholders of banks other than borrowers. Time has come to give a serious thought to discipline the borrowers and to contain the problem of NPAs. Since only banks and borrowers do figure in the generation of NPAs, the only and ideal way to come out of this ever greening problem is to have a built in mechanism to liquidate NPAs by means of creating a fund under the nomenclature Precautionary Margin Reserve Fund (PMR) involving all borrowers and banks themselves. This has to be done on a systematic and scientific basis. Over a period this fund will be more than the formation of NPAs, and this approach can strengthen the vitally missing credit discipline among the borrowers. This suggestion developed through a statistical model has been found workable resulting in disciplining the borrowers and making the balance sheet of the banks strong. The Govt is the major beneficiary in case the solution is introduced.

T.V. Gopalakrishnan
(edited version of this appeared in Business-Standard dt 27/12/11).

SLR, Fiscal Discipline and Banks

Gopalakrishnan (Fort Worth, Texas)

This refers to your editorial on SLR reduction and Govt's fiscal discipline. The reduction of SLR is ideal provided the banking system is otherwise sound and the Govt is prudent in its fiscal management. If reduction in SLR is permitted,the banks exposure to credit will expand and consequently, it will have to provide additional capital to meet the capital adequacy standards, provide more towards provision for bad debts and find good demand for credit expansion which is not there due to high interest rate, high inflation,lack of congenial atmosphere / comfort level for investment by the private sector etc. No doubt, the need for reduction in SLR is justifiable to discipline the Government's fiscal management and dependence on dependable bank finance, will it be possible in India taking into consideration poor professionalism in banking, compulsions to finance weaker sections of society, lack of discipline among borrowers to conduct their operations with banks and public money etc is a million dollar question ? How far RBI's autonomy if at all if it is there, can permit it to run the banking system the way it wants? is another issue to be debated in the matter.

( This appeared in ET E Paper dt 10/09/11)