Why blame RBI?

The editorial attempts to find fault with the RBI for its regulatory and supervisory lapses and has come out with some suggestions to regain the loss of trust in Private Sector Banks among the public. Being a bankers bank and a regulator and supervisor, no doubt RBI has the moral and physical responsibility to ensure that the banks do not err and indulge in transactions which are against prescribed rules, norms and guidelines, but one has to appreciate that RBI with its limited resources of man power about 17000 staff cannot be expected to scrutinize millions of transactions involving exotic products carried out by the banks and its associate business concerns having thousands of branches and whose only philosophy is to make money at any cost. All said, RBI cannot escape from its responsibility of keeping the banking system sound and viable but aberrations do take place in the context of ever increasing expansion of business having inter linkages with various markets, institutions and economies under a severe competitive and liberalized environment. The individual banks’ greed and over confidence that they can get away with any violations if detected and questioned because of the generally deteriorating conditions in the economy in the area of adherence to Corporate Governance, accounting and auditing principles, uncalled for and unhealthy interference from various quarters in banks functioning in general and appointment of Directors without complying strictly with the fit and Proper criteria, is the key issue for the banks indulgence in such undesirable activities where RBI can have a say only after the event has occurred and that too when banks are taken up for annual inspection.Time to have a comprehensive review of everything for regaining the losing confidence of the public in the banking system.

Dr.T.V.Gopalakrishnan
(This is in response to the editorial on Sting in the tale Lessons for RBI and banks from Cobrapost investigation appeared in Business standard dated 16/5/13).

Public Secrtor Banks, Directors and Corporate Governance

Why talk of repentance in leisure only? The appointment of Directors is at the will and pleasure of the influential politicians and bureaucrats and the considerations are very many better not to be spelt out.The fit and proper criteria based on qualifications, experience, specialized knowledge in the field of banking, accountancy, rural credit etc for appointment of Directors is only on paper and the contacts and connections are the real fit and criteria followed in practice is known to all in the banking system.Corporate Governance is introduced with lot of propaganda and it is practiced more in breach is an open secret.The way loans are sanctioned,accounts are restructured,and bad debts are written off is an established proof that directors on the Board and corporate Governance practices have no role to play in improving the functioning of banks. Banks suffer, economy suffers,depositors suffer,good borrowers suffer all because of lack of Corporate governance and the benefits are enjoyed by Nominee directors and bad borrowers. Some exceptions may be there but they will have their own stories to suppress and suffer.Ethics,honesty and integrity are unfortunately not available in the market and these have to be cultivated by practice,culture and commitment.The present atmosphere is certainly unsuitable for any one to even think of. Better to keep away and suffer all time  and not at leisure.

Dr.T.V.Gopalakrishnan

(This has been published in Money Life in response to the Article Directors of PSBs the Ground Reality)

Bank Licenses Another cash cow

Bank Licenses will give more opportunities for the Govt to exploit the economy in several ways. The aspirants for bank licenses are mostly Corporates having diversified interests which include even real estate business. Since banks are highly leveraged institutions, the access to money for the avaricious and greedy industrialists is unlimited and there has always been a nexus between politicians and Industrialists to exploit the economy. The election is also round the corner.The desire to improve financial inclusion is only a sugar quote and if the Govt and RBI are serious on Financial Inclusion the existing banks themselves can be made to achieve that. Unfortunately, our masses are illiterate and they can be easily fooled by some cheap gimmicks. The present approach to banks Licensing may turn out  to  be another gimmick and some industrial groups may get the license to prove to be a major head ache later on. This article is definitely a warning and has perhaps come out of the past experiences the economy had.

Dr.T.V.Gopalakrishnan

(This comment appeared in ET dated 15/5/13 in response to the article After Telecom licenses and Coal Blocks will bank licenses be the next cash Cow?)

Banks Board should be made accountable

How these sorts of violations have not been detected by the banks concurrent auditors, internal inspection machinery and statutory auditors? need an explanation from the top management. It is humanly impossible for RBI to scrutinise each and every individual transaction in banks. Further RBI has introduced sufficient checks and balances to ensure that the banks do conduct transactions as per the prudential guidelines and it is for individual banks managements to ensure   that they  do not violate any of the RBI guidelines and conduct business which is not in the interest of the economy. The greed is the force behind these banks and aggressiveness in marketing of the banks subsidiary companies' products make them to ignore the prudence and violate the directives.The findings of RBI indicate that banks do not have any corporate Governance system in vogue and the boards do not care to adhere to the minimum ethics expected of them in carrying out operations. Unless and until the banks particularly the new generation banks are disciplined, the banking system can take the RBI and the Govt for a ride and the economy will get into serious problems.  Dr.T.V .Gopalakrishnan (Mumbai)  (this comment is published in TOI dated 14/5/13 in response to a write up Banks suppressing alerts on suspect dealings :RBI probe)     

Write off of bad debts at whose cost-Tax payers and depositors?

All these write off of loans running into thousands of crores of rupees are borne by the tax payers, depositors, share holders ,general customers employees and good and honest borrowers of banks. Though there is an inbuilt solution to contain formation of bad debts and discipline borrowers, banks, auditors and accountants and make the borrowers and banks to bear the cost of write offs without passing on to tax payers and other stake holders, there is reluctance and resistance  to attempt the solution on a trial basis from all corners. Both theRBI and Govt  also talk and express their concern on the staggering NPAs and loss to the exchequer, but what prevents them to introduce an inbuilt mechanism to bring under control the NPAs and discipline the recalcitrant borrowers is something strange. If the solution suggested   by this author in early 2000s had been implemented, this write offs could have been avoided and banks balance sheets would have been much stronger today. The suggestion developed as a statistical model and found workable has been published as a book titled Management of Non Performing Assets with a Foreword by the Chairman PMEAC. This model had been suggested to be published by the Foreign Examiners who had approved the  Phd  thesis with the remark that the model is worth a trial in Indian scenario. The benefits of savings on account of write offs if the suggestion had been implemented could have been passed on to depositors by offering them a higher rate of return, borrowers by granting reduction of interest rates, and share holders who include the Govt in case of PSBs a better rate of dividend, tax payers some benefits through improved GDP growth and reduced tax rates. Are the authorities waiting for Supreme Court to intervene in managing banks balance sheets ?

Dr.T.V.Gopalakrishnan

(This comment is in response to an Article Govt Banks write offs Rs 15000 crores appeared in Times of India dated 13/05/13 A modified version of this comment has also been published in TOI.). 

Monetary policy: Highly subdued, devoid of any nudge

    

The Reserve Bank’s monetary policy for the year 2013-14 had no surprises for the market and no sermons to the Government.

The policy was on the expected lines, but the tone of the Reserve Bank was a bit diffident on the fast growth prospects of the economy.

Based on the parameters, that is suppressed inflationary pressures, sluggish growth in GDP, worsening balance of payment situation particularly the current account deficit, liquidity constraints in the economy which have not shown any encouraging signs of improvement, the Reserve Bank just reduced the repo rate by 25 basis points from 7.5 per cent to 7.25 per cent.

Consequent to this change, the reverse repo rate and the Marginal Standing Facility would remain at 6.25 per cent and 8.25 per cent respectively.

The effectiveness of monetary policy depends on its transmission, through the banks, which however has been proving to be ineffective of late.

The policy measures, particularly the reduction of CRR and repo rate effected since 2010, did not translate into reduction of lending rate to customers except perhaps for a very marginal adjustment of less than 0.5 per cent to a segment of borrowers.

Even in respect of the latest reduction of 0.25 per cent in repo rate, the bankers have expressed their inability to pass on the benefit to customers.

Over a period, the banks have become greedy and changed their business profile keeping an eye on profitability ignoring the deposit customers and the borrowers engaged in physical production of goods and infrastructure.

They keep an eye on retail and well-off customers and encourage auto loans, housing loans and other consumption loans which were in the non-priority list in the olden days.

Banks’ tendency to maintain NIM at around 3.5 per cent has been persisting despite the Governor’s exhortation to reduce it to a reasonable level and this coupled with ease of doing business more with borrowed funds than mobilised deposits has been forcing the banks to keep away from productive loans.

The problem of non-performing loans adds to the banks aversion to venture into risky loans and given an opportunity they avoid credit risk by escaping manufacturing loans. The human resources of the banks have also not been attuned to go into productive loans with adequate training on appraisal, follow-up and supervision of loans.

Making life easy has been the broader philosophy and monetary policy transmission is having a very low priority in the name of risk management and maximisation of profit, is what is seen to be in practice.

While apprehending on the inability to ease monetary policy given the poor economic scenario, the Governor in his guidance note for the period 2013-14, has, however, cautioned that “the monetary policy action by itself cannot revive growth and it needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment alongside continuing commitments to fiscal consolidation”.

This is an explicit message to the Government that the RBI has its own limitations to give a boost to the economy which has been showing sluggishness thanks to policy paralysis, governance standards and dwindling confidence in the system.

This policy statement implicitly indicates that a lot remains too be done by the Government to put back the economy on growth trajectory.

The highlight of this year’s policy is that the Reserve Bank has brought in a regulatory measure in respect of unhedged portion of the foreign currency exposure of corporates which has been long overdue.

This will have some impact on banks profitability and capital adequacy areas, but it will certainly help to improve the health of the corporates and forex market in the long run.

The overall message one can infer from this policy is that RBI can think of easing monetary policy further only if inflation is brought under threshold level and other requirements which basically come under the domain of the Government to give a thrust to the growth of the economy are in place.

A genuine concern well brought out.

Dr.T.V.Gopalakrishnan

Keywords: RBI, monetary policy, suppressed inflationary pressures, sluggish growth in GDP, worsening balance of payment, current account deficit, economy

This article is published in Business Line dated 13/5/13) 

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Growth, Food Security Bill and Poverty

This article explains the truth well that ' Delayed reform and slower growth kept an additional 109 million people below the poverty line'. The reforms which have virtually stopped since last few years, have added miseries to the people which include, more poverty, illiteracy, unemployment, and all economic related problems like inflation, high fiscal and current account deficit etc.again adding to poverty. The solution to the problem of poverty as rightly highlighted in the article lies in faster Growth and Food security will help only to add miseries of the people. Iyer should come out with more of such articles for the understanding of the masses, politicians, bureaucrats, and industrialists.Exploiting and perpetuating poverty and illiteracy can never be good economics.

(This comment in response to an article Fast Growth will save lives not the Food Security Bill appeared in Times of India dated 12 5/13)