World Bank Loan

This is with  reference to the article Why India does not need the World Bank loan( Business Line dt 7/10/09). The author has rightly argued why our Public Sector Banks do not require the World Bank Loan. It is true that our Public Sector Banks which have been capitalized more than the regulatory requirements and the international standards( as per Basel II norms) and which are financially sound should not have been clubbed along with India Infrastructure Company Ltd and Power Grid Corporation Of India to justify raising of loans from the world .

To support the economic growth envisaged at around 8 per cent and above, the banking system needs capital base and this has to be and can be easily found internally. As it is, the liquidity is very high in the system and the credit off take has not been at the desired / expected level and banks are finding it difficult to reduce the intake of deposits by reducing interest rates further because of better rates offered under Governments savings schemes. The lending rates have not gone down and are not likely to go down further because of inflation expectations.

Besides, with very high demand for funds from the Government sector owing to huge fiscal deficit the chances of reducing interest rates by banks and creating credit off take are remote. In addition, the level of raising non performing loans will automatically put a check on banks to expand credit.

In this back ground, there is no urgent need for banks to expand their capital base and that too from an outside international agency. There are umpteen ways banks can raise resources from both domestic and international market at very competitive rates on their own merit and strength and that is what the Government should encourage. This is the message we have to give to the International Financial system in general and international financial institutions like The World Bank in particular.

(This appeared in Business Line 13/10/09)

Dr.T.V.Gopalakrishnan

Forex Inflows

This refers to your edit Its yesterday once more (ET.10/09/09).No doubt our present economic scenario requires huge funds to support economic growth and minimise the consequences of fiscal deficit of very high order.The heavy inflows of forex resources beyond the absorbing capacity of the economy can tilt the calculations and bring disorder in exchange rate stability,inflation control,export, import and management of the economy.
The only way to tackle the influx is to absorb the excess funds without simultaneously creating supply of rupees in a separate account styled Foreign Exchange Inflows Stabilisation Fund with RBI. Banks, exporters, investors who ever have excess forex and do not require urgently can invest such excesses in this Fund for a small compensation and an incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of steririsation etc.

This write-up appeared in ET dt12/10/09.


Dr.T.V.Gopalakrishnan

Legal Reforms -Long Overdue

Kudos to Law Minister to have come out with plans to introduce legal reform and bring speedy justice for the benefit of public.

This has been long overdue and should have been there along with economic reforms.The full benefit of economic reforms so far introduced have not been reflecting in the economy because of legal hurdles and it is a boon for public that with the announcement of time bound delivery of justice and disposal of pending cases running into crores and for years,things will improve and benefit the economy considerably in all segments particularly in infrastructure, agriculture ,finance and industrial production.

This will give a boost to the sagging morale of entrepreneurs and make them venture into more economic activities. Projects kept pending under various stages because of legal disputes, have affected our economic growth very badly.If the disputes get settled early with this proposed legal reforms, the economy can recover fast and will bring all round confidence and prospirity. Legal reform is one area needing urgent attention and it deserves all support and encouragement from everywhere.

Dr.T.V.Gopalakrishnan

NON-PERFORMING LOANS- A PRACTICAL SOLUTION

Govt Banks and Capital Adequacy

This has reference to the news item 12%by 12: Govt banks lineup for cash-loading(ET dated 14th Sep 2009).It has become a fashion among Govt Banks to look forward to Govt for capital support to maintain the capital adequacy ratio prescribed/expected by the Regulator to ensure soundness of banks' functioning in terms of the risks they build up.
The real risk coverage has to come from within and not by induction of Govt funds ie public money. Banks have to learn to expand business and capital through effective and efficient management of their credit portfolio,investments and off balance sheet items. The very system of subsidizing bad credit by all stakeholders of banks particularly by depositors and shareholders which include Govt has to be necessarily stopped and there should be a way out to take care of formation of non performing loans and to stand on banks own legs without depending on Government or other stakeholders in case a situation of build up of bad loans more than reasonable limits,write off of loans,more provisional requirements and lowering of profits arise due to internal reasons or external factors beyond the control of banks.
Since Non-performing loans are inevitable in banking business,it is better to have a fund mobilised from all borrowers,banks themselves and if unavoidable from Government and RBI by way of small premiums based on certain norms having relevance to healthy and acceptable practices. Dependence by banks on Govt funds to support their capital base only reflects on their inefficiency in running the business.This fund which can be styled as Precautionary Margin Reserve Fund(PMR), on accumulation over a period, can take care of future NPLs,discipline credit portfolio and strengthen the balance sheet. Implementation of this idea will turn out to be a win-win situation for banks,their stakeholders and the government.


Dr.T.V.Gopalakrishnan.

Foreign Investors

This refers to your edit 'Attracting foreign investors' (ET,Sept11,2009).
The inflow of foreign funds in manufacturing and infrastructure can be augmented considerably if the Government acts with right earnest in this direction.This requires appropriate environment with friendly rules, regulations,procedures and positive governance,
It is high time the Government set up an International Information centre from where prospective foreign investors can have complete information regarding the economy, the potential areas which require investments, laws to be adhered to, infrastructure available, institutions to be contacted for various types of investments and facilities available to take care of investors various requirements etc.

(This appeared in ET,14/09/09)

Dr.T.V.Gopalakrishnan

Portfolio Inflows

No doubt our economy requires capital flows,but the funds should help to strengthen our capital market and they should not in any way bring in undesirable effects in the money supply,inflation,exchange rates and unmanageable volatility in the capital market.The suggestion to curb portfolio inflows through a staggered programme of phasing out P-Notes in this context is very apt and SEBI Should be in a position to identify the nature and source of funds flowing into the market with appropriate records and procedures.
It is time to curb undue volatility in the market influenced by the strategies of FIIS to exploit and make money taking advantage of our economy's dependence on foreign inflows. What the economy needs is FDI and funds which are of semi permanent nature and definitely not funds which can disturb the stability and order in the stock market.

This appeared in ET, 10/09/09

Dr.T.V.Gopalakrishnan

Global Banks

There is certain inevitability for Indian Banks to evolve themselves as global banks as soon as possible.it is time now that India has one or two banks in international financial system to benefit out of globalisation of economies and justify its own strength as a fast growing economy in every sense of the term. Indian banking system is very sound and stable and our regulatory system has proved to be the best as per the recent international experience. When our IT can command the world market why not our banking which has strong foundation and history of sound working cannot make its presence in international markets is something surprising and it only indicates that adequate attention has not been given to give a push and thrust towards consolidation of banks to achieve the global standards in terms of size and methods of operation.Since we have large sized public sector banks with reasonable international presence, it is high time Government being the owner takes the initiative and provides the logistical support to merge one or two public sector banks with State Bank of India and develop it as a global bank. Merging subsidiaries with SBI can help only to increase the size of SBI domestically and will not serve the purpose of making SBI a global bank which requires acquistion and mergers of banks which have international presence.
This is the best time to acquire some banks abroad with due diligence and expand our banking internationally.

Dr.T.V.Gopalakrishnan