Ajay Shah: In need of action

Ajay Shah: In need of action: Although a banking crisis raises the need for major reform, the RBI has not yet woken up to this



My VIEW:

March 21, 2016

Snakes and ladders

This refers to Ajay shah’s piece “In need of action” (Business Standard, Snakes & Ladders, March 21). The writer has cogently argued the case for reforms in the banking sector and a change in approach on the part of RBI to the current agonies of banks arising from ‘stressed assets’. It is tough for anyone to rescue public sector banks (PSBs) from the shameful situation they have been dragged into by government policies or to defend the high level of bad loans they have accumulated. Since nationalisation, political leadership has been meddling with the working of PSBs, using the ‘assumed’ ownership rights, with immunity. The miraculous survival of PSBs including SBI (State Bank of India) can be attributed to the net interest margins (NIMs) banks in India were privileged to enjoy continuously. During the current ‘Rajan era’, even at times of near ‘cartelisation’, RBI (Reserve Bank of India) has been merciful when it comes to passing on the benefits of lower resource cost by reducing lending rates.

 Judging the performance of banks with reference to the bad loans accumulated or the
support they need from the owners, by itself, is not rational. Comparison is always with private sector banks. To get a clear picture, one has to remember that PSBs’ share in banking business is three times that of private sector banks. What prevents the private sector banks from increasing their share in business is a riddle that policy-makers and regulators should solve, at least at this stage, before succumbing to the pressure to again ‘privatise’ PSBs. Among institutionalised businesses in India, banks stand alone as one group which have been, by and large, able to meet regulatory norms and payment obligations thanks to the professionalism with which RBI has been carrying out the regulatory and supervisory responsibilities.

 It may be recalled that banks were nationalised because of the refusal of the private sector to plough back deposits mobilised from small savers to sectors that benefited inclusive economic development. The residual and new private sector banks continue to be selective in providing credit; the social responsibility of the banking system was largely met by PSBs. The corporates, which did not want to follow the banking discipline, used their influence to get credit from PSBs. All these, together, resulted in differential treatment for public and private sector banks. Given a level playing field and semblance of functional autonomy, the future of Indian banking is safe in the hands of PSBs.

This is not an argument against the need for reforms brought out in the article. This is a plea to analysts to have a look at the performance of corporates which owe large amounts to banks and the role of regulatory agencies in ensuring financial discipline and compliance of provisions of various laws in the conduct of their business.

 MG Warrier, Mumbai