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Satya Pal Singh- November 11- 2014 - Bank on sound banking

Satya Pal Singh. Editorial. XI. XV. XIV



Need to bank on sound banking!





Satya Pal Singh-fnbworld  By Satya Pal Singh



India GDP projection-fnbworld


The Narendra Modi government is visibly elated with the foreigners rushing to India, buying stocks, bonds and other porfolio investments, pushing the share market to its new highs, to the delight of investors. But will the country's favourite status continue with the FDIs and FIIs and the capital market remain upbeat yet longer ? Though indicators throw up a positive scenario for a reasonably high GDP growth, the government seems to be unreasonably slow in implementing economic reforms, especially in the banking sector.

This key sector is not being dealt with properly. From the time economy started sliding fast since the early years of UPA II, Manmohan Singh and his Finance Minister put their heads together looking for ways to revive it. They seriously discussed also the long-pending proposed divestment of state-controlled banks, but under resistance from some opposition quarters and reservations within the Congress, they preferred to freeze the proposal.

When three public sector banks ran into disrepute recently, virtually tremor struck the entire banking system and questions were raised: what actually ailed this sector ? Syndicate Bank CMD was hauled up for accepting bribe to raise the credit limit of a private company. In another case, the government ordered forensic audits of the Oriental Bank of Commerce and Dena Bank for allegedly embezzling Rs. 436-crore deposits of private and public sector units.

Finance Minister Arun Jaitley-fnbworld

The government-controlled banking system is already under heavy burden of non-performing assets, mainly due to the absence of adequate safeguards and corruption in top-level appointments. Can the banks explain why bad loans are rising at break-neck speed ? Bad loans rose almost 30% to Rs 2,45 ,809 crore in 2013-14 from Rs`1,83,854 crore in the previous year. Earlier too, the hike was equally staggering. What Finance Minister Arun Jaitley says is quite shocking: “There are people whose intentions are not good…they do not want to repay their loans.” That is the reason why RBI Governor Raghuram Rajan wants tight discipline and transparent governance in public sector.  

It's noticeable that while private banks added $33 billion to their wealth via capital market from the time when slump started in late 2010, govt banks lost a shocking $27 billion. Is that a pointer to economic resurgence ? Does not this show how market treats the government-controlled institutions when it comes to raising money out of their stocks ? Certainly very poorly, but why ? Because the investor prefers to lock money in private banks which definitely yield better returns. So, why not add a little shine of privatization to public sector banks ?

Reserve Bank of India-fnbworld

If Prime Minister and Finance Minister, aided by RBI Governor, want to infuse life into the state banking system, they must wake up quickly to sell majority of government stakes in these banks. No one says state should lose control over them: minority government shares can still be retained to meet the needed social obligations. Reforms don't come easily; they claim their price. Bank employees resent this, for the obvious reason of losing stability premium on jobs. But the government can well handle this by reaching an understanding, allowing them some extra pecuniary benefits.

Investment for large-scale national development has to come through an efficient banking system which presently is under tremendous strain. This cycle of development will start firmly with long-term foreign and domestic investment and end with reasonably high GDP growth and national prosperity, where poverty levels will be seen drastically reduced. One hopes the Prime Minister will retain his party's political capital through a sound banking system which ultimately will add to national wealth.

It's also important not to pursue the policy of loan waivers and interest subvention as a means to create  vote bank among beneficiaries. Such policies menacingly disrupt credit flows. Loan wavers to farmers as a gratuitous relief are normally resorted to win popularity and vote. This policy is neither economy-friendly nor does it meet the ends of justice. The essential alto-rilievo may, however, be given only in times of emergencies and natural calamities. But it is observed that the ruling political parties decide on loan waivers as a populist measure even in times of normal crops. A great majority of kisans (farmers) don't repay loans in the hope that these would eventually be waived in election time. Law-abiding farmers, who repay loans timely, are left fuming with painful grouse.  

Narendra Modi's popularity rests on quick deliveries on various fronts, notably strong national security,  resurging economy, which includes push to agriculture and industry, creation of jobs and infrastructure for development, effective check on prices, visible fight against corruption to take it to zero tolerance,  affordable health and education system, among others. The government must, therefore, intensify the tempo of development and carry out the necessary reforms to create smooth passage for a robust economy.


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