Rate CUT And Competition In Banks

I fully  concur with opinion of RBI governor Mr. Raghuram Rajan who says that reduction of interest or giveaways to corporates are not the only tools for Credit Growth or for growth in economy . There is limit for RBI or for any Government to give relief to business houses in interest and if we go beyond it, or if we cross the limit , it will be disincentive to silent savers and it will have adverse affect on savings and investment environment in the country . High value savers have already shifted their savings from banks to other pockets like real estate, gold, stock markets , commodity market or in Swiss Banks. 

But the bitter truth is that business houses are not leaving any stone unturned to build pressure on RBI for lowering of interest rate. Politicians of all colour and creed who do not understand the intricacies of the economic principles or who do not want to understand it wilfully to serve their political agenda are time and again putting pressure on RBI to lower interest rate. Finance Ministers during UPA rule or now in NDA rule are thinking in the same fashion that only lowering of interest rate may cure the sick banks and may give a boost to economy. As if interest is panacea for all ailments.

Politicians do not try to understand that if banks are forced to reduce interest rate on loans and advances, they will have to lower interest rate they pay o deposits which they receive from savers. And if savers particularly pensioners or person whose livelihood depend on interest will face greater difficulty if interest rates are lowered on their savings. They will be forced to put money for higher interest with local money lenders or Chit fund companies or NBFC . This will definitely erode the deposit base of lending banks and hence deplete their lending capacity. When their resources will shrink, they will naturally will not lend or try to borrow money from RBI or other costlier sources. This will further cut their capacity to lower rate or cut their net interest margin and finally cut their profits.

Further , continuous rise in bad debts is causing banks greater pain and erosion in their interest income. Volume of bad debts has been consistently increasing in all banks due to various reasons. Banks are constrained to write off loans and interest . Again their profit and capital gets eroded. If their profitability get eroded further by interest cut , health of banks will further deteriorate.  RBI Governor is therefore perfectly right in not lowering interest rate . He is right in saying that only Stimulus to business houses cannot help in giving a boost to economy.

After 2008 financial crisis is USA , India claimed that US crisis had not impacted Indian economy. Still the then UPA Government gave away hundreds of crores of rupees to Corporate houses in various forms of subsidy.  Government advised banks to give all relief to business houses without ascertaining  the fact whether the business houses were affected by US crisis or not. GOI allowed Public Sector Banks to give interest concessions as per their whims and fancies and allowed them to restructure bank loan if the same was irregular to stop slippages in NPA category.

Previous Government inculcated a wrong culture in minds of bankers who used this tactics to conceal all bad loans . This is one of prime reasons that ratio of gross NPA and that of stressed assets in PSBs have grown to such a large extent. Stimulus allowed by banks and GOI to corporates after 2008 crisis were as good as Jugaad tools used by UPA government , but they did not yield an fruitful result , rather they damaged the sound economic health of the country. This happened despite opposition by the then RBI Governor Mr. Suba Rao.

It is good luck that RBI Governor Mr. Rajan has understood the main problem public sector banks are facing and hence he is trying to prescribe proper medicine and not sticking to 'Jugaad' tools as suggested by clever politicians .He does not believe in temporary solution and neither does he believe in artificial or manipulated growth of banks. He does not want window dressing . He does not want bankers to book higher profit by window dressing . He does not want that banks should hide bad loans , he does not want banks to reduce provisions by fraudulent measures and he does not want banks to boost profit by fraudulent methods.

Let us see how far Mr. Rajan gets success in his Utopian ideas. I say Utopian because I know the nature, attitude and character of Indian politicians.

Also read my Blog "RBI Governor Does Not like Jugaad"

Why Raghuram Rajan Believes Low Rates Aren't the Only Growth Pill-NDTV-20th September 2015

When it comes to interest rates, mum is the word for any central banker ahead of the credit policy. And the RBI Governor is no different.

But he is one central banker who is known to speak his mind. Every word he says makes policymakers sit up and take notice.

"I know these cameras are here not to see me speak on core competencies but on interest rates - so let me offer my standard disclaimer," RBI Governor Raghuram Rajan told a hall packed with industry captains, economists and mediapersons while delivering the CK Prahlad Lecture in Mumbai today.

"For any hints of what we may do in the upcoming policy, please read the guidance in our last policy."

The timing of his lecture today was key for two reasons - the RBI Governor was speaking hours after US Federal Reserve Chief Janet Yellen decided not to hike interest rates, coming as a relief to economies like India that have seen stock markets rallying as a response to Fed's decision. Plus, ten days from now the RBI has to take a call on whether or not to cut interest rates at a time when inflation in India has touched historic lows and pressure is mounting from all sides to deliver a rate cut to boost growth.

Despite his assertion not to draw any veiled inferences from the contents of today's speech, he did give three useful insights into why he thinks low interest rates alone cannot spur the growth of any economy. And why he believes sustainable growth needs a lot more that just low rates and giveaways for the industry.

For one - he says, reforms (and not rates) hold the key to India's sustainable growth. "We have to expand the sustainable growth potential. That means continuing to implement reforms that government and regulators have announced that is the only way to get sustainable growth potential up," he said. A crystal clear message to the government - walk the talk, implement the reforms.

His second assertion was to learn from the experience of Brazil - an economy that was delivering an impressive 7 per cent plus growth rate just a few years ago and is now likely to shrink over 3 per cent. He says Brazil's central bank was "pressed to lower rates" fueling a credit spree that now overburdened customers are struggling to pay.

Third, the Governor today made a key distinction between the interests of the "vocal borrower" and the "silent saver." So while low interest rates benefit borrowers - be it individuals or the industry, we forget that they hurt the depositors. The Governor felt it was important to keep the silent saver in mind while taking a call on rates. "For us at RBI, key task is to keep inflation low - not just today, but well into the future so that we get nominal modest rates that satisfy not just the very vocal borrowers but also the silent saver," he said.

Click Here To Read My Blog of 13th June 2015 Interest Rate is Not medicine to cure sick banks

 Many of his critics will strongly disagree with his views arguing that if historically low inflation rates don't merit a rate cut, then what does? Shouldn't we be worrying about "deflation" rather than "inflation" as the Chief Economic Adviser Arvind Subramanian so clearly articulated recently.

But Dr Rajan's message is clear - he isn't succumbing to any pressures and will lower rates only when he feels the timing is right.

What's true is that Dr Rajan can be credited with putting India on a much stronger footing in his two years of Governorship. The Fed decided against a rate hike, but today India was far better prepared and a much stronger economy to deal with any global shocks than it was two years ago when he took over as the RBI Governor. In 2013, the taper tantrum sent Indian markets and the rupee into a tizzy putting us among the worst performing markets worldwide. Today, as Dr Rajan himself says - "India is an island of calm in an ocean of turmoil."

Dr Rajan, we're not taking any hints from today's speech. But for those who are taking a September rate cut for granted, be prepared for some surprises.

http://profit.ndtv.com/news/economy/article-why-raghuram-rajan-believes-low-rates-arent-the-only-growth-pill-1219000

What Type of Competition It is?- I ask

Following is my opinion

It seems ridiculous to me when RBI or Government of India or any other economist or writer or any banker talk of competition in banking industry. What type of competition after all it is? In the recent past ,Reserve Bank of India and Government of India have given license to many business men for opening of new banks, differentiated banks or payment banks, or opened Mahila Bank or Mudra Bank and claiming that these banks will create competition among banks.

About 100 year old public sector banks or you may say that four decades old nationalised banks are said to be competing with new generation private banks , banks which took birth about two decades ago. Giant PS banks with old infrastructure, with mind set of secured government job and with responsibility of shouldering the task of social welfare agenda of government are competing with private banks run by perfectly new generation technology, by youth crazy of jobs and afraid of loosing jobs and run with absolutely profit motto without taking care of any social objective. What type of competition it is, God knows.

There are 28 public banks and they are competing with each other. One PSB is taking over business of other PSB giving interest concession or by giving relaxation in service charges. One PSB sacrifices interest or processing charge to snatch credit business from other PSB and offer higher interest rate on deposits to snatch deposit business from other bank. Is it called competition?

One PSB losses and another PSB gains. Such types of competition is like hand of a person is competing with other hand, one leg is competing with other leg , ears of the same persons are competing eyes of the same person. You may imagine .the fate of a body when different parts of the body competes with each other, act against each other and work in conflict with each other. Or you may say that there is no harmony among different parts of the same body. Perhaps government is forcing such competition on various public sector banks and causing loss ultimately to people of India, to taxpayers and to investors in different PS banks. Number of weak banks has been increasing year after year and talk of merger and consolidation to hide weakness of banks is going on for last three decades and more. Government has to infuse thousands of crores of rupees to these banks to survive and to compete with private banks . Not only this, PSBs have already sacrificed lacs of crores of rupees in writing off of bad loans or in compromising with bad borrowers. This is the cost of competition for PSBs have to bear and still their shares are not choice of investors. In other words, one may that Private banks are allowed to spoil the future of PSBs in the name of so called competition..

Secondly, Different PSBs are competing with private banks like Axis Bank, HDBC bank or ICICI bank as if normal trains are competing with Metro rail. Normal and old chain of trains are to carry an number of passenger running from village to village causing discomfort to all whereas Metros are meant and designed to serve passengers of big towns and confined to big cities only. Fare of normal trains cannot be increased  keeping in view  the pain of poor people even though quality of service get eroded and deteriorate day by day.

Further Private banks are set up purely to earn profit whereas PSBs are made to serve social agenda and national agenda of the country. Competition imposed on PSBs  is like competition between government hospitals and private nursing homes. Private nursing homes charges are extraordinarily higher  and theyvhsve option to choose patients and charge as per their whims whereas charges of government hospitals cannot go up and cannot be discriminatory keeping in view the possible protest from common men and from politicians of opposition group. Competition is like that between private schools and private colleges for higher educations on the one hand who charges lacs of rupees as tuition fee per year from student with government run schools and colleges on the other hand which cannot increase tuition fee to that extent. Similar is the quality of teachers in government schools and that of Doctors appointed in government hospitals. On the other hand Doctors appointed in private nursing homes or teachers in private colleges are of high quality and have scope to earn much higher income compared to their counterparts in public hospitals and public schools. Appointment , promotions and transfer in public banks takes place based on flattery and bribery whereas that in private banks based purely on merit and quality of performance and potential of  the worker.

Obviously if PSBs with different supporting hands and infrastructure are forced to compete with entirely a different set of supporting staff and infrastructure , it will cause much damage to former only . Private banks will not take any such step or undertake any project for lending which may cause loss to them in future whereas officials working in PSBs can cause all losses to their bank only to achieve the target or to please their bosses or to please their political masters. There is heaven and hell difference between the two sets of bank and between two set of workers. As such the idea of competition is totally unjustified, deceptive and suicidal .

During last few months , RBI has given license for opening of new private banks like Bundhan Bank or IDFC bank , given license for opening of payment bank or for opening of banks to deal in small and micro finance . RBI says that these new banks will further increase competition among banks. Such competition is like a Adult or matured person is said to compete with a newly born baby. Or more clearly you may say that a passenger train is forced to compete with Rajdhani train and inviting accidents and losses to passengers. To make it crystal clear, such type of competition is likev asking a boy admitted in extremely poorly maintained village level school to compete with a boy admitted in high standard costly private school.

I am unable to understand what type of competition these newly born banks will create or generate for old generation public banks. But one thing is certain  to me that these newly born private banks, payment banks or small finance banks will grab quality business of old PSBs and cause erosion in business volume and cause loss to existing banks. PSBs will have to pay a lot and face huge damage in competing with these new generation banks and obviously such losses  accumulated together will lastly come on the shoulder of Government of India and that on people of India only.

It is true that as number of new banks increases, customers will get new option of banks and they may get better option of services in some towns and cities Rich customers who can afford paying higher service charges may shift to best serving private banks or new generation banks. But there is no doubt that old set of PSBs will gradually grow in weakness and turn from bad to worst , become non-performer or less performer and will slowly be thrown in waste box by new generation youth .WE have seen how Regional Rural Banks during last two three decades have been growing weakness and gradually they are merged with parent bank. We have seen how various cooperative banks are sitting on bomb of bad debts and facing chances of closure. Similarly few PSBs have become too weak to survive and government is contemplating to merge them with stronger PSBs. Government is unable to change the wine , but they are changing bottle frequently . But it is sure that Government cannot increase the sale of wine by changing bottles only. One stock of old bottles will go in the back racks and new set of new bottle may be keep in front rack . Ultimately it is the quality and cohesive policy which work for long period.

Until contents changes, sale of bottle cannot increase. New generation banks which have fresh and quality materials to serve in their banks will grow and old banks which are constrained to stick to old contents and old tools cannot dream of increasing their sale.

To conclude , I may say that entire talk of competition in bank is farce, ridiculous, deceptive and harmful too. And last but not the least, I am unable to understand what purpose is going to be served by such mismatching and ill-conceived competition. It is absolutely unimaginable that PSBs will be getting good outcome and better results in competing with private banks. As a matter of fact , even various branches of the same Public bank cannot dream of competing with other branch of the same bank. This is because each branch has got some locational advantages and disadvantages. A branch situated in remote village cannot dream of competing with a branch situated in a town or in metro city. Not to speak of branches at various location, even branches situated in same town cannot dream of competing with other branches of the same bank in the same town because each mohalla or ward has some merits and some demerits.

A branch situated in the premises of a good school, or a good college or good PSU or a reputed institution can capture business in hundreds of crores of rupees in a year without making any special effort. On the contrary a branch situated in remote village, or in a critical area, or in a naxal affected area or even in dry industrial area cannot dream of capturing good business or earning considerably good profit at par with that in a town or in a city. There are some places in Industrial areas, where credit expansion in hundreds of crores of rupees is possible every year whereas in some other places , it is difficult to increase credit even by a crore or two in a year.

Potential of business for any branch or for any bank in any area depend on many locational factors such as local area, local politicians, local inhabitants, business potential , administrative support ,infrastructural support in the area, local climate ,availability of natural resources ,quality and quantity human resources etc . As such the very thought of competition among various branches or various banks is faulty and misleading.

I want to ask a question to all  , are such competition meant for giving better service to customers or for earning higher profits?

Are such competition to fulfil task of the social objective and completing social welfare plans mooted by GOI with available resources , building better infrastructure , growing more and more crop, manufacturing best product, increasing exports and increasing comfort of common men or ..........for giving an opportunity to private banks to earn greater profit at the cost of that of Public sector banks?

People of India, politicians ,great economists and planners of the country have to ponder over it and assess what type of competition is going on in banking industry and what type of it is necessary to save sinking banks. Banks in public sector are meant to distribute charity or to earn profit only.

Is Government forcing competition among looters of banks to loot maximum in the name of business or in the name of competition?

Bankers are freely giving credit ,freely writing off loan and then again giving fresh loan and again writing off and so on . Sometimes they hide bad loans by restructure and sometimes by selling to ARCs and sometimes by writing off them. This is an open secret that public sector banks are competing with each other in increasing stressed assets , in increasing Gross Non Performing assets, in writing off loans , in causing loss due to frauds and in boosting the size of balance sheet by manipulation and by fraudulent methods.

Is it the purpose of competition suggested by RBI and GOI?

Banking industry to brace itself for competition-DNA 23.09.2015

The banking industry landscape is set for a salutary change. So far the industry has endured the public sector banks’ patchy performance interspersed with the recent breezy spell of private banks’ entry on a limited scale. The Reserve Bank of India is aiming to foster competition and innovation in order to promote efficient service delivery to end-users.

In June-July this year, the RBI gave licenses to IDFC Limited, a non-banking finance company (NBFC) and Bandhan Financial Services Pvt Ltd, an NBFC-cum-microfinance institution (MFI), to carry out banking services across the country. Subsequently, in August, licenses were granted to 11 payments banks which are ‘niche’ or ‘differentiated’ banks with the common objective of advancing financial inclusion. The RBI announced its ‘in-principle’ approval to 10 applicants for setting up Small Finance Banks (SFBs).

Read in detail by clicking on following link
http://www.dnaindia.com/analysis/column-banking-industry-to-brace-itself-for-competition-2127696