Greed has trampled over trust, respect and legality, the HDFC chairman said, while recalling a new word coined recently, 'Banksters' -- implying that bankers were ready to dethrone gangsters with their despicable behaviour
Mumbai: At a time when bankers across the world are being termed as 'London Whale', hedge-fund sharks and various other deadly creatures, Indian financial system remains intact despite its 'boring banking' tag, industry leader and HDFC chairman Deepak Parekh said, reports PTI.
"To my mind, the winning strategy for banks in India is 'Basic Banking Model' - what is otherwise known as 'boring banking'. There is enough of retail business potential for all existing banks, new banks (as and when fresh licences are given), non-banking financial companies (NBFCs) and microfinance companies and other players," he said.
"Greed has trampled over trust, respect and legality," he said, while recalling a new word coined recently, 'Banksters' -- implying that bankers were ready to dethrone gangsters with their despicable behaviour," Parekh said.
"Today, there are no longer any 'Wall Street Stars' or celebrated champions in the financial industry," he added.
Parekh said leadership plays an important role in shaping the culture of a bank, but banks have grown so large and the key question arises whether bank CEOs are able to keep track of what their traders or employees are up to.
"Thus, the recommendation of ring-fencing retail banking from investment banking is becoming more compelling now at least amongst the regulators. The solution to banking scandals cannot be financial penalties, resignations and tighter regulation," he said.
Noting that the regulation of Indian financial system has been appreciated globally and the robustness of banking system here is very much intact, Parekh said even most of the restructured loans are not stressed because of poor credit quality, but due to "prevalent policy uncertainties".
Speaking at Motilal Oswal Annual Global Investor Conference, the eminent banker and financial services giant HDFC Chairman said a rock-bottom level of investment cycle in the country has indeed taken a toll on banking sector.
But, India has got far too pre-occupied with its "woes on slowing GDP growth, policy paralysis, inability of the government to push reforms; and investor confidence being shaken due to GAAR and other tax uncertainties."
"In the process, we seem to have forgotten that the key fundamentals of the economy are very much intact in India," he said, while listing out factors like a young population, growing middle class, better job opportunities, rising disposable incomes and a high household savings rate.
Parekh said banks are taking unprecedented beating globally amid issues like subprime crisis, collapse of financial institutions, Euro zone debt crisis, rate rigging scandal and failures to prevent money laundering.
"And, of course, the London Whale, hedge-fund sharks and heaven knows what other deadly creatures are lurking in the financial world!" he said in a lighter vein.
On the other hand, he said, Indian banking has been fairly isolated from this chaos, in part because it "was never as sophisticated or complicated as that of the Western world."
In the context of Indian banking system, Parekh said public sector banks have a disproportionately larger share of the NPAs compared to private sector banks and "a distinct trend seen in the banking sector, particularly with public sector banks is that the concentration risk has increased as many banks have high exposures to the same few groups."
Identifying retail focus as a key for better performance, Parekh said that consumer credit penetration in India is extremely low compared to countries like China, Japan, Singapore and Malaysia.
Asking investors to take a "big picture" view, Parekh said banking will see exponential growth by the end of this decade.
"Mortgages are expected to cross Rs40 trillion by 2020. With a growing bankable population, by 2020, the number of bank branches is expected to double from 2010 levels. This means 70,000 more branches will be added. Similarly, there will be a five-fold increase in the number of ATMs."
"Wealth management is also expected to grow by 10 times. So, the prospects are very promising. Private equity has also seen a healthy growth in India," he said.
"India still has an estimated $20 billion of dry powder that is funds committed but not invested. However, much greater effort especially in terms of a more conducive regulatory environment will be needed to increase penetration of insurance.
"In the recent period, both the mutual fund industry and life insurance sector have unfortunately, seen de-growth. This is partly attributable to the many regulatory changes," Parekh said, while admitting that ULIPs were indeed being mis-sold.
Still, the life insurance industry has been saddled with a number of new regulations and frequent changes made the operating environment difficult, he said, while terming that it has become a case of 'a regulation a day keeps business away!' .
"In the future, I see more mergers taking place? There will be fewer, but larger players" in the insurance space, Parekh said, while expressing hope about growth in mutual fund industry as well on the back of recent measures taken by SEBI.
"So on the whole, Indian financial system will continue to grow and the future outlook remains encouraging," he said.
Listing out the concerns and challenges, Parekh said that one of the risks is that of regulatory overbearance.
"Admittedly, today the job of a financial regulator is extremely challenging and while there is a need to be vigilant, it is also important for the regulators not to be too prescriptive and let market forces work.
"Indian financial conglomerates have additional challenge of having to deal with multiple regulators in the financial sector. As mentioned earlier, frequent regulatory changes are unwarranted and the diktat on where and how and at what rate to lend at is not good for the financial system," he said.
Giving example of the recent regulatory changes is in the priority sector norms, Parekh said that agriculture as a percentage of GDP over the years has come down significantly, but the mandated 18 per cent priority sector limit continues.
At the same time, indirect lending to housing finance firms and most NBFCs are no longer priority sector lending.
"To my mind it is more important that credit be made available and it does not always have to be that bank provides credit directly. I do not buy the 'lazy banking? argument!
"If infrastructure financing is a national priority, then why is not it included as priority sector lending?," he asked.
He also expressed concern about the regulators' perception on NBFCs.
"It appears that there is an attempt to slowly and steadily curb activities of NBFCs by clamping down on their ability to raise resources. The regulators don't want NBFCs raising retail deposits," he said.
However, he admitted that some regulatory concerns on NBFCs were valid, such as NBFCs excessively funding promoters who pledged their shares or the rapid rise in gold loans.
"Regulators do not seem to appreciate that there are many NBFCs that have a very good track record and have provided credit where banks have been unable or unwilling to do so.
"The question then arises is whether RBI will be willing to grant bank licenses to convert these NBFCs into banks?"
Parekh also called upon the government to ensure a conducive environment, remove policy uncertainties, hike insurance FDI cap, bring in legislation and taxation changes for Financial Holding Firms, and articulate its plan to fund PSU banks' additional equity requirement of Rs1.5 trillion.
He said that private sector banks should be able to more easily meet their additional capital requirements, but it may also result in more banks having a foreign shareholding in excess of 51% per cent and consequently, complexities arising from 'foreign owned Indian controlled' financial entities would need to be ironed out.
In a sharp reaction to SBI chief Chaudhuri's recent comment that CRR does not help anybody and it was unfairly put on banks, Dr Chakrabarty said, it he is not able to do business as per RBI's regulatory environment, he has to find some other place
Kancheepuram (Tamil Nadu): A top official from the Reserve Bank of India (RBI) on Monday snubbed State Bank of India (SBI) Chairman Pratip K Chaudhuri for his remarks suggesting abolition of cash reserve ratio (CRR), bluntly telling him that he has to find 'some other place' if he could not work as per the central bank's regulatory environment, reports PTI.
"...if the SBI Chairman is not able to do business as per our regulatory environment, he has to find some other place," RBI Deputy Governor KC Chakrabarty said in a sharp reaction to Chaudhuri's recent comment that CRR does not help anybody and it was unfairly put on banks.
Chakrabarty was responding to a question by a student of Great Lakes Institute of Management during its third annual financial conference "Systemic Risk".
To another query as to "which banking tree needed to be protected", Dr Chakrabarty, drawing an analogy to forest fire, said: "Obviously it is the SBI. SBI is too big a tree. If you fail to protect SBI tree, it (the fire) may spread on to other banks and it will turn out to be a systemic failure."
Chaudhuri had questioned why the CRR was not applied to insurance companies, non-banking financial companies and mutual funds, who are also mobilising public deposits.
"CRR doesn't help anybody and it is unfairly put on the banks," the chief of the country's largest public sector State Bank of India had said last week.
Keeping required funds with the Reserve Bank without any interest was costing the banking system about Rs 21,000 crore, Chaudhuri had said. CRR is the amount of deposits banks keep with RBI in cash.
In its quarterly monetary policy review, RBI had last month retained the CRR at 4.75% and reduced the statutory liquidity ratio (SLR) -- the amount of deposits banks park in government bonds -- by 1% to 23%, effective 11th August.
It had also left key interest rates untouched, a move that disappointed industry and retail borrowers.
With rising NPAs of the banking industry and strain on their profitability due to slowdown in the economy, there is every justification for commercial banks to clamour for marked reduction in the CRR, which alone can provide some reprieve to the banking industry
Of late, the Cash Reserve Ratio (CRR) has become a bone of contention between the Reserve Bank of India (RBI) and the commercial banks, though it is as yet at a low key for obvious reasons. Some time back, one chairman of a public sector bank equated the CRR to a non-performing asset (NPA) and said that his CRR was the biggest NPA in his books. This is because, CRR does not earn any income for the banks just like the non-performing loans, and is, therefore, a drain on the profitability of banks. The similarity ends here, but the banks are feeling the pinch now more than any time before.
Traditionally CRR has been one of the monetary tools in the hands of the RBI along with other instruments like Statutory Liquidity Ratio (SLR) and Open Market Operations (OMO) to fight inflation in the country. Under Reserve Bank of India Act, 1936, a certain percentage of net demand and time liabilities (NDTL) of banks is required to be mandatorily parked with the RBI on a daily basis, which is called CRR, and RBI has the statutory right to raise or lower the ratio according to the needs of securing monetary stability in the country. At present it is pegged at 4.75% and every scheduled commercial bank (SCB) is required to maintain 4.75% of its NDTL as cash balance with RBI and this amount does not earn any interest for the SCBs. Till 2007, RBI was required to pay interest on the CRR balances kept by SCBs, but by an amendment to the RBI Act, this provision to pay interest was withdrawn, and hence the RBI does not pay any interest on the CRR balances maintained with it from 31 March 2007.
Magnitude of the CRR balances held with RBI
The magnitude of the CRR balances maintained by banks with RBI can be gauzed from the following figures. As on 27th July, 2012 on a NDTL of all SCBs amounting to Rs.66,29,500 crore, all banks put together maintained a cash balance of Rs3,14,900 crore with the RBI every day, and this keeps on growing with the growth in deposits of the banking industry. This humungous amount does not earn any interest for the banks. If you calculate the interest on this amount at the average lending rate of banks, say at 10%, the total loss to the banking industry is in excess of Rs31,000 crore per year. The total net profit of the entire banking industry for the year 2010-11 was Rs 70,331 crore. If only this additional income by way of earnings on the CRR was available to the banks, the total profit would have gone up by over 40%. As this makes a huge difference in the performance of banks, one can imagine the agony and anguish of banks over this issue.
And the vexatious part of it is that the RBI lends to commercial banks up to a certain limit to each bank at the repo rate of 8% per annum at present and that too against pledge of government securities as it is a collateralized lending by RBI to banks.
Impact of CRR on State Bank of India
State Bank of India, the biggest bank in the country is quite vocal about this matter because of the considerable loss of revenue caused to the bank. According to Pratip Chaudhuri, chairman of SBI, the annual loss to SBI alone on account of CRR is of the order of Rs3,500 crore which is nearly 30% of the annual declared net profit of the bank of Rs11,707 crore for the year 2011-12. He has, therefore, suggested phasing out of CRR, and its eventual abolition within a reasonable time-frame, as impounding of this large quantum of lendable resources in a capital-scare economy with vast requirement for infrastructure, does not stand to reason. As per the report in the Hindu Business Line, Mr Chaudhuri went a step further and said, “these funds have an opportunity cost, in terms of foregone lending opportunity. Thus holding back funds and keeping them idle hurts overall productivity, affects growth and leading to stunting of banks.” He further said that SLR of 23% was sufficient to address the issues of solvency of and liquidity in banks and CRR was largely redundant.
Finance ministry proposal to pay interest on CRR deposits
With a view to give some reprieve to the banks and to persuade them to bring down the lending rates, the finance ministry is reported to have mooted the idea of giving 7% interest on CRR deposits to banks, and then ask them to lower the lending rates, as the RBI has not so far resorted to any easing of the monetary policy. If the RBI concurs with this proposal, the banks will earn interest at 7% p.a., and this will bring down the cost of funds, enabling them to pass on the benefits to borrowers by lowering their lending rates. It is not known whether the RBI has agreed to this proposal and whether it is legally in order for the RBI to pay interest on CRR balances, when such a provision existing earlier was withdrawn by amending the RBI Act in 2007.
What is the practice followed in developed countries?
Most of the central banks in developed countries have dispensed with the system of CRR and have been using the tool of open market operations to control inflation. While countries like the UK, Canada, Sweden, Australia and New Zealand have zero reserve requirements, USA has a graded system of reserve requirements depending upon the size of the bank. It starts from zero percent to 10%, but the critical point is that this reserve is not on the total demand and time liabilities of the bank, but on dollar balances only on net transaction accounts, i.e. only on checking accounts, which form a much smaller part of the total liabilities of the bank. And unlike in India, the entire cash held by the banks in their own vaults is considered as reserve and only the balance amount is required to be deposited with the Federal Reserve—the central bank of the US. Surprisingly, Federal Reserve pays interest on the reserve balances maintained with it including on the excess balances, and the current rate of interest paid is 0.25% p.a., which is equivalent to their discount rate at present.
Story of a whipping boy
Here is a story going round the banking circles. There was a disciplined school teacher in village school, who ensured that his students followed value systems, etc. He had one student, coming from the richest family in the village, but the boy was very indifferent in his studies, very mischievous and would not listen to the teacher’s admonitions. But the teacher was afraid to punish him as it might boomerang against him due to the influence commanded by the boy’s parents with the school management. The teacher would, therefore, pick up a poor man’s son and though he was innocent, punish him for all the wrong-deeds of the rich man’s son, making the poor student a whipping boy, much against his own wishes.
Are banks too whipping boys for the ills of the economy?
This is exactly what is happening in the banking industry today. The RBI puts the onus squarely on the government for the rising inflation in the economy, saying that it is due to supply side constraints and the fiscal deficit caused by the rising subsidy burden but can do nothing about it. And it does not bring down the interest rates fearing that it would fuel inflation and tinkers with the monetary policy by reducing the SLR, when the banks needed reduction in CRR to shore up their profits. RBI expects the banks to reduce their lending rates without any corresponding reduction either in repo rate or CRR. This amounts to punishing the banks for the inaction of the government.
The corporate debt restructuring scheme (CDR) was devised by RBI to give relief to the industries which are in distress due to the slowdown in the economy. And now banks are blamed for the huge restructured loans in the banking industry, and are asked to increase provisioning against such restructured advances, affecting their profitability.
Here is another example. In the wake of deficit monsoon and the failure of rain gods, banks should have been advised to be discreet in lending to agriculture to ensure that they do not accumulate further NPAs in agricultural sector. Instead, the government is pushing the public sector banks to lend more, having set a target of Rs5.75 lakh crore for the current financial year, an increase of 20% over last year. And the banks may reluctantly comply with the orders of the government and achieve the set target, with a ray of hope that these loans would be recovered when the government comes out with another loan waiver scheme next year before the general elections. This may throw the fiscal deficit to winds, but who cares?
Slowdown in the economy is due to policy inaction on the part of the government, but the banks are facing the music of increased non-performing loans and higher provisioning on restructured advances. Instead of giving the banks powers to change the management of badly managed units, so as to bring down the restructured advances, the government is busy issuing instructions to public sector banks as to how to manage their liabilities, which, in fact, is the domain of the RBI.
The final verdict
With the rising non-performing assets of the banking industry, growing number of accounts falling under the hammer of corporate debt restructuring, dwindling margins of commercial banks and the strain on their profitability, there is every justification for the commercial banks to clamour for marked reduction in the CRR, which alone can provide some reprieve to the banking industry.
The final verdict, however, is in the hands of the RBI. If the mood in the RBI is any indication, and going by the views aired in the media by some of the economists who were part of RBI in the years gone by, there appears to exist an ego clash with the government, due to which the RBI may not easily relent either to reduce, leave alone abolishing, the CRR or to pay interest on the CRR balances for the time being, until the core inflation comes down to the comfort zone of 5% as repeatedly stated by the governor of the RBI.
But from the angle of practicality and pragmatism, with a view to assist the banks in meeting the capital adequacy norms prescribed by the RBI under Basel III norms, and in view of the threat of a downgrade in rating of banks hanging like a Damocles’ sword over the banking industry, RBI should not be carried away by the economist’s dogma, as the country’s banks do need an olive branch to hang on in this difficult period in history.
In the words of Shakespeare, banks in our country are “more sinned against than sinning”.
(The author is a banking analyst. He writes for Moneylife under the pen-name ‘Gurpur’)