Why There Is No Financial System to Protect Common Man's Savings, Asks Deepak Parekh
While we have regular loan waivers and corporate loan write-offs, why is no there financial system to protect the common man's savings, asks Deepak Parekh, chairman of Housing Development Finance Corp (HDFC). 
 
"To my mind, there is no greater cardinal sin in finance than the misuse of the common man's hard earned savings. It seems brutally unfair that we have allowed a system of loan waivers and write offs every now and again, but yet we do not have robust enough financial systems to protect the honest, common man's savings. And mind you, this is not just a problem in India, this is a financial problem the world over," Mr Parekh said while delivering his keynote address on "Path to $5 trillion: Role of the Financial Sector" at the Centre for Financial Services. 
 
Without taking the name of scam-hit Punjab & Maharashtra Cooperative Bank (PMC Bank), Mr Parekh said, trust and confidence are the backbone of any financial system and it takes years to build a reputation and seconds to destroy it.  
 
According to the HDFC chairman, India needs more savers in the country if credit has to grow. "The savings rate at 30% of gross domestic product (GDP) has been showing a declining trend over the past decade. Household savings is important for the Indian economy and that is why there is likely to be a threshold beyond which lowering interest rates becomes difficult. Indian savers prefer assured returns which is why fixed deposits continue to remain the preferred choice of savings," he said.
 
Investment and insurance play an important role in the financial life, especially for youngsters, Mr Parekh said, adding, "We have got to get younger people insured much earlier in life. We have got to get more youngsters to become patient, long-term savers and investors in equities and mutual funds. And I am optimistic enough to believe we are moving in the right direction. In 2014, assets under management of mutual funds hit the Rs10 trillion mark and in just three years, in 2017, it doubled to Rs20 trillion and as at August 2019 it stood at Rs25 trillion. About 57% of industry investor base are retail investors."
 
In unusual times, as we are in right now, the HDFC chairman feels that fiscal and monetary policy tools need to be accelerated in a timely, yet prudent manner. He said, "There is consensus that a slight increase in the fiscal deficit target can be accommodated as long as it stimulates growth. Efforts are being made to ensure that lower fiscal revenues on account of stimulus measures, lower corporate tax rates and goods and services tax (GST) collection shortfalls could be compensated by more aggressive disinvestments plans and perhaps increased payouts by the Reserve Bank of India (RBI)."
 
To ensure adequate liquidity in the system during this year alone, the RBI has reduced policy rates by 135 basis points (bps) and is trying for effective monetary policy transmission.  
 
However, the crux of the problem with the financial sector, according to Mr Parekh, is that the flow of credit to the commercial sector is still clogged. "During the first six months of the current financial year, the total flow of resources to the commercial sector from banks and non-bank sources was only Rs0.9 trillion compared to Rs7.4 trillion in the previous year - that's a drop of 88%. This clearly reflects the risk averseness in the system." 
 
"Since the time the asset quality review (AQR) began in 2015, banks have scaled back lending. Till last year, the commercial sector relied heavily on non-bank funding sources as a substitute. When non-bank funding sources got choked, it threw the financial system into a tizzy. The underlying point is that the Indian economy needs both, banks and non-bank sources to meet its funding needs. And the key hurdle now is getting over the trust deficit," he added. 
 
According to Mr Parekh, several companies are still unwinding their overleveraged positions. He says, "Leverage is a double-edged sword. In good times, it helps to scale up and amplifies profits, but in a downturn, over leverage has seen the downfall of many. A simple rule is that capital must always be raised from a position of strength and not when one's back is up against the wall."
 
Talking about India becoming a $5 trillion economy by 2014, the HDFC chief feels the question is not whether we can do it, but how soon we can attain this goal. He said, "Today, India is a US$ 2.8 trillion economy. It took India 60 years post-independence to become a $1 trillion dollar economy in 2007. It took another seven years to become a $2 trillion dollar economy in 2015. The next trillion will be added in just five years, when India is likely to be a $3 trillion economy in 2020. The key point is that each trillion is being added in a shorter time span. If India's economy is not $5 trillion by 2024 as envisaged by the government, it will certainly achieve it a year later."
 
Mr Parekh feels that India critically needs two things from the world, capital and oil. He says, about 30% of bonds issued by governments and companies globally are trading at negative yields, which is about 17 trillion. "Doesn't this make it a fine time for India to seize the opportunity to attract much more global capital? Investors are craving for higher yields and India has demonstrated that it can deliver attractive returns. For example, despite all the negative headlines that the real estate sector has been receiving, few recognise that in the first six months of this year, investors have pumped in close to $4 billion across commercial office premises, retail and warehousing. Sovereign funds, pension funds, private equity investors are seeing the long-term growth opportunities in the expansion of India's services sector, particularly information technology (IT) and IT enabled services and e-commerce, which in turn needs warehousing and logistics assets," he added.
 
The other key reason, according to the HDFC chairman on why India's macro parameters are currently fairly strong is that oil prices have remained fairly moderate. Fortunately, he said, "We have not faced shocks of oil above $100 per barrel since 2014. Since India imports 80% of its crude requirements, higher oil prices play havoc with inflation, the fiscal, the current account deficit (CAD) and the currency."
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    COMMENTS

    Sanjeev B

    3 days ago

    Liquidating FDs should be as simple as withdrawing money from an ATM. Why can't we have a system that allows a depositor to withdraw their FDs upto say 20 lakh from any bank they wish? That bank will need to just net it off using an FD clearing house system. And the clearing house will guarantee payment by insuring deposits through large insurance companies in India and abroad.

    This can be done, it is just that banking as an industry is living in the 20th century. Not just in India, but everywhere in the world. Retail depositors are the poor sods who get the worst treatment.

    Savings rates will grow if there is trust in the banking system. Right now that is sorely lacking.

    RAMACHANDRAN THARKABHUSHANAM

    4 days ago

    WHY SUCH LATE REALIZATION MR. PAREKH. IT IS NORMAL PHENOMENON THAT COMMON WAS ALWAYS HARD HIT. TAKE THE INSTANCE OF REDUCTION OF CORPORATE TAX WHICH BENEFITS BUSINESS PEOPLE AND INDUSTRIALISTS. FOR US THERE IS REDUCTION OF INTEREST RATE AND NO GREAT RELIEF FROM INCOME TAX. THAT IS THE WORLD.

    Ranbir Lamba

    5 days ago

    Nothing will change till law is changed
    That too harsh one

    Loose a penny
    Loose a limb of your body

    Gupta

    5 days ago

    Instead of going gaga (not RaGa) over an insane lawyer or Swamy from Harvard who is time and again projected as finance minister, a radical change would be to bring in someone like Deepak Parekh as a Finance Minister and now that Aditya Puri is retiring, put him as RBI governor. BUT only if you can let them be and allow them to function, which is where this govt has a problem. No use getting smart people in if they suffer the same fate as Mr. Raghuram Rajan (or RaRa!)

    B. Yerram Raju

    5 days ago

    Very good articulation on thinking way forward from the current imbroglio, The cause should be addressed because of the consequence. The cause Deepak Parekh should know is the way banks migrated to doing non-banking more than banking in their greed for profits. System-wedded banks forgot that there is a customer-depositor in front of them; there is a responsibility to him (him means her also); they have a responsibility towards due diligence for every borrowing client or a client who seeks other services. Yes; systems and digitization are necessary for speed and accuracy and this does not mean that the core of service behind it should be thrown to vagaries of managers. One Assistant General Manager of a PSB told me that after lending it is not her responsibility to monitor the loan so much as recovering the loan from whatever securities are available. This attitude has permeated so much in banking that should explain the unending burgeoning of NPAs across segments.
    In several cases for revival that we have handled, it came out clearly that banks were to blame more than entrepreneurs: term loans sanctioned without releasing working capital; working capital where sanctioned was debited with quarterly interest instead of capitalizing as project finance rules specify to the account leading to the account becoming NPA up front when the project was commissioned; working capital sanctioned but not released in time; work orders received were not extended finance on the ground that the limits were not renewed; yearly renewals did not take place despite submission of all the financial statements for want of the required staff; systems dictating the limits and not the enterprise activity etc. Since the Banks have to share the blame if the accounts were to revive, they do not revive the accounts and act like a Shylock. The regulator who should oversee the implementation of regulation is a mute spectator and a victim of the lobbying IBA. People refuse to see the red-herring and continue to live as hypocrites. Pleasing the boss and regulator with figures of performance somehow has attained credibility. This should change.

    gcmbinty

    6 days ago

    It is not the system, it is the man who manages the system bent to break for personal interests that requires some sort of fears of punishment in his or her mind. Take the example of the ICICI Bank Chairperson who with a view to help her own husband was lax in implementing the regulatory measures. If the traffic Police does not stop the traffic violations, the traffic signals system would be of any help. Similarly, if the manager of a bank does not follow strictly the rules of giving out loans, no system is good. The punishment has got to be exemplary.

    Deepak Narain

    6 days ago

    Mr Parekh is a great honourable man. But, we have problem with his own HDFC Bank. We have written about 10 times in recent past to all concerned, including its CEO, but to no avail.

    First, they arbitrarily blocked our online access to our Account (No. 12021570000696) without notice and now they are not restoring it. We have forgotten the PIN for our Debit Card and no relief about this either. We cannot create online a new Password for our Account without an active Debit Card and we cannot activate our Debit Card without access to our Account. It is a deadlock situation and no help.

    We are stranded in Canada due to sudden disclosure of serious heart and kidney problems with me (78+) and our own people in our country are further making life difficult for us! What to do?

    Nagaraju Bommanahalli

    6 days ago

    In India nobody knows how Indian companies are doing fraud from the beginning to last ,for example a big business men will start the company in India as below .His companies actual value is Rs2000crores but with the help of the auditors,Banks,and chartered accountants he made his company s values to RS 6000 crores by book adjustment with bribe and he call IPO that is in share market and collect Rs10000 crores in share market, first he pumped 60%of money to foreign country in the name of business and will deposit most of the money in his name next he will file bankruptcy due to losses and will write off all the loans this is the business doing in India ED is doing drama ICICI Bank chandakochar is well known to all she done huge fraud in ICICI Bank, this drama of enquire is doing from past one year, but still she is not arrested, reasons In this icici bank scam all SEBI auditors ED RBI central government rating agencies big leaders of all parties involved.central government making all efforts to avoid arrest these fellows,if arrested all all foreign country become knows most of the Indian companies running on bogus and take away all foreign investment,then India become bankruptcy.This is well known by central government hence avoiding all efforts to arrest directors of icici bank chandakochar DHFL jetairways Videocon kingfisher airline PNB bank head [email protected] etc .even Vijaymalya kingfisher airline companies don't have single plane in his companies name but all banks gave Rs10000 crores money, same type loans gave to jet airways,DLF, wait in few months most of the common people investment in icici bank NBFC PSU banks equity NCD mutul funds become Zero

    Rohan DSouza

    6 days ago

    RBI is the licensor and watchdog for all Indian banks. It is the RBI which has failed in its duties to detect frauds and undisclosed NPAs of banks . RBI should take the responsibility and use its reserves to guarantee the investments of the citizens in all banks, be it cooperative or private or govt owned. If it falls short of funds, it should take back its reserves which it has transferred to the Govt. How can you expect the common man to check the health of banks before investing when even the RBI could not do it. Its time for Govt and its institutions to take responsibility and accountability.

    REPLY

    Ranbir Lamba

    In Reply to Rohan DSouza 6 days ago

    Case in court can resolve it .PIL

    TIHARwale

    6 days ago

    a common saying in India is fools let out properties on rent to regret for the wise to enjoy and Government is in agreement with this and so replace depositors and borrowers respectively in Indian banking scenario

    Ranbir Lamba

    6 days ago

    Government has created tax terror even Rafael engineer fears tax terror.
    There is need to increase stringent punishments for NPA & loan default . Regulator & bankers + Babus be put under loss recovery terror
    Save each penny of investors They are your AAN DATTA.
    Pay money in hands of investors by
    A) Reduce prices & pass on benefits of 40% corporate tax rate
    B) Reduce GST
    C) Reduce IT slabs let max be 20%
    D) Rewards to employees for making loss making to profit making PSU
    E) Make each one accountable & responsible from peon to Netas .
    No immunity to anyone
    F( Perform or Perish

    ..

    To my mind, there is no greater cardinal sin in finance than the misuse of the common man's hard earned savings. It seems brutally unfair that we have allowed a system of loan waivers and write offs every now and again, but yet we do not have robust enough financial systems to protect the honest, common man's savings.

    PMC Bank: Finance Minister says Govt Will Amend Laws If it Help in Better Regulation
    Facing flak from several quarters on the Punjab & Maharashtra Co-operative (PMC) Bank fraud case, finance minister Nirmala Sitharaman on Thursday says if amendments help in better regulation, the union government would go ahead with the required legislative procedure in cooperative sector. While assuring customers and depositors, the finance minister also mentioned that her ministry has nothing much to do with the issues of PMC Bank but she will speak with Reserve Bank of India (RBI) governor on the distress of depositors. 
     
    "Finance Ministry may have nothing to do with it (PMC bank matter) directly because RBI is the regulator. But from my side, I have asked the secretaries of my ministry to work with ministries of rural development and urban development to study in detail as to what is happening (with PMC Bank)," the minister says in Mumbai.
     
    Speaking to reporters at Bharatiya Janata Party (BJP)'s office in Mumbai, Ms Sitharaman said that she would meet the RBI governor Thursday evening and convey the issues and urgency displayed by the PMC Bank customers.
     
    Earlier in the day, the Minister met distressed customers of PMC Bank in Mumbai, who were protesting outside the BJP office. 
     
     
    Ms Sitharaman further said that she has asked secretaries of the concerned Ministry to study in detail the shortcomings and if necessary look at ways in which the respective acts have to be amended. 
     
    She said that in the meeting to be held to decide on amendments in Act for better regulation, along with representatives from the finance ministry a deputy governor level officer of the RBI would also be present.
     
    The finance minister says she has explained to the (PMC Bank) customers that the RBI is taking action, doing what should be done as per the law. In such instances where there is malpractice and boards get bypassed, the central bank handles the matter, she added.
     
    During the conversation with the PMC Bank depositors, the finance minister also informed them that the finance ministry is working with rural development ministry.
     
    The PMC Bank fraud came to light in late September, when the RBI barred the bank from carrying out the majority of its routine business transactions for a period of six months, sparking panic among the depositors and sending shock-waves in the city banking and business circles.
     
     
    On Wednesday, customers of PMC Bank protested outside a Mumbai court.
     
    Carrying placards that read "No Bail, Only Jail", they accused the RBI of not taking strict action against the erring officials and appealed to Prime Minister Narendra Modi to intervene in the matter, says a report from NDTV.
     
    Days after fraud came to light, the now-suspended managing director of the bank Joy Thomas, in a letter to the RBI acknowledged the wrongdoing, and said the bank even opened a number of dummy accounts to replace the stressed accounts held by Wadhawans-led Housing Development and Infrastructure Ltd (HDIL).
     
    The economic offences wing (EOW) of Mumbai Police and the enforcement directorate (ED) are investigating the matter and have made few arrests and attached properties and assets so far.
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    COMMENTS

    Ranbir Lamba

    5 days ago

    Note my post of yesterday where FM said can't do anything. I had Recommended ammend the law & make it punative She has responded quickly & will set right for further safety of customers

    Umadevi

    5 days ago

    The root cause is the political influx to the board of many banks....and they will sanction loans to fraud entities. Cooperative banks in Kerala are forced to issue loans to State Road Transport Corp. and Electricity Board etc. which cannot be recovered as these enterprises are already loss making.

    lalit

    6 days ago

    Why only PMC, let the finance minister ask RBI on the status of all other cooperative banks to take preventative action right now so that such scams come out right now.
    Also RBI Governor and auditors should be held accountable for the collapse of PMC Bank since they are the one who monitor and do the audit of such banks.

    Dharam Vir Narang

    7 days ago

    When properties and assets of HDIL have been attached why normal banking has not still been restored for PMC customers. In case of other banks 2.75 lakh crs. have been written off so why different rules for banks operating in one Bharat (India).

    REPLY

    Girija Santhanam

    In Reply to Dharam Vir Narang 4 days ago

    If Money Life believes in responsible journalism, let them work out a framework by which such scams can be avoided in the future. Let Money Life can ask a few experts to recommend to Nirmala - what needs to be done. Instead of waiting for one more scam, can't the Finance Minister investigate the working of other co-operative banks? Why can't we have separate regulators only for co-operative banks? When we know that RBI doesn't have the capacity or wherewithal to carry out multiple audits, why not attack the root cause of the problem? Vigilance is no longer an option - it is the need of the hour.

    Sucheta Dalal

    In Reply to Girija Santhanam 4 days ago

    Ms Santhanam -- since you keep sending us a string of google-researched articles, we would have expected that you at least make the effort to understand what is journalism and media.
    First, we are not regulators. We cannot prevent scams. Do you even realise how silly you sound? You say you know RBI has not wherewithal to carry out multiple audits -- really? Then it should give up the job of being banking regulator.
    But you think Moneylife - a publication - has the wherewithal to get to the "root of the problem" --and then what? Do we have the power to implement?
    Also, since you have had articles published in Moneylife -- make an effort to visit Moneylife Foundation's website and understand it is a separate entity engaged in financial literacy. That must homework on your part is surely not too much to ask?

    RBI rejects India Bulls-Lakshmi Vilas Bank amalgamation
    The Reserve Bank of India on Wednesday rejected the merger of Lakshmi Vilas Bank and India Bulls Housing Finance Ltd, months after the bank had sought its approval on May 7.
     
    "The RBI vide their letter dated October 9, 2019, informed that the application for voluntary amalgamation of Indiabulls Housing Finance Ltd and Indiabulls Commercial Credit Ltd with the Lakshmi Vilas Bank (LVB) cannot be approved," Lakshmi Vilas Bank said in a statement.
     
    The crucial merger was for Indianbulls was to diversify its asset while for Lakshmi Vilas Bank, running in loss for five successive quarters, it was to raise capital to come out of the lending curbs.
     
    The board of directors of the bank on April 5 had approved a scheme of amalgamation with Indiabulls Housing Finance.
     
    The RBI's rejection of amalgamation comes shortly after it had initiated Prompt Corrective Action (PCA) against the Lakshmi Vilas Bank, owing to high non-performing assets (NPA) and others.
     
    On Sep 28, the bank announced: "The RBI has initiated PCA on account of high net NPA, insufficient capital to risk assets weighted ratio (CRAR, also known as capital adequacy ratio CAR) and common equity tier-1, negative return on assets for two consecutive years and high leverage."
     
    The PCA comes after the RBI carried out an on-site inspection of the Bank on March 31 under Risk Based Supervision.
     
    According to the bank, the Reserve Bank has advised the RBI on the restrictions imposed and the actions to be taken.
     
    The Lakshmi Vilas Bank said it will report the monthly progress on the RBI directions.
     
    "The PCA is aimed at improving the bank's performance and will not have any adverse impact on its normal day-today operations, including acceptance/repayment of deposits in the normal course," the bank said.
     
    Meanwhile the credit rating agency, Brickwork Ratings India Pvt Ltd has revised the rating from "BWR BBB -" (Credit Watch with Developing Implications) to "BWR BB+" (Credit Watch with Developing lmplications) for the bank's unsecured redeemable non-convertible subordinated lower tier II bonds - Series VII (Option B), of Rs.50.50 crore.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Girija Santhanam

    4 days ago

    This is a good move by RBI. Needs to be appreciated. It is better that LVB is liquidated.

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