I am of the strong opinion that there should be uniform interest rate regime and rate of interest for deposits should be 10 to 12 percent for long term deposits. If rate of interest is uniform , public sector banks will stop sacrificing their profit margin for taking over advances from other sister banks ( other public sector bank which belong to same government, same country and governed by same Central Bank called RBI ) by giving exorbitant concessions in interest rate and other charges.
I am of the opinion that any reduction in interest rate may adversely affect the poor and middle class families and retired families whose survival depends on pension and interest income and whose buying capacity is also reduced as interest rate is reduced.
Business community will not be affected even if interest rate is increased by one or two percent because contribution of interest cost in total cost of any product is insignificant and negligible in many cases. Moreover business community do not entirely depend on borrowed fund. Even if they borrow the money from bank, it is hardly 50 to 75 % of total money invested in any business venture. Obviously Rise in interest rate by one or two percent even above 10 percent will have negligible impact on their profit margin or on selling price of the product. Further even if bank reduces interest rate by one or two percent , they are not going to decrease selling price of their product .
But poor and middle class families will be very much affected adversely if the rate of interest on their deposits is decreased by one or two percent. Many of this segment of society depend on interest income for their livelihood. Lacs of employees who retire ever year and get terminal benefits invest the same in bank deposits to get monthly income for their family expenses. And hence any reduction in interest rate may affect badly their life.
Government more often plead that if rate of interest is reduced , number of buyers of home ,and buyers of vehicles will increase and thus help in growth of real estate sector and auto sector. I like to mention here that barring two wheelers and low cost homes say valued less than Rs. ten lac , buyers of four wheelers and high value homes are normally rich enough to afford and bear with rise in interest cost of one or two percent.
An individual cannot imagine of buying a car or a home in town and cities until his monthly income is less than five lac per annum . Only bribe earners and black money keepers can imagine of buying a high value loan where he can hide his ill earned money.
Moreover home buyers are getting concessions in tax also.. As such any further concession given to them in interest rate is definitely at the cost of benefits ( inform of interest accruals ) of poor and middle class families. Similarly if government promotes sell of for vehicles, it indirectly invite many other grave problems like that of pollution , traffic tam, fuel subsidy burden, road maintenance cost etc.
I hope government of India instead of reducing interest rate on deposits will advocate rise in interest rate for the benefit of common men. Further if paying capacity of common men rise , it will give boost to demand of product , businessmen can boost profit by thicker turnover with thinner profit margin.
Before the launch of reformation era in 1991 , business men used to do business with comparatively higher interest rate and GDP growth by way of manufacturing used to much better and greater than what it was seen during low interest rate regime.
The most painful part of low interest rate regime is that banks diverted their lending to retail sector and reduced their exposure in manufacturing and agriculture sector. . . This resulted in rise and upsurge in apartment construction activities and builders and high net worth corporate houses became main beneficiary of such acts . They became billionaire in a few months and few years .
On the contrary , cost of land in all towns and cities went up ten to hundred times. . House which could be purchased in 2 to 3 lac of rupees in during nineties now cost two to three crores. Due to this abnormal rise in land cost and cost of flats, poor and real middle class families cannot afford buying home or flats in apartment. Again this adversely affect the demand and this is why many builders are unable to sell their flats despite many relaxation in interest rate and concessions in taxes given to home buyers.
The most painful and bitter truth is that it is real estate sector only which absorb billions of black money generate daily by bad business men and bad service men. Tax evaders treat real estate sector as the most safe investment and most safe heaven to park ill-earned money.
I therefore feel that low interest regime have lesser number of benefits and few positive effects than number of losses and negative effects to the economy. Government must ponder over the interest issue , get it debated from all angles of considerations and then only it should advocate low rate of interest . Otherwise building pressure on RBI for reduction in interest rate may benefit a few business men but prove suicidal and prove harmful to the economy in the long run as today economy is suffering due to low interest regime imposed by UPA government since 2001.
I do not hesitate in prising RBI governor Mr. Rajan who tried his best to keep interest rate unchanged for almost a year. Though Mr. Suba Rao , former RBI Governor also tried his best in this regard , he failed and ultimately bowed down to some extent under pressure of the then Finance Minister.
So far as credit growth in public sector banks is concerned , I would like to say that private banks charge higher rate of interest and higher other charges on loans they sanction to business community than public sector banks. Even though private banks charges are higher their credit portfolio rise at much higher rate than that of PS banks. Credit Growth rate in private banks is at least double than of PSU banks.
Obviously it is not only the high interest rat in PS banks which can be blamed for low credit growth . I have no hesitation in saying that credit growth is not taking place due to other reasons as mentioned herein below.
Bank officers at branches or in administrative office are not fully trained and skilled in processing of loan proposals. Large scale promotion based on bribery and flattery during last ten years in the name of merit have killed the quality of bank loaning processes and caused much loss to the bank.
Secondly there is fear of loan account going bad and there is fear of failing to recover the money from defaulters. The legal machinery to recover the money from defaulters is totally ineffective and corrupt.
Thirdly legal and police system is so much corrupt , inefficient and ineffective that there is no fear of law and punitive action in the minds of defaulters of loan . If government do not make the legal set up effective, the number of defaulters goes on rising and number of write off will as hitherto continue to rise and finally give rise to bribery.
Fourth, businessmen are not getting adequate support from various departments of the government timely, without hassle and without payment of huge bribe .It takes months and years in getting statutory clearances . This forces many businessmen to close the business or drop the idea of putting the planned project into action.
Lastly local mafias, naxal elements, police officials, agents of various regulating bodies, tax officials tortures businessmen to such a large extent , that they think it better to refrain from doing business.
There is complete lack of administration, response, and good governance at all levels including banks, RBI, Ministry , police and judiciary. This enhances the possibility of happening of all types of crime and ill-motivated activities. This results in reign of injustice which is more conducive for crime than doing business, or practising medical services by even Doctors or CA or Advocates and other social activities and even service in some companies which give higher package is not possible without fear of repercussion and extortion.
Finally there is large scale nexus among business men (loan seekers ), bank managers who are loan sanctioning authorities , valuers, Chartered Accountants, Advocates who promotes bribed based lending , bribe based write off and bribe based delaying tactics in count of law.
The greatest loss is caused to employees of public sector banks by corrupt top bankers and corrupt supporting other departments. Banks lost money in bad assets, , in write off, in interest concessions given to businessmen and so on. And when profit goes down, it is bank staff who have to suffer in wage hike and they have to work late and on Sundays and holidays to complete the work. It is to point out here that PS banks have undertaken the task of rapid branch expansion during last few years only to please ministers but not added sufficient manpower to save expenses.PS banks are now indulged in profit making only by exploitation of staff as it used to happen before nationalisation of banks in 1969.
I reproduce opinion of a write published in newspaper statesman on 26.01.2015 which substantiate my opinion to a great extent.
The vast multitude of lower middle class and poor Indians are gasping for a decent life. Just consider the plight of millions who bank only on interest on fixed deposits. They are being affected directly with a cut in interest rate. Shouldn’t the ruling government look after their interests after garnering votes? This is a unique phenomenon in India. There has to be a limit beyond which this social injustice must not be allowed to be perpetuated
I wish the RBI Governor had not reduced the interest rate. For 17 months he held his ground resolutely. It is possible that he was tired of hearing sermons and came under pressure. Mr Raghuram Rajan has, otherwise, been performing with remarkable professionalism and independence. He has proved himself to be one of the finest central bankers in the world. Successive Governments have not been at ease with RBI under Mr Rajan’s outstanding stewardship. That is a good sign for our democracy. Institutions like the judiciary, CAG, Election Commission, RBI etc are torch-bearers of our democracy. Any political interference must be repulsed with a heavy hand.
But why reduce the interest rate? Only to appease industry ? Industry in India has been banking only on borrowed funds. A significant slice of these funds are becoming sterile. Its sophisticated name is NPA (Non Performing Asset). NPAs have been bleeding banks. Any cut in the lending rate inevitably adds to this bleeding. Banks are thus forced to reduce interest on deposits to recoup losses. So, an impending reduction of deposit interest rate looms large. Thus, bank depositors are destined, yet again, to take a direct hit.
Policy-makers fail to grasp that the industry does not grow on subsidy alone, just as exports do not grow merely on a depreciating rupee. Sops alone cannot engineer growth. In order to kick-start growth, India’s industry has to be emancipated from a corrupt state machinery. This ought to be the first priority for the new government. Digressing from this basic ailment and finding a scapegoat in RBI’s monetary policy is disingenuous. The present RBI top brass surely know their job.
In any event, the cost of capital has never dampened India’s investment climate to the extent an oppressive state machinery has. Every governmental palm with powers to coerce needs to be greased if you wish to survive as an industrialist. The situation is grim and has reached an axiomatic absurdity. Every businessman will confide privately that the hidden cost to do business far exceeds other legitimate costs. And black money is generated precisely to incur this hidden cost. Let us admit our national failure to arrest corruption and initiate remedial measures on a war footing.
One per cent additional cost of borrowing cannot surely kill or retard our industry, but this fraction makes all the difference to the vast multitude of lower middle class and poor Indians, gasping for a decent life. Just consider the plight of millions who bank only on interest on fixed deposits. They are being hit directly with a cut in interest rate. FICCI, CII or ASSOCHAM never take up their cause with North Block. Shouldn’t the ruling government look after their interests after garnering votes?
A friend was lamenting that he can no longer afford to attend any social function or go on a holiday or even dine in a restaurant, thanks to his dwindling income from bank deposits. In 2004 he retired as a Deputy Manager of a PSU and received Rs 25 lakh in all, plus a monthly annuity of Rs. 5,500. He says that in the last ten years, while prices have shot up, his monthly interest on bank deposits has dwindled from Rs. 24,000 to Rs. 18,000. Any further cut in interest rate would start eroding his capital, and if he survives another decade, he may well have to start skipping one meal. He cannot afford the luxury of investing in the capital market to boost his yield. Investments in gold and real estate are beyond his means. Besides, such investments would exhaust his liquid funds to run the household.
For the vast multitude in India, bank deposits are the safest channels of life’s savings. Out of the total bank deposits of about $ 1.3 trillion, roughly $ 1 trillion would comprise deposits of the low and middle-income groups. Higher income groups and the industry seldom invest in bank deposits since they can opt for greener pastures. They only lobby for bank credit at low costs and play around with bank funds to bolster return. The low-income group thus subsidises our industry. This is a unique phenomenon in India. There has to be a limit beyond which this social injustice must not be allowed to be perpetuated. The government must conceive a scheme to compensate this vast economically vulnerable segment of bank depositors. India’s economy will collapse if bank depositors shift funds to ponzi schemes. The Government must wake up and find an answer to the perpetually threatened bank depositors with decreasing return only to appease NPA wallas.
The surest way forward should be to make bank deposits attractive by hiking the interest rate and making it tax-free. This, in turn, will make banks robust. Capital outside the banking system will flow back into it. Maybe, even the wealthy will then park funds with banks. Banking in India is the largest national instrument for socio-economic development. Banks need funds to bolster growth by targeted lending.
Can the government afford to ignore the raw material of the banking business ~ deposits? To kick-start growth, let us bank mainly on our banks rather than the stock market or foreign investors. The sheer size, reach, volume and diversity of the banking network is unrivalled in India. Only a strong and vibrant banking system will make India a world economic power. Every government has failed to grasp the potential of the banking sector as a vehicle for engineering growth with social justice. I hope this government breaks the hoodoo!
I am of the opinion that any reduction in interest rate may adversely affect the poor and middle class families and retired families whose survival depends on pension and interest income and whose buying capacity is also reduced as interest rate is reduced.
Business community will not be affected even if interest rate is increased by one or two percent because contribution of interest cost in total cost of any product is insignificant and negligible in many cases. Moreover business community do not entirely depend on borrowed fund. Even if they borrow the money from bank, it is hardly 50 to 75 % of total money invested in any business venture. Obviously Rise in interest rate by one or two percent even above 10 percent will have negligible impact on their profit margin or on selling price of the product. Further even if bank reduces interest rate by one or two percent , they are not going to decrease selling price of their product .
But poor and middle class families will be very much affected adversely if the rate of interest on their deposits is decreased by one or two percent. Many of this segment of society depend on interest income for their livelihood. Lacs of employees who retire ever year and get terminal benefits invest the same in bank deposits to get monthly income for their family expenses. And hence any reduction in interest rate may affect badly their life.
Government more often plead that if rate of interest is reduced , number of buyers of home ,and buyers of vehicles will increase and thus help in growth of real estate sector and auto sector. I like to mention here that barring two wheelers and low cost homes say valued less than Rs. ten lac , buyers of four wheelers and high value homes are normally rich enough to afford and bear with rise in interest cost of one or two percent.
An individual cannot imagine of buying a car or a home in town and cities until his monthly income is less than five lac per annum . Only bribe earners and black money keepers can imagine of buying a high value loan where he can hide his ill earned money.
Moreover home buyers are getting concessions in tax also.. As such any further concession given to them in interest rate is definitely at the cost of benefits ( inform of interest accruals ) of poor and middle class families. Similarly if government promotes sell of for vehicles, it indirectly invite many other grave problems like that of pollution , traffic tam, fuel subsidy burden, road maintenance cost etc.
I hope government of India instead of reducing interest rate on deposits will advocate rise in interest rate for the benefit of common men. Further if paying capacity of common men rise , it will give boost to demand of product , businessmen can boost profit by thicker turnover with thinner profit margin.
Before the launch of reformation era in 1991 , business men used to do business with comparatively higher interest rate and GDP growth by way of manufacturing used to much better and greater than what it was seen during low interest rate regime.
The most painful part of low interest rate regime is that banks diverted their lending to retail sector and reduced their exposure in manufacturing and agriculture sector. . . This resulted in rise and upsurge in apartment construction activities and builders and high net worth corporate houses became main beneficiary of such acts . They became billionaire in a few months and few years .
On the contrary , cost of land in all towns and cities went up ten to hundred times. . House which could be purchased in 2 to 3 lac of rupees in during nineties now cost two to three crores. Due to this abnormal rise in land cost and cost of flats, poor and real middle class families cannot afford buying home or flats in apartment. Again this adversely affect the demand and this is why many builders are unable to sell their flats despite many relaxation in interest rate and concessions in taxes given to home buyers.
The most painful and bitter truth is that it is real estate sector only which absorb billions of black money generate daily by bad business men and bad service men. Tax evaders treat real estate sector as the most safe investment and most safe heaven to park ill-earned money.
I therefore feel that low interest regime have lesser number of benefits and few positive effects than number of losses and negative effects to the economy. Government must ponder over the interest issue , get it debated from all angles of considerations and then only it should advocate low rate of interest . Otherwise building pressure on RBI for reduction in interest rate may benefit a few business men but prove suicidal and prove harmful to the economy in the long run as today economy is suffering due to low interest regime imposed by UPA government since 2001.
I do not hesitate in prising RBI governor Mr. Rajan who tried his best to keep interest rate unchanged for almost a year. Though Mr. Suba Rao , former RBI Governor also tried his best in this regard , he failed and ultimately bowed down to some extent under pressure of the then Finance Minister.
So far as credit growth in public sector banks is concerned , I would like to say that private banks charge higher rate of interest and higher other charges on loans they sanction to business community than public sector banks. Even though private banks charges are higher their credit portfolio rise at much higher rate than that of PS banks. Credit Growth rate in private banks is at least double than of PSU banks.
Obviously it is not only the high interest rat in PS banks which can be blamed for low credit growth . I have no hesitation in saying that credit growth is not taking place due to other reasons as mentioned herein below.
Bank officers at branches or in administrative office are not fully trained and skilled in processing of loan proposals. Large scale promotion based on bribery and flattery during last ten years in the name of merit have killed the quality of bank loaning processes and caused much loss to the bank.
Secondly there is fear of loan account going bad and there is fear of failing to recover the money from defaulters. The legal machinery to recover the money from defaulters is totally ineffective and corrupt.
Thirdly legal and police system is so much corrupt , inefficient and ineffective that there is no fear of law and punitive action in the minds of defaulters of loan . If government do not make the legal set up effective, the number of defaulters goes on rising and number of write off will as hitherto continue to rise and finally give rise to bribery.
Fourth, businessmen are not getting adequate support from various departments of the government timely, without hassle and without payment of huge bribe .It takes months and years in getting statutory clearances . This forces many businessmen to close the business or drop the idea of putting the planned project into action.
Lastly local mafias, naxal elements, police officials, agents of various regulating bodies, tax officials tortures businessmen to such a large extent , that they think it better to refrain from doing business.
There is complete lack of administration, response, and good governance at all levels including banks, RBI, Ministry , police and judiciary. This enhances the possibility of happening of all types of crime and ill-motivated activities. This results in reign of injustice which is more conducive for crime than doing business, or practising medical services by even Doctors or CA or Advocates and other social activities and even service in some companies which give higher package is not possible without fear of repercussion and extortion.
Finally there is large scale nexus among business men (loan seekers ), bank managers who are loan sanctioning authorities , valuers, Chartered Accountants, Advocates who promotes bribed based lending , bribe based write off and bribe based delaying tactics in count of law.
The greatest loss is caused to employees of public sector banks by corrupt top bankers and corrupt supporting other departments. Banks lost money in bad assets, , in write off, in interest concessions given to businessmen and so on. And when profit goes down, it is bank staff who have to suffer in wage hike and they have to work late and on Sundays and holidays to complete the work. It is to point out here that PS banks have undertaken the task of rapid branch expansion during last few years only to please ministers but not added sufficient manpower to save expenses.PS banks are now indulged in profit making only by exploitation of staff as it used to happen before nationalisation of banks in 1969.
I reproduce opinion of a write published in newspaper statesman on 26.01.2015 which substantiate my opinion to a great extent.
The vast multitude of lower middle class and poor Indians are gasping for a decent life. Just consider the plight of millions who bank only on interest on fixed deposits. They are being affected directly with a cut in interest rate. Shouldn’t the ruling government look after their interests after garnering votes? This is a unique phenomenon in India. There has to be a limit beyond which this social injustice must not be allowed to be perpetuated
I wish the RBI Governor had not reduced the interest rate. For 17 months he held his ground resolutely. It is possible that he was tired of hearing sermons and came under pressure. Mr Raghuram Rajan has, otherwise, been performing with remarkable professionalism and independence. He has proved himself to be one of the finest central bankers in the world. Successive Governments have not been at ease with RBI under Mr Rajan’s outstanding stewardship. That is a good sign for our democracy. Institutions like the judiciary, CAG, Election Commission, RBI etc are torch-bearers of our democracy. Any political interference must be repulsed with a heavy hand.
But why reduce the interest rate? Only to appease industry ? Industry in India has been banking only on borrowed funds. A significant slice of these funds are becoming sterile. Its sophisticated name is NPA (Non Performing Asset). NPAs have been bleeding banks. Any cut in the lending rate inevitably adds to this bleeding. Banks are thus forced to reduce interest on deposits to recoup losses. So, an impending reduction of deposit interest rate looms large. Thus, bank depositors are destined, yet again, to take a direct hit.
Policy-makers fail to grasp that the industry does not grow on subsidy alone, just as exports do not grow merely on a depreciating rupee. Sops alone cannot engineer growth. In order to kick-start growth, India’s industry has to be emancipated from a corrupt state machinery. This ought to be the first priority for the new government. Digressing from this basic ailment and finding a scapegoat in RBI’s monetary policy is disingenuous. The present RBI top brass surely know their job.
In any event, the cost of capital has never dampened India’s investment climate to the extent an oppressive state machinery has. Every governmental palm with powers to coerce needs to be greased if you wish to survive as an industrialist. The situation is grim and has reached an axiomatic absurdity. Every businessman will confide privately that the hidden cost to do business far exceeds other legitimate costs. And black money is generated precisely to incur this hidden cost. Let us admit our national failure to arrest corruption and initiate remedial measures on a war footing.
One per cent additional cost of borrowing cannot surely kill or retard our industry, but this fraction makes all the difference to the vast multitude of lower middle class and poor Indians, gasping for a decent life. Just consider the plight of millions who bank only on interest on fixed deposits. They are being hit directly with a cut in interest rate. FICCI, CII or ASSOCHAM never take up their cause with North Block. Shouldn’t the ruling government look after their interests after garnering votes?
A friend was lamenting that he can no longer afford to attend any social function or go on a holiday or even dine in a restaurant, thanks to his dwindling income from bank deposits. In 2004 he retired as a Deputy Manager of a PSU and received Rs 25 lakh in all, plus a monthly annuity of Rs. 5,500. He says that in the last ten years, while prices have shot up, his monthly interest on bank deposits has dwindled from Rs. 24,000 to Rs. 18,000. Any further cut in interest rate would start eroding his capital, and if he survives another decade, he may well have to start skipping one meal. He cannot afford the luxury of investing in the capital market to boost his yield. Investments in gold and real estate are beyond his means. Besides, such investments would exhaust his liquid funds to run the household.
For the vast multitude in India, bank deposits are the safest channels of life’s savings. Out of the total bank deposits of about $ 1.3 trillion, roughly $ 1 trillion would comprise deposits of the low and middle-income groups. Higher income groups and the industry seldom invest in bank deposits since they can opt for greener pastures. They only lobby for bank credit at low costs and play around with bank funds to bolster return. The low-income group thus subsidises our industry. This is a unique phenomenon in India. There has to be a limit beyond which this social injustice must not be allowed to be perpetuated. The government must conceive a scheme to compensate this vast economically vulnerable segment of bank depositors. India’s economy will collapse if bank depositors shift funds to ponzi schemes. The Government must wake up and find an answer to the perpetually threatened bank depositors with decreasing return only to appease NPA wallas.
The surest way forward should be to make bank deposits attractive by hiking the interest rate and making it tax-free. This, in turn, will make banks robust. Capital outside the banking system will flow back into it. Maybe, even the wealthy will then park funds with banks. Banking in India is the largest national instrument for socio-economic development. Banks need funds to bolster growth by targeted lending.
Can the government afford to ignore the raw material of the banking business ~ deposits? To kick-start growth, let us bank mainly on our banks rather than the stock market or foreign investors. The sheer size, reach, volume and diversity of the banking network is unrivalled in India. Only a strong and vibrant banking system will make India a world economic power. Every government has failed to grasp the potential of the banking sector as a vehicle for engineering growth with social justice. I hope this government breaks the hoodoo!
Why not Uniform Interest Rate -By Danendra Jain written on 28th April 2012
![Post]( "Post")
by dkjain49709 on Fri Dec 11, 2009 7:17 pm
The war continues among banks on interest rate. After nationalization of banks in 1969, RBI used to decide rate structure for deposits and for lending uniformly applicable for all banks. But after adoption of reformation policy in the year 1991, RBI freed lending rates excepting loans upto Rs.2.00 lacs. In the name of competition, banks started rate war to attract high profile customers into their fold. Social banking concept and mass banking approach initiated through nationalization of banks have now become the history.
Common men are now neglected for all practical purposes. High profile customers have now become the heroes and bankers now run behind these heroes. Profit making has become the sole priority. Priority and neglected sector of the society has became the last option for government banks as well as private banks so far as the growth in business is concerned.. Lending for farmers has slowly been transferred to NGOs and Micro Finance Institute who have gradually started lending at higher rates, even higher than local money lenders. It is also true that in the name of poor, banks open Financial Inclusion branches and only open No Frill accounts to give direct credit of various aids and subsidies to real beneficiaries. I am unable to understand how poor people will get satisfaction and fight with their poverty merely by having a bank account until their real regular income rises.
More or less up to the end of the year 2009, banks offered higher and higher rate of interest to attract bulk deposit in their fold and sanctioned loans at sub BPLR rate. It means banks offered higher rate for deposits and lower rates for advances if there was scope of doing bulk business. In this mad run for target, banks not only acted against the interest of investors but also damaged the profitability and almost neglected small depositors and common men who needed small loans for their small businesses.
After all it is not father’s money of any CMD of any bank, it is public money. Banks collect major chunk of low cost deposits from retail depositors but finance major chunk of their money at low rate to big corporate .Banks offer lower rate of interest for big value advances and offer higher rate for big value deposits but charge higher rate on low value lending and offer lower rate on deposit of low value deposits. After all PSBs are sons of same government and hence there is no question on competition among brothers and that too at the cost of family's interest.
Management of banks works for the pleasure of big corporate and indirectly increases their personal wealth through illegal earning. They do not hesitate to dilute lending principles for high value loans but show strict adherences for rules for low value lending. These classic cultures adopted by banks have already damaged the fundamentals of banks and the basic objective of nationalization of banks has been totally discarded. Banks do not have enough earning to make adequate provisions for bad assets and for terminal benefits for retiring staff and due to this reason government of India is forced to infuse additional capital to banks from time to time so that they can survive and adhere to stricter Basle norms.
Management of banks appear to remain busy in earning profit by resorting to bulk lending and by imposing irrational service charges like cash deposit charges on small and medium class depositors and borrowers. Banks forget making adequate provisions for pension and reduce provisions for bad asset by concealing bad assets for years together to exhibit higher profit to their mentors, ministers, RBI and government of India.
Fraudulent attitude of banks continues till they are exposed by some agency or some honest officer. Banks ignore the main work of monitoring lending done by them and as a result quality of lending deteriorated and monitoring of loans completely stopped in the name of global recession. When the assets become bad they have lame excuses like global recession, rate hike, bad weather, inflation, legal constraints etc.
Due to this unhealthy and mischievous mind set of bank officers, amount of gross Non Performing Assets goes on increasing. Bribe led lending has increased, bribe based write off of loan has increased, vote bank oriented waiver of loan resorted by government has gone up and so on. It has adversely affected not only the quality of loans and deposits but also the culture of working bank employees. Officers in particular and employees in general focus on those work where they find scope of earning through illegal money to become richer and richer and for this evil work they indulge in flattery to bosses and ministers to get rid of punitive action.
To add fuel to fire, Banks have started opening new and new branches to please ministers and to raise business without improving the quality and quantity of manpower. Unprecedented damage has already been caused particularly in public sector banks due to inadequate honest and talented performers.
And now RBI has further added fuel to fire by deregulating savings interest rate. Already unhealthy rate was prevalent in banks in lending rates. Banks will not increase rate on Saving deposits but will not like to increase lending rate .As a result, cost of fund will go on increasing and yield on advances will go on falling down, one due to low lending rate and other due to increasing trend in provisioning due to rising level of NPA as also due to higher coverage ratio. NPA of banks will increase and increase only until drastic actions are taken against top officials who indulge in bribe led lending.
Interest war initiated by RBI in the name of competition will spoil the future of Public sector banks and improve the profitability and overall business of private banks. Not only this , if private banks and then public sector banks start offering higher rate of interest on saving deposits, future of post office deposit schemes will also be jeopardized.
Lastly, it is wise to mention here that if big value loans start becoming bad assets due to real recessionary global pressure or due to some natural mishaps or due to some inherent weakness in the project , banks will suffer unprecedented growth in NPA which will eat their capital and create a crisis similar to subprime crisis which erupted in USA and other European countries a few years ago and which is likely to recur in coming days..
I therefore plead that RBI should uniform rate structure on deposits and advances for all government banks and at the same time regulate private banks which violate discipline and indulge in avoidable competition. Competition among various government banks is altogether unwarranted and undesirable keeping in view the mindset of normal Indians. Government of India has to suffer loss and citizen of India has to suffer the consequences if any bank fails, it may by Vijaya Bank or United Bank or Indian bank or any other bank. Due to wrong policies of government, BSNL, railways, airlines and many PSUs are suffering loss and it will not be surprising if banks also follow the same path.
Will bank agree to IBA's idea of Uniform Interest Rate
While expressing my views on the idea of introduction of Base rate contemplated and suggested by RBI a few months ago before bankers to replace existing PLR or BPLR I had opined that it will be better for government to introduce Uniform Interest rate structure on deposits and advances to avoid unwarranted and unhealthy competition on interest rate as also to avoid stoppable transfer of borrower account from one bank to other bank and to avoid cases of account becoming NPA only due to higher rate of interest .
I would like to refer to news item published in leading newspaper on 11th December 2009 wherein similar suggestion has been given by RBI deputy governor Usha Thorat and IBA is now planning to introduce uniform rate for all home loans borrowers (to start with) so that the difference in floating interest rates among old and new home loan customers may be done away with. There is no doubt that the same step will have to be taken for other loans sooner or later. It is true that in the reformation era government is not considering it fit now to meddle with interest rate charged by banks because they themselves have given freedom to banks to plan and execute their own rate structure.
Similarly RBI governor has also pointed out that there is sharp increase from 26% to 41% in short-term deposit at banks, which invariably causes asset liability mismatch. Such short time term deposit are most likely to switch over to post offices and private companies who offer better rates and thus banks will be left with high cost deposits which they mobilized a year ago or before for long term. Overall cost of residual fund will go up whereas government in all its meeting with bankers ha been putting stress on lowering of lending rates.
To add fuel to fire banks will have to offer higher rates on deposits when they start facing liquidity crisis aggravated by hike in CRR and SLR likely to be announced by RBI in the next quarter when pain of global economic crisis subsides. Obviously for attaining stable cost of fund banks have to stop interest war among themselves and RBI has to reintroduce policy of uniform interest rate as was prevalent in pre-reformation era .As soon as banks arrive at a position when cost of fund is known and predictable for a considerably long period, banks will be in a position to frame their long term lending policy which will be non-discriminatory, appropriate and justified. Further there will not be any fear of liquidity crisis, which often crops up now-a-days due to large-scale exodus of deposits from banks. It is good luck for banks that RBI during trailing twelve months released huge cash by reducing CRR to combat global economic crisis.
Further to strengthen liquidity and to maintain proper asset liability combination government has to ensure that money lent by banks come back as per repayment schedule set by lending banks. For this purpose borrower must have a sense of fear in mind that if they default in repayment as per terms of credit they will have to face serious legal consequences. If it so happens I hope even bankers will not hesitate in taking credit decisions fastly and aggressively even under poor manpower at branches and there is no doubt that RBI will be able to achieve lending target maintaining quality of credit in particular and health of banks in general. IN such position banks will concentrate not in managing interest rate or asset liability mismatch but in creasing their deposit and advance portfolio by extending better and better fast service.
Danendra Jain
11th December 2009
I would like to refer to news item published in leading newspaper on 11th December 2009 wherein similar suggestion has been given by RBI deputy governor Usha Thorat and IBA is now planning to introduce uniform rate for all home loans borrowers (to start with) so that the difference in floating interest rates among old and new home loan customers may be done away with. There is no doubt that the same step will have to be taken for other loans sooner or later. It is true that in the reformation era government is not considering it fit now to meddle with interest rate charged by banks because they themselves have given freedom to banks to plan and execute their own rate structure.
Similarly RBI governor has also pointed out that there is sharp increase from 26% to 41% in short-term deposit at banks, which invariably causes asset liability mismatch. Such short time term deposit are most likely to switch over to post offices and private companies who offer better rates and thus banks will be left with high cost deposits which they mobilized a year ago or before for long term. Overall cost of residual fund will go up whereas government in all its meeting with bankers ha been putting stress on lowering of lending rates.
To add fuel to fire banks will have to offer higher rates on deposits when they start facing liquidity crisis aggravated by hike in CRR and SLR likely to be announced by RBI in the next quarter when pain of global economic crisis subsides. Obviously for attaining stable cost of fund banks have to stop interest war among themselves and RBI has to reintroduce policy of uniform interest rate as was prevalent in pre-reformation era .As soon as banks arrive at a position when cost of fund is known and predictable for a considerably long period, banks will be in a position to frame their long term lending policy which will be non-discriminatory, appropriate and justified. Further there will not be any fear of liquidity crisis, which often crops up now-a-days due to large-scale exodus of deposits from banks. It is good luck for banks that RBI during trailing twelve months released huge cash by reducing CRR to combat global economic crisis.
Further to strengthen liquidity and to maintain proper asset liability combination government has to ensure that money lent by banks come back as per repayment schedule set by lending banks. For this purpose borrower must have a sense of fear in mind that if they default in repayment as per terms of credit they will have to face serious legal consequences. If it so happens I hope even bankers will not hesitate in taking credit decisions fastly and aggressively even under poor manpower at branches and there is no doubt that RBI will be able to achieve lending target maintaining quality of credit in particular and health of banks in general. IN such position banks will concentrate not in managing interest rate or asset liability mismatch but in creasing their deposit and advance portfolio by extending better and better fast service.
Danendra Jain
11th December 2009
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