Low-cost deposits should not be used to repair the damage caused by wilful defaulters. Instead, theymust be the key for profitability in the long run
Though deposit is shown on the liability side of the bank’s balance sheet, it is more than an asset. Banks, which have the skill to manage the deposit, always reap the benefit. Low cost current account and savings account are like life jackets for banks, which help the banks keep afloat in bad time. Banks pay four per cent interest and zero per cent interest on savings bank and current account deposit respectively. The banks gain nine per cent to 14 per cent interest when they use deposit for lending purpose.
So, current account and savings account generates huge interest income for the banks. The Financial Resolution and Deposit Insurance Bill 2017, introduced in Parliament in August last year, has a bail in clause to save sinking banks. Here, the bail-in option will let the banks use the depositors’ money to prevent capital erosion in the banks. The point is: Why does the question of capital erosion always arise from time to time when the banks have the state-of-the-art appraisal, monitoring and audit mechanism?
A majority of Indians deposit their hard earned money in the banks to tide over emergency situations, like hospitalisation, children’s education and marriage. Millions of people depend on interest income. Though public sector banks have reduced the rate of interest on fixed deposit from 12 per cent to seven per cent in the last two decades, people still keep deposit in public sector banks. They still hope somebody will take care of their deposit and address their account-related problems.
The age-old savings habit of people gives the banks the necessary resilience. Involving depositors to resolve the banks’ non-performing asset crisis will scare away depositors. People’s deposit, which builds the banks, should not be used to repair the damage caused by wilful defaulters. Bail in clause may let people shift deposit and invest in buying gold or real estate. Many gullible depositors will fall victims to the spurious financial entities who promise high return and ultimately run away with the people’s deposit.
Banks should get more teeth to recover loans from big willful defaulters whose number is likely to increase when the banks widen their capital base. If 50 per cent of the bad loan of the big willful defaulters are recovered, it would reduce banks gross non-performing asset (GNPA) to less than five per cent. Banks can effectively use deposit for profit with investment skills. Every bank should conduct a potential survey before flowing credit to any sector. Without accurate potential survey, banks can’t earn profit. The Government should create the right environment to enhance credit performance. Credit planning is more of common sense and courage than of intricate econometrics. Credit flow to the social sector should not be target-oriented and it should always be demand-driven.
Over the decades, successive Governments bailed out the banks when bad loan gripped the banking sector. The question is: Why the banks have amassed such huge non-performing asset at 9.6 per cent of the total loans and advances as on March 31, 2017? When banks all over the world have tightened their internal checks and control after 2008 Lehman Brothers’ collapse, why do banks in India pump loans to risky sectors? Lehman’s crisis had not affected the Indian banking sector as it was not integrated with the global financial sector. Even in 2012, the non-performing asset of the banks was less than four per cent and banks were safe. What happened after 2008 was not expected from an established sound banking system.
Banks will seldom need a bail out amid good governance. Big willful defaulters should not escape the law after duping banks. State Governments should stop giving free food and freebies to the people unless they are in real distress. Instead, the Government should give them a healthy river, a healthy pond and an active well. Give them friendly police force, good school, a good hospital, a playground, good teaching staff and above all, good governance, which will help increase people’s income. Crack down on spurious agriculture input suppliers so that the farmers can get good yield.
It is the duty of the Government to ensure transparency in the market yards so that the original farmer producers can earn good margin. If the Government achieves this, people will fill the Government’s coffer with revenue. The Government should also safeguard the banks from loan poachers and unscrupulous corporate entities, who feast on bank loans.
Politicians should not promise loan waivers. They must know that such practices will only adversely affect the banking business. Series of loan waivers in the past decades have damaged repayment ethics and created large number of wilful defaulters. Loan waivers and onetime settlement create favorable climate for willful defaulters.
Political leaders of all hues should converge on one objective of depoliticising the banks. They should muster courage to take an oath in Parliament and Assembly that they should not use the banks for political gain or to help crony capitalism. Banks should be treated as the new temples, dedicated to the economic development of the people.
(The writer is a freelance commentator)