Saturday, April 28, 2012

Why not Uniform Interest Rate

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 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

Postby dkjain49709 on Fri Dec 11, 2009 7:17 pm
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

Lacs of cases against defaulters of the bank and against NPA borrowers have been filed in various local courts, district courts, Lok Adalats, Ombudsmen, High courts, Supreme court, Debt recovery Tribunals, District Certificate Officers, District magistrate’s court  , Sub Divisional Magistrate’ court for taking possession of property seized under SERFAECI act etc have been filed by various financial institutes including public sector banks but due to manpower shortage or due to inefficiency of executives, or due to malicious intention of magistrates and judges, or  due to conspiracy of advocates in nexus with judges and magistrates cases are lying pending for years together.

Is there any provision to take action against judges who in nexus with advocates are willfully delaying the process of justice?

If yes, has any government taken any against any corrupt judges in the past which could demonstrate the effectiveness of the Law and willingness of rulers to punish the corrupt judges before it is too late?

 Has any of the government taken any drastic step to reduce pendency in courts and to expedite award of justice?

What action government has taken against the judiciary and advocates in recovering the money of banks which have been locked in willful defaulters of the bank?

It is observed that banks have granted loan against fake deed of landed property or financed to many firms against the collateral or prime security of same laded property.
Have government punished any of Sub registrars or deed writer or bankers who worked with negligence and malicious intention?

Banks sanction new loans and advances on the strength of prime of collateral security valued by approved valuers or government recognized valuers. But if these valuers give inflated value of any property after taking extraordinary service charges from loan seeker or with some vested interest or with malicious intention and in turn jeopardize the loan disbursed by banks, what remedial recourse lies with bankers or the government. Bankers at most remove the name of such valuers from their panel or the government blacklist such valuers.

Is there any provision to punish such valuers?

If yes, has any authority or any bankers have ever  punished such unscrupulous valuers?

It is observed that Chartered Accountants blindly sign on balance sheets or financial reports of banks and borrowers, companies and firms if they are given attractive amount of money as service charges. These CA while conducting statutory audits of various banks more often than not ,simply put their seal and signature and take attractive fees and charges from banks. Wage without work is the suitable slogan of CAs.

It is also true that CAs have to complete audit of two to three branches in a period of five to six days and hence they can neither make honest and through scrutiny of records of branch of the bank they are asked to audit by RBI nor they have the will to do so because there is no deterrent action if they prefer not to do their duty honestly.

Have government taken any action against any of CAs in the past 60 years which could teach a lesson to team of CA?

Have government pondered over the real need of time period to make a serious scrutiny of balance sheet of a branch?

Or it is planned diplomacy of clever bankers to give minimum time to CA or for that matter any inquiry or vigilance officer so that he comes under pressure and sign the financial papers hurriedly ignoring the faults and mistakes.

Due to sheer negligence and malicious intention of the controlling, monitoring and regulating officials .Chartered Accountants in India have become habituated to claim gift, bribe, grand hospitality and all out of pocket expenses to sign a balance sheet , which may be right or wrong, true or false, actual or inflated. It is only a few stray cases where CAs are greedy and bank officials are dry honest and simple hearted that some of the irregularities are reported in audit report.

 It is worthwhile to mention here evil deeds of owner of Satyam Computers was not detected by team of Chartered Accountants and similarly less provisioning made by public sector banks including SBI towards their regular liabilities such as pension, gratuity, NPA was also not detected by team of CAs who use to audit the bank year after year.

Similarly there are advocates who give legal opinion blindly and cause huge loss to banks who on the basis of favourable legal reports and search reports sanction loans to loan seekers and who ultimately become victim of negligence and malicious intention of the advocates. RBI knows very well that huge amount of banks have become irrecoverable only due to multiple financing on same landed property or due to financing on fake deed or due to wrongful and unlawful sale of property already mortgaged to some bank for taking loan.

Have Government taken action against any advocate or any sub registrar or Any Deed writer or any officials due to whose fault banks had to suffer huge loss?
Never ,,, Never   because none of government department and offices really  want to work especially top ranked officers who are busy in passing the time and retire . Officials in all offices and departments usually remain in search of some clients who can offer attractive bribe in cash or in kind or some precious gifts in lieu of service he extends.

Bank officials who sanction credit after taking bribe are able to please their bosses and ensure their timely and unusual promotion and get choice posting. Honest and intelligent officers are sidelined and posted at critical place or remote rural centers so that their voice against evil work may be stopped. Good officers are denied their promotion in time and juniors are given change after taking bribe. Has government ever tried to stop such bribe based promotions and transfers. Not only this even direct recruitment of officers in various scales is also undertaken by bank officials  to earn bribe , campus recruitment is allowed in a college based on whims of some senior officers to give favour to his own boys and girls , of his own community. Not only in banks but top ranked officials of all state governments and central government resort to mass transfer and earn money in lieu of giving favour to staff who desire choice posting and timely promotions.

Police officers do not lodge  FIR in their registers, do not execute warrants issued against VIPs by various courts ,do not question criminals but tortures the person who wish to lodge complaint against criminals , defaulters and law breakers.

Has government taken any step in last 60 years to change the system and procedure of police department which give them unrestricted powers and which tempts them to take whimsical decisions and arbitrary action against honest and true citizens?

Hundreds of cases filed against corrupt officers related to misuse of power, fraudulent activities, bribe led lending, lack of monitoring, negligence of duty, favour to dishonest contractors, passing of bills of unscrupulous suppliers, passing of fake bills or inflated bills either lie pending for disposal for years together  in the office of Vigilance office, CBI,Anti Corruption bureau, or Human resource department for decisive action against erring officers or such files are closed acquitting erring officials . New trend has developed in government offices to burn the loss of files related to corruption of high profile officers. File are made untraceable or declared lost.


Is there any mechanism or tool in the rule book or almirah of the government to prevent such malpractices which frequently and recurrently occur almost in all offices, departments and Secretariats of various Ministries?

Political stalwarts spread propaganda that loans of poor farmers or big businessmen will be waived by the government or by the bank .Such ill motivated propaganda ultimately vitiates the atmosphere of recovery. Government announces waiver scheme from time to time for electoral gain. As a result borrowers of the bank willfully default in repayment of bank loan. Quantum of Non Performing Assets known as bad assets in public domain continues to rise year after year in all public sector banks. Then process of compromise and write off starts at bank level and again there is unhealthy transaction of money between bankers and borrowers or between brokers and officers who decides to sanction sacrifice loan amount. Ultimately culture of non-re payment of loan by borrowers back to banks takes the root and bankers have to suffer huge loss due to high provisioning and due to rising NPA. For this purpose bank officials , union leaders and politicians all are friends and relatives of each other.

Government has not courage, no will, no effective tools to punish bad politicians because government is made of such corrupt politicians only. Government has no courage to punish kith and kin of powerful politicians and bureaucrats who have willfully defaulted in repayment of bank loans and payment of tax dues or other charges due to government.

This is why there is mass upsurge against rampant corruption and people of India have started raising voice against corrupt system.
Government can punish Ramdeo or Anna Hazare but cannot stop public revolt.

High interest rates alone not to blame: CanRobeco's Jain

Published on Tue, Apr 24, 2012 at 10:00 |  Source :
Updated at Tue, Apr 24, 2012 at 16:43  
Contrary to popular perception, high interest rate is not the main factor dragging down the market and the economy, feels Ritesh Jain, head of investments atCanara Robeco Asset Management .
“High interest cost is not the main culprit behind the depressed business sentiment; once things start moving at the policy level, you will see companies starting to invest even at these rates of interest,” Jain in a free-wheeling chat.
“Businesses are doing poorly because the cost of doing business (clearances etc) and the cost of living (higher wage bills) have shot up,” says the 37-year old money manager, now in his fourth year at Canara Robeco, managing over Rs 7600 crore across equity, bond and gold.
Last week, the Reserve Bank of India cut the benchmark repo rate��"the rate at which it lends to banks��"by 50 basis points. The response by banks has been mixed, with some like SBI saying it would not lower its base rate because cost of funds continued to be high.
“My view is that interest rates could remain high for some time. That is because government borrowings will remain high. And unless supply side issues are addressed, inflation will stay high. That in turn will reduce the savings in the economy, which means banks will continue to have a tough time raising money through deposits. If banks cut deposit rates, savers may further shy away,” Jain says.
Jain sees benchmark bond yields ranged between 8.50-8.75% over the next couple of months, and inflation surprising on the upside.
“I expect short term rates to start rising again but the longer end will remain range bound because of open market operations by RBI,” he says.
Deposit mobilization growth in FY12 was around 13% , against RBI’s target of 16%. At a time when the central bank is trying its best to ease interest rates and revive the economy, Jain thinks it is a good thing that the investment cycle is not on an upswing.
“Given the government’s high borrowing and the fact that banks are struggling to raise deposits, interest rates would have gone through the roof if corporates too had competed for funds. And corporates don’t have too many avenues to borrow at the moment, except locally. European banks were the biggest lenders to Indian companies. That route has all but dried up because of the debt crisis there,” says Jain who learnt the ropes of money management during his eight-year stint at Kotak Asset Management before joining Canara Robeco.
In the equity space, consumption remains Jain’s preferred theme. This, despite fast moving consumer goods shares having run-up over the last year and looking expensive now. Jain admits the stocks are not cheap.
“As of now the earnings visibility continues to be good. We expect top names in this space to see a 20-25% growth in earnings this year too. Also, there are no substitutes for these companies. So, the high valuations can be justified on the basis of earnings visibility as well replacement cost,” says Jain of his decision to invest in the sector.
He is not bullish on banking except for some private sector names. Canara Robeco’s key equity schemes hold a sizeable chunk of HDFC Bank and ICICI Bank shares. The fund house is underweight on technology, overweight on auto and a few infrastructure firms in the cement and road space.
Over the next six months, Jain sees a wide divergence in the financial performance of companies, and expects benchmark indices to move sideways with a downward bias as time correction plays out and economy bottoms out.
India’s deteriorating current account deficit (CAD) has been giving policy makers sleepless nights as a combination of rising trade deficit and slowing foreign capital flows have put renewed pressure on the rupee.
But Jain feels the stock market is a bit complacent about the problem, despite the CAD of over 4% is the worst in more than two decades.
“We are particularly vulnerable on rupee and the recent interest rate cut by RBI has actually made rupee weaker. If investment does not pickup over next 3-6 months and petrol and diesel prices are not hiked, I expect the rupee to weaken further beyond 54. These things take a life of their own and feed on themselves,” says Jain.
More than equities or bonds, Jain is bullish on the prospects of gold for the foreseeable future. Since the global financial crisis in 2008, many investors have increased their exposure to gold as they are less confident about central banks and governments’ ability to resolve the problems in their economies. That has caused gold to outperform other asset classes by a wide margin, but also stoked fears that gold prices may now be in for a steep fall. Jain disagrees.
“I think gold will do well for a few more years, going by historical data: a bull run in a commodity typically lasts for 17-18 years with intermittent corrections. Gold already had an 11-year bull run. Yet, globally, investments in gold today account for less than 1% of the total across asset classes. In 1980, when gold was at $800 an ounce, roughly 22% of worldwide investments were in it. So gold is still not over-owned. The first leg of the gold bull run started in 2001 after the dotcom bubble burst, the second leg was in 2008 when the global financial crisis erupted. The third leg will be when there is a mad rush for gold when even investors who have so far been skeptical of gold, will start putting in money. That will also be the time when the rally will peak, and we are 3-4 years away from it.”
A marathoner and a regular squash player, Jain believes in delivering risk-adjusted returns rather than focusing purely on absolute returns.
“I believe my strength is that I can cut risks faster than other people. A fund manager’s job should be to give superior risk adjusted returns. Focus on the risk adjusted part of returns, and over a longer period even the absolute returns will look good,” Jain says.

Deregulation of savings bank interest rates: RBI’s move not practical in the present scenario
October 28, 2011 05:25 PM
Giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices

The Reserve Bank of India (RBI) has always been known to be like a proverbial mother-in-law, who would not like to pass on the baton to the daughter-in-law in one go, but empower the latter only in small bits and pieces. Because either the RBI does not wish to give away power easily to the banks to decide what is best for them, or does not feel confident that the banks have come of age to take their own decisions. 

The present announcement to deregulate savings bank deposit rates is coupled with two conditions, which only show that when the RBI gives up its powers, it does not do so wholeheartedly, but with reservations, despite having all the powers at its command to penalise recalcitrant banks. 

The policy announcement firstly says that each bank will have to offer a uniform interest rate on savings bank deposits up to Rs1 lakh, irrespective of the amount in the account within this limit. Secondly, for savings bankdeposits over Rs1 lakh, a bank may provide differential rates of interest if it so chooses. However, there should not be any discrimination from customer to customer on interest rate for similar amount of deposit. 

This artificial divide created by RBI is contrary to its own avowed objective of financial inclusion, which would have been better served, if this discrimination was not practiced at the instance of the apex bank. The objective of liberalisation would have been best achieved if the RBI had only stated that uniform interest rate should be paid by each bank to itssavings bank account holders irrespective of the amount in the account.  
The RBI has only created discrimination between the lower middle class and the upper middle class by allowing the banks to quote differential rates for balances below and above Rs1 lakh. 

Obviously, this will, in all probability, result in banks quoting higher rates for depositors keeping balances above Rs1 lakh, which will only serve to pamper the rich to the disadvantage of the middle class. In fact, those keeping balances above Rs1 lakh belong to the category of high net-worth individuals (HNIs), who are better informed about alternate investment opportunities and might keep higher balances only as a stop-gap arrangement, till the excess funds are profitably deployed. 

The middle class and the lower middle class on the other hand are those who are ill-informed about the banking practices due to their poor financial literary, which NGOs like Moneylife Foundation, are trying their best to improve by constantly holding free seminars at different centres across the country. It is they who need to be rewarded with a higher interest rate, as they are to be encouraged to keep all their surplus cash with banks, without hoarding them at home. Besides, they are the people who are hardest hit by galloping inflation, which is eating into their savings, and any minor relief like higher returns on their savings bank accounts would have benefitted the largest number of people in our country.  
But the present discrimination encouraged by RBI will only serve to negate this objective.

In short, the steps initiated by RBI by giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices expected to be introduced by banks to protect their own profitability, which is likely to be hit due to the higher cost of funds and increasing competition in the marketplace, in the wake of the deregulation of interest rates on savings bank deposits. 

It is only to be hoped that the RBI will ensure that the interest of the common man are protected when it comes out with detailed guidelines with regard to this subject, as indicated in the midterm policy review announced on 25th of this month.  
(The author is a banking & financial consultant. He writes for Moneylifeunder the pen name ‘Gurpur’).


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