Thursday, August 30, 2012

Uniformity of Interest Rate on Bulk Deposit

It is right to say that high proportion of bulk deposit at higher rate increases cost of deposit of banks and increases lending rates which in turn adversely affect the credit growth as also growth targets of the economy. This is why RBI and Ministry of Finance have been impressing upon public sector banks not to offer higher rate for bulk deposits, not to participate in bid for bulk deposits and to restrain their bulk deposit portfolio to 15% of their aggregate deposits.

But if only public sector banks are restrained from offering higher interest  rates on bulk deposits and  if only Public sector banks are prevented from taking part in bid for bulk deposits, the entire such deposits will gradually shift to private banks .This will increase deposit base and increasing lending power of private banks and finally they will offer lesser interest rate on lending  affecting the overall business of public sector banks. They can spoil the market for state run banks by offering attractive lending rates and by offering huge discounts for temporary period and then realizing the profit on these lending through some other ways.

Moreover when bulk deposit of any company shifts to private banks, it is but natural that other operational accounts including salary account of the company will shift to these banks. This will again adversely affect CASA            (current and savings deposits) of government banks and ultimately the cost of deposit will increase and the power of these banks to compete with private banks will get eroded. And the beneficiary will be none other than private banks. Customers will hardly get any benefits out of this because private bankers know how to extract money from traders through other service charges.

Not only this , even clients, ancillary units ,group accounts, sister concerns ,contractors and suppliers of such companies which keep bulk deposits with private banks to get higher interest  may also shift from public sector banks to private banks where their patrons keep bulk deposit . Similarly other operational accounts of such associated or linked companies will also like to shift to private banks to avoid wastage of time in clearance of cheque through collection or clearing.

Obviously any restriction exclusively on government banks or curtailing of freedom of only government banks and giving the full freedom to private banks will have cascading and multiple repercussion on bottom line of state run banks. 

It is also to be kept in mind that proportion of bulk deposit is huge in all government banks and the same is undoubtedly ranging from 20 to 40 percent. If this large amount, roughly Rs.300000 crore is withdrawn from government banks and parked in private banks, position of private banks will improve and that of PSBs will suffer great loss compared to private banks.

In addition, there are as much as Rs.900000 crore as idle cash with various big companies. In addition to this, lacs of crores of rupees are kept in banks by government departments for spending the same in gradual way in developmental projects.

As such a large chunk of bulk deposit will be snatched by private banks only and ultimately this will give an impression that government of India is willfully damaging the state run banks to boost up the profitability of private banks as they have done in the case of BSNL or Airlines.

I have been of the opinion since long that RBI should decide the rate of deposits and rate on interests for various kind of advances keeping in view the priorities of the nation and other economic parameters like inflation, global situation, currency rate, natural calamities , political situation , investment needs, social welfare needs, fiscal deficit etc and finally the overall monetary policy and fiscal guidelines issued from government of India from time to time. 

These rates should be binding for banks Private as well as public sector banks and should be available on website of all banks and customers should be offered uniform rate of interest in all corners of the country for all segment of the society and for all customers of all banks, for individuals and for institutes, for retail or bulk deposits. 

Any deviation on rates should also be applicable to customers of all banks .This will stop unhealthy interest war among banks , especially among government banks .This will stop all types of bidding. Rather GOI can give instruction to all big companies having huge idle surplus cash to stop this unhealthy practice of earning profit by interest. These companies having idle cash should rather make efforts for using the idle fund for development of the economy. 

GOI may use such idle resources for development instead of mindless expansion of branch network in quest of deposits without ensuring matching manpower in quality and quantity.

Alternately these companies may also  lend to other associates of the company or any needy company at rate decided by RBI fulfilling all norms prescribed by RBI to safeguard the interest of the company and borrowers .They will have to provide like other Financial institutes for bad debts and maintain all risk mitigants in their system as necessary. 

If this proposition suggested by me has any side ill effects, it should not be allowed or stopped in future or modified for better results. It is to be noted that even now companies like Mahindra & Mahindra, Reliance and Tata are engaged in financing their own output or else.

If rates are uniform and decided by RBI, other banks will then focus on growth of real business and will save their energy in management of assets and liabilities of various time and rate maturities. They will save the losses caused by multiple financing or cross financing. They will be able to focus on quality of their service and quality of their asset .Banks will get ample time for moving in the field to mobilise new business and to monitor their existing loans . This will improve quality of advances and help in quality growth of advances of all banks. 

Lastly, GOI and RBI may advise all government departments and public sector undertakings to park their idle fund only in state run banks.

After all, any loss by any of government banks caused by interbank interest war will be the loss of the same government and loss to the customers, depositors and investors of the same country. 

As such if policies framed by RBI or GOI either for interest rate or for Financial inclusion or for lending under priority sector or for opening of branches or for short term unsecure loans are discriminatory with private banks and not uniformly applicable to all banks , the resultant consequences may be enormous and dangerous for banking as a whole. 

It will not be an exaggeration to say that only due to faulty policies adopted during reformation era executed by incompetent and corrupt manpower has resulted in continuous erosion of assets of PSBs and continuous fall in their profitability, not to speak of deterioration in culture and attitude of manpower associated with these banks.

Even customers of banks  in the long run get frustrated and eventually  not benefitted by such type of unhealthy competition among bank; they also spoil their time and energy in shifting their banking business from one bank to other. Some of mischievous customers take advantage of this and avail loans from many banks and ultimately assets of all such banks goes bad.

Need of the hour is therefore to improve the service quality of state run banks  , attitude of manpower , quality of staff, transparency in transfer , posting, promotion and recruitment, stopping of fraud and manipulation in Human resource policies , improving  TAT in sanction of loans, stopping political interference , stopping misuse of bank's fund for political gain etc.

Need of the hour is to immediately stopping of  unwarranted competition in interest rate or opening of branches and ATMs etc in the name of Financial inclusion or coverage in minority areas.

Need of the hour is to change the present image of Policy Paralysis tagged with the government and Credit stagnation tagged with PSBs or escalation in bad assets causing critical sickness  in government banks.

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