Tuesday, December 22, 2009

Interest rate for small Borrowers

This refers to news that bankers are demanding freedom to decide interest rate for loan upto Rs.2.00 lacs sanctioned by them.

In 1969, banks were nationalized with sole objective of making it accessible to each Indian, each villager and each town dwellers. It was aimed to give relief to village farmers and small traders from the exploitation in the hands of local money lenders who used to charge heavy interest and who used to give unbearable pain to villages if they failed to repay the loan in time. Landed property of most of the villagers used to be under mortgage with local money lenders. Farmers usually under the burden of interest used to fail in repayment and as a result local moneylender gradually became land mafia in that village.

To stop exploitation, Government of India adopted Lead District approach almost fifty years ago in which lead bank in a district is given the responsibility of all round development of that district and banks are entrusted the duty to lend villagers as per their need to end exploitation by money lenders . In eighties, to give further boot up to development through micro finance , government introduced Service Area Approach in which each branch of each bank was allotted certain number of villages for absolute development of each village, each Panchayat under their service area. For this purpose each bank along with Block Development Officer (BDO) and Lead District Manager of each district use to frame service Area Plan in the month of January for the next financial year.

Such plan is approved by initially BLBC (Block Level Bankers Committee) and then by DLCC (District Level Consultative Committee). Execution of such annual plans is monitored by BLBC, DLCC and finally by SLBC. It is unfortunate that even after making more than 30 annual plans and monthly monitoring of the execution of plans by DLCC as also by SLBC , there is no actual development in the villages and it is pity that still villagers have to depend on local money lender for micro finance. Crores of rupees are spent every year in administrative expenses in implementation of said Lead District Plans and Service Area Plans

It is ridiculous that after lapse of more than three decades of lead bank approach and Service area approach, lenders are requesting Reserve Bank of India (RBI) to allow them to freely decide interest rates on loans below Rs 2 lakh to enable them

reach out to unbanked sections which are presently serviced by microfinance institutions and money lenders at high rates. It is rightly apprehended that interest rate will go up for finance made upto Rs.2.00 lacs to farmers. Banker however pleads that even the increased rate will be competitive with interest rate charged by local money lenders.

I would like to emphasize here that rates charged by banks for loan upto Rs.2.00 lacs is fixed by RBI and it is restricted to BPLR ( Benchmark Prime Lending Rate which varies from11.5% to 14.5% from bank to bank). It is worthwhile to mention here that bankers in general do not hesitate in financing to Corporate, big traders and manufacturers at rate much lower than BPLR rate.

I like to point out here that banks in general normally charge interest ranging from 8 to 9.5% on Home loans, 10 to 11.5% on vehicle loans, 9.5 to 11.5% on Education loans, 7 to 10% on export loans and so. It is bitter truth that more than three fourth of banks lending is at rates less than BPLR under corporate lending or retail lending schemes. Not only this banks are offering one after other discounts on such lending which is rates much lower than BPLR to increase their market share .Even RBI has been suggesting bankers from time to time to further reduce interest rates on vehicles and home finance to increase demand in the market.

I am unable to understand why bankers are demanding freedom for deciding interest rates for farmers.
Do they want to exploit the villagers in the same as money lenders?
Have they discarded the idea, objective and vision of Service Area Approach?
Have they honestly executed last thirty plans and more framed during last thirty years?
Are they ridiculing social objective of government of India?

As a matter of fact bankers have been charging more interest on loans upto two lacs in comparision to loans given to other sectors mentioned above.

Do they want to earn profit from small traders and give discount to big borrowers?

It is true that RBI will not agree to such proposals of the banks in fear of sharp public reaction against increase in interest rates for small loans. But demand made by banks for freedom to decide rate for small loans points towards their real attitude in lending to small borrowers. Their plea to give relief to small borrowers from local money lenders is nothing but deceptive and unreliable.

Demand for freedom made by bankers is against the core objective of bank’s nationalization, Lead Bank approach and Service Area Approach. Not only this it also proves that bankers and government agencies have been simply befooling villagers in the name of service area approach for last three decades and more and the ground reality is that small villagers are still facing exploitation in the hands of money lenders.

Now everyone is talking of Social Inclusion. Political leaders advocate social inclusion when they frame their political manifesto. Ministers cry for Aaam Aadmi when they deliver speech to attract voters. Economists and Banks sympathize poor villagers. Are they shedding crocodile tears for poor and small borrowers?

Mere opening of Zero Balance Accounts in bank or distribution of Rs.300 or Rs.400 as pension to old people cannot serve the purpose of social inclusion. Bankers need to come forward to extend small sized lending at rate lower than BPLR and to make up this loss they should charge a little bit higher rate on lending made for purchase of vehicles, flats , real estate developers and also to big manufacturers, exporters and other service providers and big merchants. Objective of social objective can be fulfilled not by greedy politicians but by bankers.

Moreover it must be kept in mind that if small traders and small farmers do not survive and do not leave in peace, the very existence and rise of big traders, corporate houses, industrialists and exports will be at stake. Entire capitalistic approach of ruling government will be proving disastrous when mass movement and violence is resorted by exploited class of people to demand justice and for their survival.

“Marta kya nahin karta”

Danendra Jain
23rd December 2009

Saturday, December 12, 2009

Uniform Interest Rate

Banks are dealing with money deposited by public. Banks are custodian of public deposit. They have got no moral right to lend only to achieve the target set by the management. Government cannot justify its action in courts when it promotes waiver of loans or compromise with recalcitrant and willful defaulters. Non performing assets in all banks have been rising year after year and banks cannot guarantee the correctness of their published balance sheets. Banks cannot justify lending without earning profit or offer whimsical discounts endangering the overall health and overall future of banks. At the same time banks cannot charge discriminatory rate of interest for different home loan borrowers, say old and new.

If all government funds are taken out from banks or at least become eligible for payment of interest by banks, I think most of the banks will face unimaginable loss or at least erosion in their profit. Even in such pathetic condition and poor health of banks, some of CMDs of banks are advocating for lowering of interest rate just to please a few ministers and shying away from accepting uniform interest rate.

Lowering of interest rate by weak banks just to meet the challenge posed by strong banks will tell upon the health of such weak banks and ultimately jeopardize the deposits made by common men. After all who has given banks right to play with public deposits as per whims and fancies of ministers and Government of India. If private banks instigate rate war it is imaginable, but the painful truth is that it is PSBs which are lowering rates without taking care of cost of fund and possibility of erosion in their profitability. In olden days private merchants were accused of labour exploitation. In the modern era banks are earning profit by reducing manpower and exploiting existing manpower. Anyway, if even weak bank collapses due to wrongful policies prevailing in the market or promoted by government, it is none other than depositors who will suffer the most.

As such it is the interest of banking community as a whole that interest rate is made uniform and the focus of bankers is made to concentrate on more and more lending. It is to be kept in mind that a person who is ready to avail loan of Rs.20.00 lac or more is least bothered of one or two percent higher interest charged to him.

Wednesday, December 9, 2009

Wage Revision and Performance

Government has put stress on salary packages of employees of public sector banks to have performance linked variable component from next financial year. They could not ensure performance in central and state government departments but bent upon linking wage revision of bankers with performance knowing very well that it is still banks where work flows smoothly compared to other departments of government.

Government should first define performance, explain how to measure performance of various segment of officers and non officers, how to ascertain degree of customer service extended by a bank employee, how to correlate deposit mobilized by an officer with non performing assets (NPA) created by him before advocating performance based pay hike or incentive (PLI) to be introduced in public sector banks. There are numerous officers in banking industry who by paying bribe to government departments could mobilize handsome deposit to become performer but who endangered crores of rupees of banks by lending huge money to ineligible borrowers or to fake borrowers or who were found to be indulged in fraudulent activities.

Bitter truth is that an officer in general is treated star performers by an executive is later charge sheeted by another set of executive when exposure of irregularities created by so called star performers takes place or when top executive sitting at the top post do not like the said star performer.

There is already promotion policy in vogue in all banks which promises promotions based on performances. But the ground reality is that promotions are never given based on performances. Those who are flatterers, who are yes-man of bosses, who earn through bribe and share with bosses, who please bosses with cash and gifts are normally given better marks in Interview and selected for promotion. Similarly top officials are tactful enough to use good officers to clean the malady created and accumulated by their yes-men and justify the promotion given by them to a bad performer at the cost of good performer. If a honest and sincere survey is conducted on bank officers, the outcome will definitely reveal the large scale annoyance of bank officers with their top management and exposes injustices in promotion process. One cannot deny that promotions said to be performance linked in banking is absolutely whimsical and in no way related to work done by any officer.

In a bank it is very difficult to ascertain and measure work done by an employee and make it comparable with others. Different employees in different departments in banks at different branches and different administrative offices require different skill and unique level of handling. Every one is not competent to handle auditing work and similarly every officer is not tactful and efficient enough to handle a branch as Branch head. There are some officers who can be good faculty member in a training college but fail completely when they are posted in a branch and instructed to perform routine work in a branch.

Secondly, position, potential and work nature of a branch differs from village to village and from town to town. Quality of work at administrative offices is entirely a different story because administrative offices need no service to customer but only service and flattery to bosses. In brief each branch and each officer has a different characteristic and need unique treatment, different set of knowledge level and absolutely unique behavior.

I am unable to understand how bank management will justifiably quantify the work done by different segment of workers. It is rather bank management who can easily make or mar the career of any officer or a branch manager just by posting him at normal or critical branch, or by increasing or reducing manpower compared to normally required strength of manpower for a particular branch. Manpower provided to different branches is not uniform and more or less depends on the whims and fancies of higher bosses. An officer in good book of a boss can get surplus manpower whereas another officer when posted at same branch will be deprived of even normal strength of manpower.

There are many banks where even appraisal reports are not in vogue for assessing the work of award staff. Even for officer’s appraisal report is designed in such a manner that he or she is rated in different state in different way depending upon the likes and dislikes of the assessor. Even if appraisal reports on performance is written by his immediate boss, it has got no relevance in case of posting or promotion of an officer considered by the management from time to time. It is in banks that even guidelines for officers issued by government of India regarding Rural posting or North East posting related incentive is misused by the management to punish or isolate an officer who is not serving personal interest of the Boss.

If management wants to give performance linked incentive to any officer of their choice they will extend all cooperative hands and on the contrary they may pull back some good assisting workers from a branch to belittle good work done by a an officer who is though good performer but not in good book of his assessor. A man is not good or bad only because he is good or bad, but it largely depends on how the assessor or the judge perceives his performance. Attractive suit length in a cloth shop is liked by one but may be disliked by other.

Availability of suitable infrastructure and the potential of the area have greater role to play in performance of an officer. Similarly position of all branches is not same. There are branches, which are fraud ridden requiring skill in legal matter. There are branches where bad advances are huge and need focused attention on recovery of advances. On the contrary there are some new potential branches where in a year business rises to what 10 years old branch could not achieve in another town. Some branches are fifty years old having multifarious jobs and some are new requiring no special skill, some are situated in Naxal affected areas and some others are in business wise potential area. After all what will be the criteria for judging the performance of a bank employee which will be uniformly applicable and acceptable to all is a million dollar question.

It is seen in banks that charge sheeted officers are promoted based on caste or religion or closeness to bosses or based on recommendation of some God fathers or based on bribe he or she offers to top management in lieu of promotion he secures. There is no guarantee that the performance-linked incentive as contemplated by government of India will be used for real growth of banks.

As long as banks are unable to decide the framework and uniformly acceptable yardstick to measure the performance qualifying for incentive, mere introduction of such PLI in banks will undoubtedly create more conflicts, confusion and give rise to reign of injustice as perpetuated through promotions and posting by greedy and corrupt bank management in general, I do not talk of a negligible portion of exceptional good officials sitting at the top. Please excuse me. In general any power invested with Indian bosses produces nothing but gives rise to more and more corrupt practices and do not help in creating an environment conducive for real elevation of really good workers and real growth of banks. When incentive in form of promotion is not awarded judiciously, it is difficult to understand that the management will justifiably distribute Performance linked Incentives.

Danendra Jain
Ganaraj Choumuhani Agartala
9th December 2009

Saturday, November 21, 2009

Why is meger so important?

Central Government has been building pressure on banks to make best efforts for merger and acquisition. But I am unable to understand the motive behind it in Indian perspective. Finance Minister has said that through consolidation, financial powers of banks will improve and they will not only be able to augment efficiency and help in GDP growth but also get success in competing with International big banks.

Here the million dollar question arises whether Late Indira Gandhi had nationalized banks to compete with International banks, whether banks are meant to extend credit in thousands of crores to a few hundred merchants or manufacturers only?

Have government forgotten the social objective of banks completely?

Is it possible for a government to survive by discarding the interest of common men, farmers, and small traders in India?

Is it necessary for India to have bigger banks to extend credit to farmers and small traders who together constitutes 95% of population and without whose support even economic viability of large projects would be at stake?

It is important to mention here that there is sharp rise in loan portfolio or visible growth in advances of banks in general is not due to financing made by banks to small traders and farmers but only due to bulk financing made to big corporate houses, to real estate developers and to infra structure developers.

Does any one in the government or in RBI mean that by merger and enhancing powers of banks, there will be equitable GDP growth in country like India?

Even in America where big banks are many, one out of every seven Americans starves and struggle for earning their bread and butter for at least survival. In India the position is worse than that in USA. In India nine out of every ten Indians are unable to earn sufficient money even for respectful living. Considerable large proportion of Indian population is suffering from mal-nutrition; they die of curable diseases in want of proper medical assistance and they remain unemployed in want of adequate opportunities.



This is India where even federal structure of the country is at stake due to largely growing unemployment and where person like Raj Thakre has been trying hard to disallow Non-Marathi to seek employment in Maharashtra and Shiv Raj Chouhan CM says he would not give employment to Biharis and North Indian in the state of MP. Besides, in majority of villages, small towns and cities there are inadequate and improper sanitation facilities, acute scarcity of water and electricity, crisis for medical treatment and what not. This is why I reiterate that Indian environment is different from other developed nations and hence need unique treatment.

It is worthwhile to add here that USA government has realized after fall of big banks and financial Institution during last year that management of big banks is very difficult compared to smaller ones. Still there are about 8000 smaller banks functioning in USA to serve common men. It is also true that 125 banks became bankrupt or closed their shutters during the current year in USA.

If we talk of India we have less than 30 public sector banks and they are said to be in better health position. They are well scattered in every nook and corner of the country to serve Indians in general. They have to be encouraged to extend maximum help to small borrowers. They cannot extend any better help to poor person after merger of banks. Then what is the need of merger and acquisition? Why is government bent upon merger? Need of the hour is to make existing banks able to cater to the needs of common men.

Even if government feels the necessity of having large banks with huge capital to compete with foreign banks, they can choose to have one or two like SBI or PNB (after merger of SBI with associate banks I think capital size of SBI will be comparable with their foreign counterparts and similarly after merger of PNB with some suitable bank), At least other banks should be left untouched to serve common men and forget big projects, bulk financing, corporate borrowers completely and concentrate only on small and mid size borrowers i.e. credit upto ten lacs. It is also pity that though government is expressing desire of merger and acquisitions of banks, they have not yet formulated concrete policy such as minimum number of branches fit for suitable bank and minimum capital required for strong bank visualized by them.

Even if we leave aside the social objective, it is not commercially good proposition to build pressure (frequent request by FM or RBI is enough to build pressure) on banks to go for merger and acquisition especially when government have granted economic freedom to individual banks in the era of economic reformation, liberalization and globalization When need will arise banks will themselves strive hard to grow bigger to survive. As of now banks in India are said to be safer than foreign banks. Even government has admitted it repeatedly.



Inspite of all, if government still consider it better for banks to go for merger, I would like to suggest our Finance Minister to merge all PSBs including SBI and make them one entity like Income Tax department and other departments of Government of India so that there be no unwarranted interest rate war, no case of multiple financing, no case of multiple fake accounts, no case of take over at the cost of bank’s interest and no unhealthy competition as now prevalent in banking industry. There will be unified effort to recover the money from recalcitrant borrowers. Banks will be able to check money laundering in a better way. There will be uniform and effective implementation of KYC (Know Your Customer) norms. People will not get opportunity to park their black money in different branches of different banks. Tax authorities will be able to trap the black money comfortably in shortest time. And so on ……


Need of the hour is to strengthen the existing structure of banks, make them more and more efficient and enthusiastic.



Government should make efforts for repayment of loan and for this purpose make water tight laws to ensure cent percent recovery of loan from willful defaulters so that proportion of dead money in bank’s balance sheet comes down and they can afford and generate will to make finance to common men. Present scenario is that branch manager of every bank’s branch is afraid of extending credit to small borrowers in fear of account going bad and lastly added to Non Performing Asset.



Need of the hour is to avoid political intervention in banking affairs and to resort to healthy norms for financing without any fear of target achievement. To add fuel to fire every bank is suffering from staff shortage and as a consequence there is no monitoring on existing borrower accounts and gradually service quality in banks at many branches is deteriorating in want of adequate staff. Banks are even unable to redeploy the existing surplus staff at Metro branches to branches having shortage of staff due to protest from powerful employees union. Even after huge retirement, resignation and death as also expansion of branches in all banks there is practically very poor recruitment.

Last but not the least; bitter truth is that big business houses are getting all sorts of help from the government, from the banks and from all corners but all at the cost of poor and middle family. Rich business houses are producing, hoarding and realizing maximum profit on their products and it will not exaggeration to say that the present trend of rising price is caused by these profit makers only. Government has been making promises and promises to control price, but always fail on this front because they have given undue freedom and undue privileges to these business houses. I hope government will make all best efforts to give relief to general mass who are subjected to unbearable pain on account of sharp price rise in all commodities without proportionate rise in their monthly income.

India is said to be suffering from naxalism due to increasing poverty and due to the fact that they are denied their legitimate right and they are even deprived of justice in proper time. Can merger and acquisition by banks help in ameliorating their problems of poverty-ridden Indians? I would like to draw the attention of learned FM and PM that late Indira Gandhi (Congress Party) had nationalized banks because private banks were hesitant to extend credit to common men, villagers were deprived of banking facilities and common men was afraid of even entering in to bank. Private Banks were exploiting not only staff working in the banks but were also exploiting business houses. It will not be exaggeration to predict and say that the same Congress Party under the banner of UPA is dragging banking industry in pre-nationalization era.

Please keep in minds that during reformation era 23 banks were forcefully merged to bigger banks by government of India because they succumbed to malady and irregularity they accumulated, and not because they were small banks. Giant banks, Lehman Brothers, AIG in USA failed not because they were big but they followed wrong policies and committed misadventure in delivery of credit and in making investments.

In India I doubt the honesty and integrity of government in their efforts for merger, acquisition and consolidation of banks because they know the quantum of malady and bad assets hidden behind the rosy balance sheets of PSBs. Otherwise there is no reason for providing capital infusion to various weak banks from time to time. It is their political agenda to save the banks from exposure of their reality (when the misdeeds increases to such a large extent that it punctures the tyre of running banks). They are trying to divert the attention of public from inherent weaknesses of PSBs and this is why they are not agreeable to respectable wage revision of bank employees even after two year long dialogue with union leaders. Exodus of talented employees and non-entry of well-qualified person in PSB banks is also a vital reason behind growing weakness of Banks. On the contrary private banks like ICICI and HDFC banks have grown to such a large extent in last 15 years of their existence that even 100-year-old PSBs are facing challenge for survival.

Further any merger of banks may cause more chaos and confusion than solving any problem. Different banks have different identity and its unique geographical concentration or expansion and hence merger of two banks with different characteristics and different process of promotions and transfers will create more conflicts, more industrial disturbance and more public grievances. There are banks where management gives ten promotions in 30 years and on the contrary there are banks where even one promotion is not given in 30 years. Some employees are south centered and some are confined to Metro Branches in their entire tenure in banks. There are various points of conflicts, which banks have to settle before contemplating acquisition and mergers.



Danendra Jain

Wednesday, November 4, 2009

Stimulus trauma

As far as I know government has provided liquidity of Rs.4.00 lacs crores to banking system after September 2008 by reducing CRR by 4.75% . After the collapse of Lehman Brothers and many prominent financial institutions including big banks in USA, Indian government also could sense the fear of global meltdown and recession and announced various stimulus packages in line with what Mr. Obama announced for USA to meet the economic crisis he faced.

Here it is worthwhile to mention that economic condition of US people and their standard of living is not at all comparable with that of India. Our banks do not extend credit as US banks were extending before eruption of crisis last year. The banks in US were facing sub prime crisis which Indian banks do not face at all. And this is why many economists predicted that Indian economy will not be affected by the crisis US government could face after giant bank like City Bank, biggest insurance company like AIG and financial institutes like Lehman Brothers started falling .

It is however true that liquidity crisis in US was grave at that time and the stimulus package announced by Obama government was necessary to save their economy. Due to such crisis in USA, other nations including India could be affected in trade related to export and import with US. As such industries in India involved in export directly or indirectly could be the victim of US economic crisis. Growth contribution done by such industries could play some role in overall GDP growth. But these industries did not need additional finance. Rather these industries could not utilize even the sanctioned credit in want of export orders. In case their export proceeds were blocked by foreign based importers, the problem of liquidity could arise for such export oriented industries. And they needed stimulus package indeed.

But our government was generous and cautious enough to announce various tax cut and reduction in CRR, repo rate and SLR. Banks could get back as much as four lac crore rupees from RBI which they had earlier parked with RBI as per then prevailing CRR rate. As a result banks could get not only surplus liquidity but also could earn additional interest of at least Rs.40000/- crores during the period Sept 08 to September 09.Had it not been so I presume banks could not have shown growth in profit , rather they could come in losses due to already existing inherent weakness .The greatest weakness of Banking in India is that there is not proper repayment of loan which they disburse due to weak judiciary , weak administration and dirty policy of the government in fear of erosion of vote bank.

Secondly banks were allowed to restructure their credit to such industries which were likely to be affected by global economic crisis. Banks in general misutilised this policy of RBI and restructured almost all hidden bad loans (which were although Non performing assets called as Sub standard assets but shown as Standard assets in their books of accounts so that they could portray attractive picture in their financial statements). As far as I know bank altogether restructured loan of value as much as two lac crores and more. In this way they could book interest income on such loans which were otherwise not eligible for booking interest as per prudential norms set by RBI for classification of assets and income recognition.
It is obvious that if above mentioned stimulus packages were not extended by RBI, banks in general could slip to red zone, not due to the effects of global economic crisis but due to hidden malady.

This is why our government is not in a position to withdraw the stimulus package inspite of the fact that there is visible recovery from the effects of so called crisis erupted in the last year. As a matter of fact most of the industries have booked considerable good growth in their annual and quarterly result. Another bitter truth is that banks are not able to extend credit as much as it is required from them by government of India and in proportion to liquidity they got from RBI as medicine to cure the sickness which was visualized to creep into the banking system after eruption of crisis in USA. This is proved by the fact that banks in general are parking their surplus liquidity with RBI at Reverse Repo Rate i.e. as low as 3%. Another bad consequence of surplus liquidity with banks is that they have reduced interest rate on deposit from 11% last year to 5 to 6% this year. The most painful effects of such sharp fall in deposit rate is the erosion in interest income of pensioners and other self employed erosion whose survival depends on interest income to a great extent.

Friday, October 30, 2009

Lower Interest Rate

Everyone at top places is talking of recovery in economy and for this purpose they talk of low interest rate to create more demand for car or bike or for house. Stimulus package is extended to bank by reducing CRR so that banks have sufficient liquidity to lend to auto and real estate sector even at sub PLR.



Who is purchasing houses, flats or commercial shops? Whether poor and downtrodden and even medium class people are at all getting any benefit from stimulus package or so called recovery in the economy despite global slowdown.


Whether declining interest rates are conducive for real and consistent GDP growth?


How majority of population will survive who save and survive on interest income?

Certainly rich and upper middle class people whose number one annual income is at least more than four lacs. Because only then he can bear the expenses of his family and save enough to buy a house or a bike or a car and can afford the subsequent expenses.
Of course person with number two income can afford buying a house or a car even if his annual pay is only one lac or even lesser.

Therefore lower interest rate regime will benefit only upper middle class and rich people of the country who are either in service or in business or trading in house or bike or car. Both consumer and manufacturers in these lines will be happy if the interest rates go down further. It is to be noted that interest payable on deposits by banks has already come down from 11% to 5.5% in many banks during last one year. Actual beneficiary of reduction of interest rate directly or indirectly is available to only and hardly 20% of total population of the country.

More than 80% of the population whose livelihood depends on interest income (pensioners, farmers, retired persons etc) or whose annual income is less than one lac a year and 15% of population whose annual income lie between one lac to four lac are now crying and facing enormous difficulties in meeting their family expenses. Such poor, downtrodden and middle class persons cannot dream of buying a house or a bike or a car. At best they can get some unskilled job of labour in the house of rich persons who take hard work but hesitate to pay sufficient money in wages. They are facing considerable erosion in their interest income, almost halved and at the same time their expenses on the same basket of commodity, which they normally consume for survival, have doubled due to abnormal price rise. Their poverty has been increasing day by day and riches have been growing richer and richer. The more profit margins corporate houses realize on their products from buyers of house or a bike or a car, the more successful businessmen they are considered and even government as well as stock market admire such trade houses. As a consequence gap between the riches and the poor is widening day by day. Situation is becoming alarming and inviting violent movement against the exploiters.

Days are not far when government will have to take into consideration the misery of those who survive on interest income and RBI will have to put stop on falling interest rates. Government will have to put brake on increasing profit margins of traders, manufacturers and other service providers to check rising prices of all essential commodities. Profit making agenda of the governments and the consumerism of top 5% of population cannot afford to ignore welfare of society at large constituting residual 95% of the population. Person who are advocating further fall in interest rates, who are indulged in profit making and creating artificial price rises in all essential commodities by hoarding are inviting nothing but social upheavals, social unrest and disturbance in law and order and ultimately violence all where.

Further there are some economists and heads of businessmen organizations like FICCI who are advocating further fall in interest rate on lending by banks. Indirectly they are advocating further fall in interest offered by banks on deposits they accept from customers. They plead that investment in new projects will become economically viable which were not economically viable under high interest rate regime. I would like to add here that 80% of investment in business comes from public savings in India and survival of Indian business and trade do not depend on external commercial borrowings or foreign direct investment or any aid from International financial body. Existance and prosperity of Indian GDP largely depend on Indian savings and not on foreign borrowings. As such when interest rate falls to an undesirable low extent, this will lead to clear cut disincentive for those who tend to save out of what they earn. When growth rate in savings fall it will adversely affect the investment capacity of the government and also welfare schemes of the government. All plans on development formulated by Government of India in their budget or in five year plan will fall flat if people save less and start spending more and more in the same way as Americans spend in USA. Obviously sharp and drastic fall in interest rate on deposits will strike the root of economy gradually and in turn invite the same problem which USA is facing and which has caused global slowdown and economic recession.

Some bankers and economists plead that due to high lending rates borrowers are not able to survive and their projects fail. It is also said Banks assets become bad and Non- performing due to interest burden. I would like to mention here that 70% of lending made by banks is sub PLR. In other words one can say that major chunk of credit made by banks to industrialists, exporters, home seekers, students seeking education loan, buyers of vehicles and houses and farmers is at rate below than Prime lending Rate (PLR) or bench Mark Prime lending rate (BPLR). It is also bitter truth that 90% of non-performing assets pertain to those borrowers who were financed at sub PLR rates. As such plea of financial experts that high interest rate is the root cause of NPA and high interest rate is not conducive for GDP growth is not true and believable.



Moreover such huge erosion in interest income of a considerable large section of Indian population as occurred during last one year will definitely pull down demand and hence adversely affect the sustainability of profit of manufacturers and industrialists. To add fuel to fire, abnormal rise in prices of all essential commodities is killing the purchasing capacity of Indian mass in general. Impact of both may prove to be detrimental for sustainable growth as also for peaceful survival of poor and average income Indians.

It is therefore the need of the hour to ponder over the structure of interest rate applicable on deposits and lending and also whether freedom to bankers to decide their interest rates is suitable and beneficial for overall growth of the Indians and health of the Indian economy. High interest rate is of course not conducive for creation of positive environment for industrial growth or farm production. But the million-dollar question is how much lowering of interest rate is justified and suitable for maintaining equilibrium not only in the economy but also for maintaining social peace. The point to be considered here is complete freedom to bankers on interest rate is more beneficial or uniform rate structure decided by RBI in union with need of the Nation is the necessity of the hour to avoid unhealthy competition and to avoid unhealthy rate war.

Wednesday, October 21, 2009

RBI says no to PLR

It was never a point of significance for any customer who borrowed money from bank whether it was Prime lending rate (PLR) or benchmark PLR (BPLR) because banks use to apply different standard of rating to decide applicable rate of lending for a particular borrower and also for different segments of lending. Rates used to be much below and much above PLR r BPLR which is normally called as sub PLR lending. In many cases like export finance, agricultural finance, retail finance banks used to charged even fixed rate or a rate which was considerable below PLR

In brief, lending rates use to vary from 4% to 18% and PLR or BPLR use to vary from 11% to 16% from bank to bank. And banks are quite justified in applying different standards of rate of interest as per their convenience and in accordance with their policy framework of earning profit because of freedom given to banks by government of India in line with the policy of liberalization and globalization under the umbrella of reformation policy adopted after 19991.

On the one hand government talk of freedom and competitiveness for banks and on the other they dictate or poke their nose unnecessarily in interest rate structure or lending standards .Such frequent change in policy on interest rates creates confusion not only among bankers but also among loan seekers and results in unnecessary take over of loan from bank to other bank. It also gives rise to dissatisfaction among even good customers when they find that some other bank is lending at lower rate. Many advance accounts have gone bad, assets have become non performing assets (NPA) only because of frequent change of rate of interest.

In fact government should decide all types of interest rates on chargeable uniformly by all banks on deposits and advances and only non-interest income as also service quality should be the area where bank will compete each other in raising profit of the bank. Unhealthy interest rate war among banks specially among PSU banks is not at all good because it after all adversely affects the profitability of weak banks .Weak banks are also part of same government and they have also issued shares to general public and hence they cannot be allowed to grow weaker and ultimately collapse .It is well know different PSU banks have different capital structure, different manpower, different infrastructure and different culture of working .which they have inherited from their past, pre- reformation era. Even after twenty years of reformation and forty year of nationalization of banks, there is over man power in some banks and there is acute crisis of man power in some other banks.

As a matter of policy framework, government should decide that maximum gap between peak deposit rates and peak lending rate for banks private or public. Government can at best suggest banks to take care of social agenda of the government and those banks that do not fulfill the sectoral targets fixed by government should be severely penalized.

I therefore feel that ruling of RBI asking banks to have Base rate in place of PLR is of no value and definitely a futile exercise. Base is always Zero and will continue to be zero. Old wine in new bottle is an old proverb. Government changes the bottle but banks serve the same wine as they have been serving for last forty years. As long as government is incapable to recover the money from willful defaulters, the health of banks cannot improve and there may not be healthy credit delivery for real GDP growth as also for creation of demand in the market. Government has to discard vote bank policy and try to understand the benefits of Indian customers in Indian perspective, Indian banks in Indian context and not always try to compare India with foreign banks because they are not all comparable in any respect and from any angle of consideration. Waiver of loan or culture of compromise with willful defaulters or political interference in banking day to day affairs is not as much in foreign banks as it is largely prevalent in Indian Banks. Judiciary in foreign countries is not as weak and corrupt as it is in India. Proportion of poor people in India and their standard of living is not at all comparable with that of developed countries with which our banks are compared. And so on…………..

Danendra Jain
20th October 2009

Sunday, October 11, 2009

Publish list of loan defaulters

Many questions are raised before me in market by well wisher of banks. One very question is why not banks publish the list of loan defaulters? I respond to this question as follows.

There are millions of NPA or bad loan accounts which if published in news paper, in one lot or in piecemeal will be of not much use and will not yield fruits. There are microscopic few readers of such list or such notices of default. Only publisher branch employees and hardly some bankers and some casual readers go through such notices. Otherwise such advertisement of defaults goes unnoticed for majority of readers. Even if some people read, it is not going to ensure repayment of bad loans. Had the borrowers been so much sensitive to his image and prestige he could have repaid the loan in time and the accounts could not have gone bad at all. It is a bitter truth that most of the bad borrowers are bad willfully and not due to reasons beyond their control.

It is worthwhile to mention here that some banks have started publishing the list of bad borrowers in local newspapers. But the fact is that readers are few and ineffective. Even notices published for possession of landed property under SERFACIA are hardly seen by readers. Publishing of such list normally become common in a few days and none will look at such list.

It is also true that banks too do not want to publish list of VIPs who are kith and kin or friends of VIPs. Besides many loan accounts in Banks become bad due to casual approach of bankers. Many loan accounts are bad only because they were disbursed by corrupt officers of banks after taking huge amount of bribe and ignoring norms of banks. It is also desirable to mention that many loan accounts become bad due to some genuine difficulties faced by borrowers. Many loan accounts become bad due to natural calamities, change in business environment beyond the control of borrower and change in government policies, sudden fall in demand of the product, due to technological up gradation and advancement existing product becomes useless and so on.

Whatever may be the reason of default, banks cannot ignore such huge defaults for longer period. In case of reason beyond the control of bankers, it is desirable that government extends helping hand and banks extend time or enhance credit facility or waive in some genuine cases. But as long as willful defaulters are not punished by police and also by courts in India in shortest period i.e. after commitment of default and within one year of such default, all actions by banks are eye wash. This is the reason that NPA of banks are rising year after year.

It is open secret now that actual NPA of all PSU Banks is at least ten times of what they have reflected (Rs.45000 crores )in their balance sheet. If hidden NPAs are revealed, I hope, total NPA will jump to at least five lac crores only in PSUs. And if NPA goes on increasing unbridled in the same fashion, there is no doubt to me that in a few years’ banks will face severe crisis endangering the very existence of many banks.

In USA about a hundred banks has gone bankrupt in the current years due to sub prime crisis. Indian government has from time to time infused capital in some of weak banks to save them from collapse; some of the weak banks have been forcefully merged with some other strong banks and some cooperative banks have been allowed to shut down their shutters. But how long such manipulation will help is a million dollar question. Hitherto banks use to either write off bad loans or provide for them or conceal them altogether so that their market image is good.

To improve the real health of banks, government will have to take hard steps to improve recovery of loans form bad borrowers, ensure time bound action in courts and by police to execute the court order. At the time management of the banks or the government or RBI supposed to monitor the activities of banks have to take proper steps to kick out corrupt officers, promote honest and effective officers, remove inactive officers from police and courts, make advocate accountable and punishable and many more such thing which hinders in creation of an atmosphere conducive for recovery of loan. Once the government becomes active, bank management show quick action on willful defaulters, culture of borrower will automatically change. For all these imaginative actions to become real, initiative have to be taken by politicians who are the root cause of many evils prevailing in government banks for decades together.


Danendra Jain
12th October 2009

Sunday, September 27, 2009

Education Loan another Sub Prime Crisisi



Government of India is likely to bring a bill in the Parliament to monitor real estate sector and to protect the interest of home buyers from bad builders and developers. It is true there are many unscrupulous builders in our country who do not have valid documents to start construction but who have taken full payment of the flats they illegally sold to home seekers. There are many such builders whose landed property is disputed, who do not have duly approved map for construction. Many builders take advance booking and fail to complete the project in time and thus the home buyers stands cheated without any visible solution to his problem. All these problems are mounting alarmingly in most of the towns and it is very much urgent to enact suitable legislation to nip in the bud before the aggrieved people initiate a violent movement against the builders.

This is really a very good step and it will help preventing greedy builders, developers and fraudulent owners of property cheat the poor and innocent home seekers. There must be provision for stern punishment to those builders who fail to handover the possession of flats or house to home seekers strictly in time and of the quality as good as promised while accepting booking for a flat or a house. This will definitely create a healthy atmosphere and there will be a fear of action in the mind of bad builders and at the same time home buyers will feel safe in buying the flat. As a result of such safety steps taken by the government, more and more buyers of home will come forward and eventually increase the demand as desired by the government. It hardly matters whether interest rate is less or more by one or two percent for home loan seekers so far as buying a flat from such builders is concerned. Matter of safety is of paramount importance for those persons who intend to buy a flat. Undoubtedly government is moving in right direction.

It is worthwhile to suggest here that similar regulating body must be formed to monitor the opening and functioning of colleges and schools of higher and primary education with provisions for stern action against the person who charge exorbitant fees from students and fail to feed them quality education as promised in their prospectuses and as promised through advertisements. If government fail to take immediate steps to protect the interest of students there is no doubt that future of education will be jeopardized but also it will adversely affect the availability of job opportunities for such ill-fed and less talented students and ultimately endanger the education loan portfolio of various banks.

It is not out of place to mention here that government in the past has waived huge amount of small bad loans of the banks which became bad due to faulty policy of dirty politicians who indulged more in vote bank politics and less in social agenda. Similarly if education loan goes bad, government will face the worst kind of financial crisis in near future, worse than sub prime crisis of USA.

Last but not the least, need of the hour is to ensure execution of such healthy policies than to frame and forget the same. There has been unprecedented rise in prices in real estate as also education sector and they need close monitoring.

Danendra Jain
Agartala

28th September 2009