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.
Friday, October 30, 2009
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
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
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
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