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Deregulation of Interest Rates - Will PS Banks will go Air India Way ?


Danendra Jain

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 damaged the profitability and almost neglected small depositors and common men who needed small loans for their small businesses.

After all it is not fatherís 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.

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 prefer and prepare uniform rate structure on deposits and advances keeping in view national and international economic scene dictate the same 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.


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