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Today I am writing about a topic which till date has hardly been discussed openly at any forum under the heading of cartelization. This may be the first article on this topic. Nobody has seen suppressing of interest rates on Saving Bank accounts from this angle. CMDs of PS Banks are shy about discussing this topic purely owing to inner guilt of cheating the poor rural folks. In media we have very few people who understands the financial implications of such moves. (For example, inspite of admission by RBI in Orissa HC about loss of Rs32,000 crores in derivative transactions and outflow of such amount abroad, except DNA and one or two other newspapers, no body has followed up the story. When I discuss this issue with some of media persons, they are not able to make head and tail of issues relating to derivative deals). The issue of cartelization of interest rate in saving banks is also serious issue and can engulf all PS Banks if some NGO or other organizations take up the issue at the right forums like Competition Commission of India (CCI). I know number of my banking fraternity may not like this discussion, but I am not a pigeon who will prefer to close his eyes rather than fly at the right time, when cat's is around you. This is a wake up call for CMDs' of PS Banks.
What is Cartelization ? Is Cartelization Illegal?
Let us first understand, what is cartelization, as number of readers may not be aware of this. A cartel is a sort of agreement among competing firms where they agree on matters like price fixing, total industry output, market share, allocation of territories etc. The aim of such collusion (also called cartel agreement) is to increase individual members' profits by reducing competition.
In other words, cartelization means a group of industry participants coming together to fix pricing of products and services. This works against the interests of consumers. However, when prices are controlled by the government under a law, it is not called cartelization, but if price control is removed and enterprises continue to come together to fix prices, etc., they are open to the charge of cartelization. Cartelization is a serious violation of the competition law, and is liable to heavy penalties.
Are there any cases where heavy penalties have been fixed for cartelization in India?
Yes, a few weeks back, the CCI pulled up 11 cement companies for forming a cartel and penalized them with a fines of Rs.6,300 crores. The Commission asked the companies to pay up 50% of their FY10 profits as penalty. These companies have been advised to desist from cartelization or else face more penalties in future. This case of cartelization was mainly fought by 74 year old, Mr , Dhruvkumar Lallubhai Desai for six years against the strong lobby of cement manufacturers like ACC, Ambuja Cement, Jaypee Cement, JK Cement etc.
What is the issue of cartelization in PS Banks ? How can one prove that PS Banks are looting the poor / rural masses through cartelization?
We are well aware that the rate of interest in Saving Bank accounts were regulated till October 2011 when RBI decided to de-regulate the same. Till October, 2011, all banks in India (public sector as well as private sector banks) were statutorily required to pay only 4% on Saving Bank accounts across India. Then in October 2011, RBI decided to deregulate the same. Thus, Saving Bank rate of interest which was earlier controlled by RBI was set free and individual banks started fixing their own of rate of interest. Just after the announcement of deregulation, Yes Bank, a private bank, hiked the rate of interest on saving bank deposits to 7%. Some other private banks too followed and they started paying 5 to 6% p.a.
However, none of the Public Sector Banks changed the Saving Bank interest rates and till date continue to pay @ 4%. RBI had expected that bigger banks will take a lead and general customer will benefit from the deregulation. However, fearing that their margins will shrink, PS Banks have entered into an unwritten agreement and decided not to hike rate of interest as they have hardly any competition from private sector banks in rural and semi urban areas, and to some extent even in big cities.
In a surprise statement towards the end of October 2011, SBI chairman Pratip Chaudhuri said "We would not be the first mover." Similarly, Kamath CMD of PNB (time and again being claimed to be No 1 bank) said "PNB will take a call on raising savings bank rates after looking at market reaction and is yet to decide on a timeline for that". Instead of taking a lead, the CMD of largest PS Bank wants to watch market reaction ? Was he looking towards SBI or private sector ? Similarly, in the first week of November, 2011, A Krishna Kumar, managing director, State Bank of India, told the press “Public sector banks are not in a hurry to raise rates because the savings deposit balance remains stable. We don't expect migration of customers in numbers because of a difference in rates. A few customers in metros may switch banks but we have many branches in rural areas, where no other bank is present.
When I read such statements from people who are considered as stalwarts of Indian banking, I feel pity about their knowledge of law and vision for their respective banks. The above were statements from the so called visionary of Indian Banking industry and heading the largest PS Banks. SBI says "it will not be the first mover". Does SBI wants PSB or Dena Bank to take lead. PNB says it will watch the market. Are SBI and PNB like banks headed by Leaders or by sheeps who always look towards other and are ready to follow and jump into river. The above statements have appeared in the newspapers and can be searched by anyone through Google. Similar statements were issued by top management of other major PS banks. Are above statements not proof of cartelization by PS Banks ? Why CCI is not taking a suo motto note of these statements?
I know that some CMDs / EDs will like to dismiss this issue by saying that even raising of interest rates, the rural customers will be able to get Rs. 200 to Rs. 500 extra, which is a small amount. But I will like to remind that in India we have cut of Rs32 as the poverty line.
The statements of CMDs of PS Banks clearly indicates that they are in no mood to squeeze their profits and offer the rural and semi urban customers the benefits of deregulation as those poor customers have no alternative but to continue their banking with PS Banks as private banks do not have branches in rural and semi urban areas. Is this not a cartelization ? PS Banks are cheating the poor rural and semi urban customers and CMDs of PS Banks openly say that they will not pay market related rate of interest to rural customers as they do not have any competition in those segments. Great statements by the top brass of the Indian banking industry.
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The worst part of this whole episode is that Government and CMDs of these PS Banks keep on beating drums that they are pro-poor and work for upliftment of rural folks. Do they want to increase their margins by cheating poor rural folks in the name of "Financial Inclusion". Even eminent statisticians like K C Chakravarty, presently DG of RBI, who considers himself to be the biggest crusader of Financial Inclusion, has never chided the CMDs of PS Banks on this issue. Why ? Merely because, if PS Banks are asked to pay market related rate of interest of 7%, they will be forced to charge higher rate of interest from industrialists to maintain even the margins. Does some people have hidden agenda like that of Britishers who extended railways merely to earn higher profits. Now Financial Inclusion is being shown as panacea for all the financial ills of our rural India.
In the given circumstances what we need is another Dhruvkumar Lallubhai Desai for watching the interests of rural customers who are being cheated by cartelization of PS Banks.
However, I have a ray of hope in this darkness. In the first week of July 2012, RBI Governor, Mr. D Subbarao said 'seven relatively small private banks have raised the rate of interest in it and are expected to improve their share of this market segment'. He was also severally critical that big banks have still to respond to this call.
However, it will not be easy call for CMDs of PS banks as they are in the habit of adopting easy going methods and want that their tenure should be smooth. They are least bothered about the future of the banks. In a bank like PNB, whose Saving Bank deposits are over Rs 1 lakh crore, an increase of 2% in Saving Bank rates will hit profits by Rs. 2000 crores annually. SBI will still be bigger loser. Which CMD will like to give up free profits so easily. Therefore, poor customers in rural areas will continue to suffer and industrialists who actually pay bribes to top management will continue to enjoy big ticket loans at low rate of interest.
Let PS Banks realise the illegality in their actions or else Courts may officially declare that they are cheating the rural poor people. That will be a real blot on the image of PS Banks. I wonder whether CMDs will be briefed by some up right bankers at the risk of being pulled up (as I was during my service !! ). I also wonder whether CMDs of these large PS Banks will be able to appreciate the immediate need for taking the appropriate steps. I wish some top media persons follow up this by taking a clue from this article.