The Hindu Business Line : Financial reforms take a ‘U’ turn

No one keeps count of the meetings of the banks convened by the Government and the RBI. But during the last few years, apparently, most bank chiefs of the public sector banks seem to have spent valuable time in the corridors of the Government and the RBI than in their own offices. One might be tempted to say that the banking system survived only because of the conservative policies, close monitoring and constant guidance of the Government and RBI.

Comparisons some times can be odious and the conclusions hackneyed. Due to the steadfast policy of the US Government of not intervening in the free market, initially a few giants collapsed. The Federal Reserve and the Treasury of the US did hold a few late night meetings with select banks and institutions during the peak crisis period. They made a momentous departure and saved the housing finance biggies Fannie Mae and Freddie Mac and prodded some big banks to take over the troubled ones. To bring back some sanity to the panicky markets, the Government had to assure that they would, if necessary, buy some weak loans from the banks, strengthen their capital and improve the liquidity through huge rescue packages.

The Indian Government had been pumping thousands of crores of rupees for recapitalising many of the insolvent public sector banks, which account for more than 80 per cent of the business. On choosing the path to reforms, the Government even diluted their stake and allowed the banks to raise money from the markets. Dilution beyond 50 per cent, permitting FDI on liberal terms and granting of autonomy to the banks and their boards were on the cards. Independent and knowledgeable professionals were to be inducted in to the boards of the banks. The Government and the RBI tried to push the banks for consolidation to create a few world class banks. The compulsions of the coalition however slowed down the reforms process. Citing the current financial crisis and the evils of free market, now some claim this as a blessing in disguise.

Spirit of the 70s

However, in reality, the return of the spirit of ‘70s is in evidence. The meeting of the bank chiefs with the Finance Minister used to be an annual or half-yearly event focusing discussions on the state of economy, performance, profitability and productivity of banks. Recoveries, NPAs, customer service and technology too figured in the discussions. The complexion of these meetings seems to have undergone a sea change in the recent years, which can’t be attributed to coalition compulsions but political strategies.

What exactly transpires in the meetings necessarily remains confidential but the official briefings throw enough hints that the banks are handed out a lot of dos and don’ts by the major share holder. It appears as though a common board, operating from Delhi, lays down the policies for all the public sector banks. It is not, though, uncommon for the individual banks to be summoned to give a pep talk on any issue.

The banks’ boards continue to be used for dispensing political favours. In the circumstances it would be difficult to gauge the contribution made or the influence exerted by the boards, some of them even truncated, on individual banks’ policies or decisions.

Let us consider the examples of liberalisation of education loans, expansion of credit for the housing sector, sops to the coffee growers and write–off of Rs 70,000 crore of agricultural loans. Banks were not left with any options or choices. There can’t be another view about the need to assist the diligent students who need financial assistance to pursue higher studies or the wisdom of protecting the distressed farmers. Education is a national priority and it is well said that no deserving student should be denied education for want of finance. Agriculture and rural development have to be given due importance for sustained economic growth and to ensure social justice.

The way these socio economic considerations were sought to be maneuvered into political strategies brought back memories of the past. It is difficult at this juncture to quantify the impact on the health of the banks. Signs of distress in the housing sector are visible. Many parents who could afford to educate their children without external aid too opted for loans, thanks to the relatively easy availability and soft terms. A positive explanation is that the parents want their wards to be more responsible and the uncharitable comment is that they see a possibility of write-off of these loans too in the future.

We are now witnessing a scenario where the politicians are openly pressurising the RBI. Reversing decisions on the risk weights or criteria for asset classification of rescheduled loans for realty or housing, just announced by the RBI, meant to fulfil the Government’s desire to increase lending to these sectors, may not be conducive for the banks’ health in the long run.

Arm twisting

Choice of borrowers, quantum of credit and rate of interest are purely operational matters and the prerogative of the banks. Interest rates on deposits or advances are to be deliberated by the individual banks’ asset-liability management committees, considering liquidity needs, cost of funds and operating costs. Arm twisting them in to accepting a uniform diktat makes mockery of the system, not to talk of ‘autonomy’ and a ‘free market democracy’. A Chairman’s comment after the recent meeting that their ‘ALM committee will decide to reduce the rate by 0.50 per cent’, speaks volumes about the process of decision making. He was only proclaiming loudly that a decision had already been taken.

The Prime Minister having declared that the Government is solidly behind the banks and that depositors’ money is safe, no doubt, is an indication that the Government would assume full responsibility for any failures.

These developments leave the regulator’s role of monitoring and supervising the banks in ambiguity. The role is being relegated to the background by the majority owner. And we are conveying a message to the senior professionals in banks responsible for the ALM and risk management functions that they have no role in making important decisions and are redundant.

The ‘melt down’ has lessons for every one in a positive sense. But should we use it as an excuse to push our political agenda?

(The author is the former Managing Director of State Bank of Mysore and is accessible at: murthy @mandavilli.com)