Spotlight
New Delhi, 16 June 2018
Banking Crisis
PRIVATISATION NO ANSWER
By Moin Qazi
Famous investment leader Warren Buffett said,
“It’s only when the tide goes out that you realise who has been swimming naked”.
When the banking system hit rocks, the tide turned and the naked were caught
disrobed.
Similarly, sometimes it takes a pitch-black
economy to reveal who and what in the financial firmament shines. It is only
when darkness falls that one can see stars twinkle. The moonlight coming from an
otherwise bleak financial world has been made possible thanks to honest
taxpayers, who are transfusing precious blood to bleeding banks.
Undeniably, the current crisis in India’s banking sector has
led to calls for privatisation of public sector banks (PSB). However, private banks
are no paragons of great virtue. Moreover, faithful advocates of privatization
are ill-informed of the real issues. The huge crowds that throng PSBs and put-up
with various inconveniences indicate the enormous faith the public has in them.
Consequently, the challenge today does not involve providing
ultra-sophisticated banking to 10% upper crust, instead to offer basic
financial services to 90% who might not be a great revenue source to banks. Consider,
almost all Government pensioners bank exclusively with PSBs.
Pertinently, PSBs have played a big role in financial
inclusion and been the Government’s backbone of its socio-economic agenda. Particularly
in rural areas, where its role is not confined only to banking, instead it encompasses
a holistic developmental agenda being the one-stop shop for the local rural
populace’s financial needs including insurance, financial literacy, remittance
and receipt of welfare subsidies and grants etc.
The Government’s socio-economic programmes have to use this
banking conduit for funds movement. Those who talk of privatisation should
visit remote branches of public banks, where managers live at great risk to
personal lives, mentoring the locals in financial literacy, technical, business
and agricultural literacy.
Remember, PSBs revolutionised rural India during the social
banking 1970 era wherein expansion of bank branches was particularly
noteworthy. It rose from 8,261 in 1969 to a whopping 65,521 in 2000 and households
accessing institutional credit rose from 32% to 61.2% between 1971-1981.
It was this emphasis on those excluded from the formal
financial stream which resulted in a slew of measures in finance driving bankers
into the battle against poverty. Alas, as we grapple with massive problems
confronting struggling masses, ignoble billionaires regularly ride to public
troughs.
Politicians are equally guilty of undermining banks integrity.
They stack decks with populist sops using banks as spigots for burnishing their
election credentials. This is apart from huge loans they forced banks to shovel
to their buddies. Shockingly, the proportion of dodgy loans, involving borrowers
not making interest payments or repaying principals has surged to highest levels
among the world’s largest economies.
Questionably, why should ordinary people bear the burden of
fat cats who are gleefully and remorselessly winnowing scarce bank capital? Wherein, the Government gooses these banks
with spruced balanced sheets to make them lend again. Ironically, instead of
being chastised, industrialists are lauded as captains of industry and adorn
glorified positions in industry associations.
India’s pile of soured loans, whose value degrades like an
unstable isotope, is a classic example of how powerful and politically
influential tycoons undermine rules to secure credit and then default on it.
The huge losses posted by banks and desperate attempts by Government to
detoxify balance sheets shows how difficult it is for rescue plans to deliver.
When borrowers become insolvent, their loans are added to an existing
mountain of debt.
Each time this happens, banks have to make heavy
write-downs, ploughing dud loans like rotten potatoes, ultimately choking the
credit line. To keep these going, the Government regularly keeps injecting
capital. Scandalously, 13 PSBs reported combined losses of $8.6 billion
this March including $6.5 billion during the last quarter while non-performing
loans have surged nearly a fifth from end-December levels.
Most big defaulters have money to employ legal experts who
play the judicial system --- it is here where law flounders notwithstanding draconian
laws which are ineffective against powerful dodgers. New laws are made when
existing ones are adequate, needing more teeth for results. We promptly condemn
waivers for poor farmers but lack courage to tame big fishes because they have
enormous clout.
Banks are aggressive in turning mortgage defaulters on the
road whereby indebted farmers commit suicide out of humiliation, salaried class
rarely default but are chased for small unpaid debts. But bankers are helpless towards
malfeasant promoters of big businesses with scammers and swindlers outfoxing
the system.
Bank’s safeguard systems are buttressed by State
institutions like regulators, bankruptcy procedures and courts. But what
finally underpins security of the whole ecosystem is trust. The RBI no longer is
the financial seer it was lionised for insulating the economy from the Lehman
2008 turmoil.
Scams are products of greed and immorality. But abuse of the
financial system is because of system’s weaknesses. In an age which heralds
technology as the silver bullet, we shouldn’t overlook the most important
source of competitive advantage: People as compliance and controls are
dependent on them running it. A process is only as good as the people managing
it. Consequently, agile auditors will have to struggle to stop managers who are
determined to hide their dirty laundry.
The reason for protecting borrowers against creditors is
much-reviled moneylenders who loom large on our collective psyche. The scenario
is now different: Big borrowers are unlike helpless farmers and lenders not
cruel sahukars but public banks. When
businessmen default, they rob each one of us taxpayers. In many cases, precious
and scarce bank funds are used to finance opulent lifestyles of the rich.
This turmoil calls for improvising risk management models which
create an illusory security sense. However, models and machines cannot act as
surrogate for human expertise. Money management is no more a genteel world.
Bankers will have to bring hard-boiled traders’ instincts to make it secure. Prophetically
John Keynes wrote in 1913: “In a country dangerous for banking as India, (it)
should be conducted on the safest possible principles”. Our departure from
time-honoured metrics has come at a heavy cost.
Today the financial sector is at crossroads wherein its
leaders will have to use their financial alchemy to overcome its most challenging
moment. Perhaps, Rudyard Kipling’s advice can be guide: “If you can trust
yourself when all men doubt you, make allowance for their doubting too.” Of course, in the long run, PSBs are not an answer unless
there is drastic change in accountability. Else, the people will keep paying
for its blunders.
Asserted ex-RBI Governor Raghuram Rajan, “A crisis offers us
a rare window of opportunity to implement reforms --- it is a terrible thing to
waste. The temptation will be to over-regulate as we have done in the past.
This creates its own perverse dynamic… Perhaps rather than swinging maniacally
between too much and too little regulation, it would be better to think of
cycle-proof regulation. ” ----- INFA
(Copyright, India News & Feature Alliance)
|