Root cause of crisis in banks

Government of India has been cutting interest rate frequently to combat the current liquidity crisis. CRR has been reduced from 9% to 5.5% which altogether injected roughly 150000 crores into banks which banks had deposited earlier in RBI free of Interest. This will not only increase liquidity in banks but also increase their profitability. In addition to that RBI has reduced Repo rate by 1.5% during last one month and now they have also reduced SLR by 1%.As such Banks can now acquire fund in case of need from RBI at lower rate of interest of 7% and further they have got additional fund by cut in SLR to lend in market for Growth. This is the expected result of fast changing scenario in banking in India as also in other parts of the world.

Inspite of all, FII's are going out of the country and dollars are flowing out. Besides inflow of dollars has not been as per expectation of the government despite relaxation in ECB norms, removal of restriction on PN notes which was imposed in the year 2007 in fear of terror fund and apprehended manipulation in stock market.

Liquidity problem in banks has been increasing and going beyond control. Profit of several banks has seen erosion in the last two quarters and many PSU banks has been identified by our learned finance Minister for infusion of more capital by government to maintain adequate Capital Adequacy Ratio of 12%. There is no doubt that even such situation continues for a longer period it will expose the real problem of not only liquidity but also that of solvency.

I have been writing since long (though not expert in writing as per expectation of media) that real problem in banks is non- repayment of loan by borrowers, over financing by banks without ensuring recovery of loans, unwarranted competition in financing in retail sector which is unproductive, avoidable interest rate competition, tradition of writing off of bad loans resulting in bad culture, increasing proportion of bad loans but concealment of the same to present rosy picture, vote bank policies of the government, lack of proper monitoring by bank officers due to heavy workload, window dressing in deposits and advances, shifting of NPA from one financial institute to other just to exhibit lesser percentage of net NPA and over spending by bankers in technological upgradation.

Government is not interested to ensure timely repayment of loan. Bankers feel helpless when borrower willfully defaults in repayment and Courts and police authorities also fail to ensure repayment of loan. Politicians always try to please their voters and for this purpose they put pressure on banks for more and more lending only without taking even collateral securities and even without taking care of availability of fund.

Bankers treat it convenient to go for retail lending even if the same is not growth oriented and which simply enhances the living style of rich segment of borrower and not at all helps in desirable growth in production. To add fuel to fire politicians prefer writing off of the dues which are not being repaid by borrowers to banks. And this is the reason that money lent by banks is blocked in the hands of big borrowers as small as retail borrowers.

Even bankers has now stopped taking care of bad loans and they take it convenient and comfortable to conceal entire bad loans so that Ministers are happy, balance sheet appears attractive and they continue to shine before the investors, media, global investors and all who are directly or indirectly concerned with the health of the banks. How long such falsification of facts will continue? The root cause of present liquidity crisis is that banks are not getting repayment from borrowers and hence they have to depend on inflows of fund either from domestic or foreign market or help from RBI.

The fact is that crisis of liquidity does not appear to ease and calm down. Because the main cause of problem partly lies in global crisis and partly in our own system promoted and protected by vote bank politics of our ruling party. And rulers are simply ignoring the domestic causes of the current problem and concentrate only on global causes when they talk in public about the crisis in banks. Even media people are of the impression that USA is the country which has triggered present crisis in the entire world.

Unfortunately even when some smart bankers or expert economists point out the same during their personal meeting with FM or PM or RBI Governor or any other key person in the government they are sidelined and given no importance .Yesmanism culture prevalent in the system also keeps good officers away from the mainstream not only in the government but also in banks.

After all election for Parliament is at hand and the very survival of the UPA government is at stake and hence they cannot take such steps which may create resentment in voters.

Bitter truth of the system has to come out sooner or later and the government has to understand the real reason and cure the main disease. Otherwise solvency problem in banks in India will be more severe and devastating than what is happening in US or other countries. Our banks are sitting of explosives of Bad assets and in future there will acute shortage of good assets, erosion in capital and last but not the least problem of solvency which is visible now also to some extent.

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