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Is it ok to ask banks to cut rates?
August 09, 2006
The finance ministry's letter was unfortunate, but it is also true there is no transparency in how rates are fixed and the spread is also too high.
K V Krishnamurthy
Former chairman, Bank of India
The advocates of democracy, liberalisation and privatisation are slowly becoming dictators and autocrats. Manmohan Singh's financial sector reforms and efforts to free the country from the Control Raj made the world look at India seriously and respectfully.
Finance Minister P Chidambaram's meetings with the boards and staff of PSU banks advocating autonomy, independence, corporate governance, bank mergers, and so on
clearly sent signals of a clear vision and focus to make the institutions vibrant. But once again, it is becoming loud and clear that political interests are supreme to the interests of independent stable financial institutions.
The recent directive of the finance ministry to PSU banks only, on fixing lending rates, is like a person directing the neighbour to control his spouse.
Instead of managing public debts, corruption, price rise, and so on, the government is doing what it shouldn't -- micro-management. Many leading public sector banks have lost their identity of public sector. The government is like any other shareholder, although the single largest shareholder. This does not give it the right to treat it as their private empire.
Everyone thought that the government is serious about corporate governance. With the set of people on the boards of banks consisting of their selected and appointed chairmen and executive directors, government and RBI nominees and other political appointees as directors, the government wants to manipulate the system to suit its best political interests, which may not necessarily make commercial sense.
When the entire bunch of CMDs of PSU banks will hail the ministry's directives as "historic", the private sector banks will laugh. Sometimes, one wonders whether such directives are clear strategies to weaken the so called PSUs to bring them to the brink of disaster and make them a candidate for merger or sale.
The government and the regulator have every right to decide the policies and system changes. What is not fair is the discrimination. If any such policy or initiative is really in the nation's interest, then the directive should go to all financial institutions.
Acting surreptitiously, manipulating the gullible, abusing authority and misusing positions and discriminations are all undesirable acts and the law-enforcing government should not be the law breaker.
It is not fair to treat private and foreign banks as the privileged ones and PSU banks as the government's private empire. A healthy financial sector is the backbone of any country. It is not fair to destroy and play with it and make it bleed. The image and rating is extremely important in the financial world.
If the ministry's action weakens the system, then the Moody's might go moody and the Standards will rate us "poor". Is it not time to change the attitude?
K C Chakrabarty
CMD, Indian Bank
There has been widespread criticism about the finance ministry's move. Shareholders' concerns must be addressed by the management or board. In case of PSU banks, the government is the majority shareholder. So what's wrong with such a directive?
How can the majority shareholders' advise be questioned under the guise of autonomy? It's commendable that the finance ministry has dealt the issue in a transparent manner.
In the entire debate on the rate rise, some of the critical issues have not been analysed in the right perspective. First, the pricing of deposits and credit and other services lacks transparency in the majority of banks and the decision on such issues does not appear to be always information-based.
In fact, for all banks, the PLR is at least 200 basis points higher than their average interest rates on advances. Even though cost structure of banks is not identical, their interest rates are! The problem is further accentuated by the fact that for PSU banks, the basic philosophy and concerns are generally volume-based and not profit-based.
In such a situation, any decision on PLR for state-owned banks will definitely create some concerns in the minds of the policymakers.
This is particularly so if we consider the fact that when the interest rates were coming down, the benefit of such reduction has not been uniformly transferred to all sections of customers. Lack of transparency of pricing decisions, irrelevance of PLR and the possibility of passing on the burden of incremental PLR to the less affluent section of society in an aggressive manner are the basic concerns of the government.
Interest rates in India are not market driven as yet and the market has not achieved the desired level of maturity in terms of the pricing of banking assets and liabilities. In fact, in a free and matured market, once the policy rates are changed, all rates are automatically changed and there is no debate on such developments.
In our case, interest rates for assets and liabilities are not totally liberated. In fact, rates of interest for about 50 per cent of the deposits portfolio are either partly or fully regulated.
Similarly, interest rates on a substantial part of advances is regulated either through regulation or through policy intervention. In such a situation, it is difficult to achieve the objective of total freedom in respect of interest rates on advances. The cost- and risk-based pricing mechanism is yet to take root in many financial institutions.
As long as interest rates are not fully liberated, in our journey towards fully deregulated interest rate regime, policy-based interventions cannot be avoided. In fact, to protect the interest of the less-privileged sections of the society and retail customers, such interventions in any civic society are desirable.