Top officials of each Bank are committing blunder after blunder by cutting interest rate under pressure of Ministry without caring for bottom line of the bank, load accruing on bank due to high interest rate deposits already issued and risk factor involved due to unavoidable creation of bad loans . They used to commit same mistake under UPA regime when Mr. P. Chidambram used to be Finance Minister.
Here I would like to mention that during Base Rate regime , banks in general used to ignore fundamentals of banks before going for cut in interest rate only to please the then key ministers related to banking industry. When Mr. Raghuram Rajan became head of RBI, he understood the root cause of falling health of banks and tried to fix a methodology for fixing interest rate and the system was termed as MCLR ( marginal cost of funds-based lending rate ). It appears to me that management of some banks have again started playing with methodology advocated by RBI for taking decision on MCLR each month and this is why some banks have announced sharp cut in interest rate after demonatisation.
To Know About MCLR Please Click On This LInk
What is Marginal Cost Based Lending Rate
I am unable to understand how a seniormost , experienced and knowledgeable person like Mr. K. C. Chakravorty can advocate cut in floating interest rate for existing borrowers who have not opted for MCLR based interest rate . SBI has given an opportunity to all existing borrower to opt for MCLR based interest rate after paying certain fee. I am astonished how an ex-banker who had sitted on top post during his post in banks and who also worked in RBI can suggest policy which is detrimental to health of banks.
It has become an habit of all political leaders to demand a rate cut without taking into account the profitability and sustainability of banks . And it becomes more painful and disheartening for bankers in general and workforce in particular when same team of politicians accuse management of bank specially ground level workers not top officials or politicians when the bank incurs loss or faces sharp erosion in profitability.
It has to be kept in mind that role of repo rate in calculation and fixation of MCLR for any bank is well defined by RBI and it has very much limited role in decision of MCLR and the major role is played by cost of deposit in reduction of interest rate for borrowers. Once deposit is accepted at high rate for say five years , banks has to pay high rate to depositors even if the rate of interest is reduced due to MCLR policy or under pressure of politicians ruling the country. In this way lending rates are reduced for new borrowers and after payment of certain fee for existing borrowers whereas deposit rates cannot be reduced for deposit already accepted . This results in Net interest margin of the bank and reduces its capacity to sustain the loss caused by growing bad loans . Obviously risk bearing capacity is greatly reduced by such mismatch in interest rate.
Unfortunately top management of Public sector banks give more value to their relation with top ranked political leaders who rule this country or give value to their own career, own future and own wealth . They give least value to intrinsic value and future health of the bank they serve.
Top officials of public sector banks are least bothered that if banks suffer loss or faces erosion in profitability , their capacity to give a pay hike to workforce also gets depleted. Obviously the main sufferers of wrong decisions taken by top officials of the bank and that of faulty policies of the government will be the working employees of the bank who are denied respectable wage hike and who has to face the anger of ruling party and politicians when bank's profit goes down and when volume of bad loans goes up to target based lending.
Unfortunately RBI which is supposed to regulate the banking operation, policy , accounting and overall health of the banks are also silent spectators of defective role played by top officials of each bank either under pressure of ministry or in greed of illegal wealth.
I hope , present government will not follow the defective policies and dirty attitude of leaders of past Governments headed by Congress Party which caused each PSB to suffer and which is mainly responsible for sharp rise in bad loans in each PSB. Government has to decide whether they want to run PSB as healthy unity to serve the National priorities or simply use it to distribute charity to their choice group of persons to enlarge their vote bank.
Banks has to and are supposed to serve national interest on priority unlike private banks which are totally profit motivated . But if PSBs are used only for improving vote bank without caring bottom line of the bank, there is no doubt that health of PSB will continue to deteriorate.
Government has no doubt established its good intention by constructing Bureau of Bank Board (BBB) and by appointing Sri Vinod Rai as its head. But one man cannot build a mountain overnight. For success of Public Sector Banks. it is necessary to bring about change in attitude of ruling leaders and then mindset of top officials to ground level workers giving full value to experience, knowledge and skill and no value to flattery and bribery.
It has always to be kept in mind that Banks can lend money at lower rate under pressure only till they survive. If banks collapse, they will not be in a position to lend even at higher rate. Similarly if profitability of banks gets eroded, banks will not be in a position to give attractive pay package to its employees and when employees are unhappy they cannot be fully loyal to their organization.
Bank officers can achieve the target allotted to them by their seniors by manipulation or by sacrificing the rules of lending and without carrying out due deligance of loan seekers . They may get promotion and good posting . But in the long run when the loan assets goes bad , banks suffer largely and government is constrained to infuse capital in such weak banks.
But how long such mismanagement will continue is a million dollar question which a prudent government should ponder over , introspect and answer to tax payers who are also indirectly suffering due to wrong policies and / or faulty execution of good policies of the government. .
I submit below the copy of news item published in the newspaper Hindu Business Line
After having been chided by Finance Ministry officials and then having been reminded by Prime Minister Narendra Modi – in his December 31 address to the nation – about the gains that had accrued to them following the withdrawal of high-value banknotes, banks ended up sharply reducing lending rates in early January.
Following demonetisation, high-value currency notes that had been withdrawn were deposited in banks by account holders, mostly in current and savings accounts. Since most banks offer only a 4 per cent interest rate on savings accounts (no interest is paid on current account deposits), banks’ overall cost of funds came down sharply. So, banks were asked to pass on the benefit of lower costs to the borrowers.
State Bank of India (SBI) reduced its marginal cost of funds-based lending rate (MCLR) by 90 basis points, ICICI Bank by 70 bps, HDFC Bank by up to 90 bps. (100 bps = 1 percentage point.) These rate cuts would lower interest costs for new borrowers. However, existing borrowers may find little to cheer about.
For details click on following link
Link to Hindu Business LIne
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