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Monday, May 29, 2017

What is wrong with our banks ?

 another old post from face book
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Indian banks are reporting losses one by one. Almost all of the banks which declared results have gone red. Others are expected to follow suit. In this context the question raised by Supreme Court can no longer be ignored. 

'What is wrong with our banks ?'
 Many things, if not everything.

1. Intermediation.   The old school of thought says banking is taking deposits and giving loans. But it is time to revisit the definition. Where is the need now to accept deposits for giving loans ? There are ample opportunities to avail loans without intermediation of banks. Public issue to crowd funding. What is left out is the unorganised setor, agricultural finance and personal loans which the banks can continue to cater to. These loans are not likely to take the banks down. Unlike the large value corporate loans.
Crux of the matter is that there is no need for the banks to bother too much about their intermediation obligation. Banking needs to be redefined as cash management and financial services. Or funds transfer and authentication / certification services.

2. Cash credit system. A strange loan delivery system prevalent probably only in this part of the world. A loan which need not be repaid ever. A credit limit which gets enhanced every year as an unwritten rule.
And the beauty is that it is considered as a fully secured exposure. Secured in reality only by fancy statements called 'declaration of stocks' delivered to the bank at regular intervals. The only advantage of cash credit exposure today is that sour assets of the banks are artificially kept down.
Cash credit system of loan delivery should be dispensed with. Working capital can be financed if necessary by way of repayable loans . Internal cash generation should fund the working capital needs and no need to depend on bank finance once a company stabilises.

3. High rate of interest. Absolutely baffling is the practice of offering high interest rates to funds parked in banks. Which is the prime excuse for charging high interest rates on loans. Which the borrower can not service easily.
Incidentally it is difficult to appreciate the argument that high interest rate keeps inflation in check. If it is meant to suck out surplus funds from the market, pray, what is the need. Let it remain in the system which will get invested in course of time when the alternate avenue, bank deposit, becomes unattractive.
Reduce rate of interest , to fall in line with rest of the world, if not for any other reason.
 
4. Company as an entity. Separate entity or not company is run by individuals. Who should be responsible personally for the loans availed by the company. Get the directors pledge their personal assets too for the loan liability of their company. In case they are reluctant banks should say no . These are not olden times. They have choice now.

Recovery probably is the most maligned word today. It is simply not worth all the aura. Nothing substantial is going to come to the banks by way of recovery. Except may be put the scare in the minds of bank executives. Conventional wisdom is not likely to find a quick enough solution for the ills of Indian banks. Let us think out of the box. Let us try.