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.
Nothing is
lost if banks decide not to give large value loans left and right.
2. Cash credit system. A strange loan
delivery system prevelant probably only in this part of the world. A loan which
need not be repaid ever. A credit limit which gets enhanced every year in
practice.
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.