By Moin Qazi
Famous investment leader Warren Buffett said, “It’s only when the tide goes out that you realise who has been swimming naked”. When the banking system hit rocks, the tide turned and the naked were caught disrobed.
Similarly, sometimes it takes a pitch-black economy to reveal who and what in the financial firmament shines. It is only when darkness falls that one can see stars twinkle. The moonlight coming from an otherwise bleak financial world has been made possible thanks to honest taxpayers, who are transfusing precious blood to bleeding banks.
Undeniably, the current crisis in India’s banking sector has led to calls for privatisation of public sector banks (PSB). However, private banks are no paragons of great virtue. Moreover, faithful advocates of privatization are ill-informed of the real issues. The huge crowds that throng PSBs and put-up with various inconveniences indicate the enormous faith the public has in them.
Consequently, the challenge today does not involve providing ultra-sophisticated banking to 10% upper crust, instead to offer basic financial services to 90% who might not be a great revenue source to banks. Consider, almost all Government pensioners bank exclusively with PSBs.
Pertinently, PSBs have played a big role in financial inclusion and been the Government’s backbone of its socio-economic agenda. Particularly in rural areas, where its role is not confined only to banking, instead it encompasses a holistic developmental agenda being the one-stop shop for the local rural populace’s financial needs including insurance, financial literacy, remittance and receipt of welfare subsidies and grants etc.
The Government’s socio-economic programmes have to use this banking conduit for funds movement. Those who talk of privatisation should visit remote branches of public banks, where managers live at great risk to personal lives, mentoring the locals in financial literacy, technical, business and agricultural literacy.
Remember, PSBs revolutionised rural India during the social banking 1970 era wherein expansion of bank branches was particularly noteworthy. It rose from 8,261 in 1969 to a whopping 65,521 in 2000 and households accessing institutional credit rose from 32% to 61.2% between 1971-1981.
It was this emphasis on those excluded from the formal financial stream which resulted in a slew of measures in finance driving bankers into the battle against poverty. Alas, as we grapple with massive problems confronting struggling masses, ignoble billionaires regularly ride to public troughs.
Politicians are equally guilty of undermining banks integrity. They stack decks with populist sops using banks as spigots for burnishing their election credentials. This is apart from huge loans they forced banks to shovel to their buddies. Shockingly, the proportion of dodgy loans, involving borrowers not making interest payments or repaying principals has surged to highest levels among the world’s largest economies.
Questionably, why should ordinary people bear the burden of fat cats who are gleefully and remorselessly winnowing scarce bank capital? Wherein, the Government gooses these banks with spruced balanced sheets to make them lend again. Ironically, instead of being chastised, industrialists are lauded as captains of industry and adorn glorified positions in industry associations.
India’s pile of soured loans, whose value degrades like an unstable isotope, is a classic example of how powerful and politically influential tycoons undermine rules to secure credit and then default on it. The huge losses posted by banks and desperate attempts by Government to detoxify balance sheets shows how difficult it is for rescue plans to deliver. When borrowers become insolvent, their loans are added to an existing mountain of debt.
Each time this happens, banks have to make heavy write-downs, ploughing dud loans like rotten potatoes, ultimately choking the credit line. To keep these going, the Government regularly keeps injecting capital. Scandalously, 13 PSBs reported combined losses of $8.6 billion this March including $6.5 billion during the last quarter while non-performing loans have surged nearly a fifth from end-December levels.
Most big defaulters have money to employ legal experts who play the judicial system — it is here where law flounders notwithstanding draconian laws which are ineffective against powerful dodgers. New laws are made when existing ones are adequate, needing more teeth for results. We promptly condemn waivers for poor farmers but lack courage to tame big fishes because they have enormous clout.
Banks are aggressive in turning mortgage defaulters on the road whereby indebted farmers commit suicide out of humiliation, salaried class rarely default but are chased for small unpaid debts. But bankers are helpless towards malfeasant promoters of big businesses with scammers and swindlers outfoxing the system.
Bank’s safeguard systems are buttressed by State institutions like regulators, bankruptcy procedures and courts. But what finally underpins security of the whole ecosystem is trust. The RBI no longer is the financial seer it was lionised for insulating the economy from the Lehman 2008 turmoil.
Scams are products of greed and immorality. But abuse of the financial system is because of system’s weaknesses. In an age which heralds technology as the silver bullet, we shouldn’t overlook the most important source of competitive advantage: People as compliance and controls are dependent on them running it. A process is only as good as the people managing it. Consequently, agile auditors will have to struggle to stop managers who are determined to hide their dirty laundry.
The reason for protecting borrowers against creditors is much-reviled moneylenders who loom large on our collective psyche. The scenario is now different: Big borrowers are unlike helpless farmers and lenders not cruel sahukars but public banks. When businessmen default, they rob each one of us taxpayers. In many cases, precious and scarce bank funds are used to finance opulent lifestyles of the rich.
This turmoil calls for improvising risk management models which create an illusory security sense. However, models and machines cannot act as surrogate for human expertise. Money management is no more a genteel world. Bankers will have to bring hard-boiled traders’ instincts to make it secure. Prophetically John Keynes wrote in 1913: “In a country dangerous for banking as India, (it) should be conducted on the safest possible principles”. Our departure from time-honoured metrics has come at a heavy cost.
Today the financial sector is at crossroads wherein its leaders will have to use their financial alchemy to overcome its most challenging moment. Perhaps, Rudyard Kipling’s advice can be guide: “If you can trust yourself when all men doubt you, make allowance for their doubting too.” Of course, in the long run, PSBs are not an answer unless there is drastic change in accountability. Else, the people will keep paying for its blunders.
Asserted ex-RBI Governor Raghuram Rajan, “A crisis offers us a rare window of opportunity to implement reforms — it is a terrible thing to waste. The temptation will be to over-regulate as we have done in the past. This creates its own perverse dynamic… Perhaps rather than swinging maniacally between too much and too little regulation, it would be better to think of cycle-proof regulation. ” —– INFA