Tuesday, December 25, 2012

Future of Public Sector Banks

 Risky futures that banks Should Avoid
Finance Minister sometimes talk of giving permission for opening of more and more new banks and some other times talk of consolidation of banks to compete with International Banks. He sometimes advises banks to concentrate on core banking activities and some other time tell them to trade in commodity future which is not core banking activity.
It is Pathetic that current sickness of  public sector banks caused by huge bad assets has not opened the eyes and ears of FM. Every year Government has to infuse capital in banks to keep them in good condition. Neither small banks like Vijya Bank nor big banks like SBI or PNB are able to save their profitability and safeguard their assets and capital .It is only by manipulation and fraudulent method or by relaxation given in CRR that these banks book little profit and that too by keeping reduced provision coverage ratio below benchmark fixed by RBI .
Banks officials firstly lend to unscrupulous borrowers under political pressure and then write them off or enter into compromise settlement with recalcitrant and willful defaulters under pressure of the government . Both ways they are weakening not only the banks but adversely affecting the interest of investors ,customers and that of working employees too.
Health of banks is moving from bad to worse and they are surviving the crisis not at their own but mostly by ventilator provided to them by GOI. Complete lack of control , bad governance , bad Human Resource Policy,  weak legal system  and profuse political exploitation have already ruined the Public sector banks. Now FM is trying to further add fuel to fire by advising banks to trade in commodity future.
Finance Minister advised bank in last few days to focus on their core banking business and try to minimize their involvement in non banking business like insurance , mutual fund ,portfolio management etc. It is well known to all that after imposing non banking business targets on banks by government of India banks in general has already reduced lending to core sector of farming and industrial development which has resulted in poor GDP growth.

Not only this in want of adequate manpower in branches , bank officials are unable to attend customer service related to their core business in a satisfactory  way. This has led to exodus of good customers from these public sector banks to private banks. It is important to note here that private banks have provided separate and adequate manpower for banking and non banking businesses  whereas PSBs are forced to perform both banking and non banking business with one or two staff in most of towns.

It is further painful and astonishing too that the same FM who advises banks to focus on their core activity of lending and accepting deposit are advising banks to trade in Future in Commodities.

Is he bent upon spoiling the future of bank? There is an old proverb "A future is enough to spoil the future of an individual share trader".

Banker who are adequately trained and who do not have enough skill to do simple banking activity , they cannot be expected to hedge credit risk by buying commodity future as envisaged by FM while suggesting banks to trade in Commodity future. 

It will not be wrong to say here it is only after introduction of commodity trading in India, Consumers of the country has to face the pain of relentless price rise and inflation has gone beyond control despite all steps taken by clever officials of Reserve Bank of India.

Last but not the least , When profit of banks will be adversely affected by rising bad assets and through losses in future trading , it will ultimately be bank staff who will have to bear the brunt of bad policies, It is staff whose wage are not rising at par with that of central government employees or state government employees .Poor wage structure  of bank employees has also played negative role in maintaining health of banks , poor customer service and poor growth in bank's business and finally led to  exodus of good performing staff and rise in attrition rate compared to that in private banks.

Both Finmin and RBI want banks to shed their non-core business ( Economic Times )

The Finance Ministry's eagerness to see banks shed their non-core business is not surprising. With Basel III norms kicking in from January 1, 2013, banks will need to not merely conserve their capital base, but beef it up to meet the additional requirements laid down under Basel III. That's a tough call even for private sector banks. But for public sector banks (PSBs) there is an additional challenge. Since the government is unwilling to countenance its stake in these banks falling to less than 51%, the option of tapping the market is virtually ruled out. Unless the government chips in to ensure it remains the majority shareholder, post-issue . But is that the best use of taxpayer money in a scenario where there are far more pressing claims on the exchequer — roads, primary schools, hospitals, to name just a few — and the fisc is already stretched. As things stand, the government seems unwilling to let economics triumph over politics and give up its fixation about majority ownership in PSBs. That being the case, the next best alternative is to conserve capital by hiving off non-core business. 

This fits in with the Reserve Bank of India's (RBI) own thinking on ring-fencing the banking business. This is to ensure that adverse developments in other businesses do not impact the bank's balance sheet. Today, many commercial banks, including PSBs have diversified into related areas such as investment bankingmutual fundsinsurance, broking, custodial business and primary dealerships. Such a model is fraught with risks. As the collapse of Lehman Bros, an investment ban

k has shown, non-bank businesses can also become large enough and inter-connected enough with the banking business as to have adverse systemic consequences in case of failure. This is the reason why the RBI, in its draft guidelines for new bank licences, has urged a different organisational structure for banks. Under the proposed structure, rather than banks spawning subsidiaries for related activities, these activities would be done by subsidiaries of a holding company that would also have a subsidiary banking company. Now for once the finance ministry and the RBI would seem to be on the same page.

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