Financial Daily from THE HINDU group of publications
Saturday, Sep 04, 2004
Money & Banking
RBI & Other Central Banks
Columns - On Mint Street
A weak-kneed response from RBI
IT is not a particularly pleasing sight to see the Reserve Bank of India go weak in the knees and rescue banks from possible losses on their gilt investments.
One thought the RBI was made of sterner stuff. For three years banks made massive trading profits, did not share the booty by cutting lending rates and now refuse to up the wages of their working force.
In the last three years, commercial banks, specially nationalised banks, have behaved most irrationally and the recent move of the RBI will only encourage them. Banks have to mark to market their portfolio and build an investment fluctuation reserve going by extant RBI orders. Seemingly they have done nothing as otherwise they would not be begging for succour. Is it not every bank's job to run its investment book and take gains and losses as a part of the game?
No institution underwrites the losses of brokers in the share or debt markets and why then banks? Where was the hurry when the RBI in its press note of September 2, 2004 admits to setting up an internal group to review the existing guidelines, with the Report of the Group to be discussed in the Standing Committee on Financial Regulation? Yields have gone up and should be going up further with the rate of inflation as of August 21 being 8.17 per cent.
It does not follow that inflation rate may not dip or that yields may not fall. In the first quarter most banks have mentioned shrinking trading profits and they have to blame themselves. Bank chairmen should be sacked for needlessly playing around with public deposits.
Another three quarters are to go for the current year to end and the RBI could have waited at least till March 2005 before taking action. Will the RBI now relax provisioning norms to help banks show nil NPAs on their balance sheets? At every meet, top RBI officials exhort bankers to tighten supervision norms with Basel II hovering in the horizon and do not find anything amiss in the bonanza offered on investments.
It will take some time for the latest Report on Trend and Progress of Banking in India to be out. But it may be worth the while to go back to the last Report 2002-03 which has a box styled "Is Treasury income a major source of bank income?"
The share of profits from securities trading varied across bank groups. Old private sector banks depended heavily on securities trading which contributed over 50 per cent of their operating profits in 2001-02 and 2002-03. Foreign banks, which booked profits over Rs 1,000 crore in 2001-02 showed a dip to Rs 504 crore to form only 13.5 per cent of their operating profits.
The SBI group booked higher profits of Rs 2,675 crore from securities trading in 2002-03 as against Rs 1,034 crore in the previous year. Yet its share in operating profits was below 25 per cent, lower than the system average of 32.6 per cent. At the bank level, while 27 banks (accounting for about 14 per cent of total assets of the banking system) earned more than 50 per cent of their profits from securities trading, 16 banks (mostly small foreign banks whose combined share in total assets is less than 0.5 per cent) had not made any profits.
For another 10 banks, trading profits were below 15 per cent of their operating profits. Some 38 banks earned more than Rs 100 crore each from trading. This trend should hold for 2003-04. Despite several warnings from the RBI that yields could go up, banks played the markets and now have been rewarded for their irresponsibility.
Why don't the banks show similar enthusiasm funding farmers or the small and medium scale enterprises? Has the RBI taken a stand on this issue as the job of banks is lending and not trading in shares or government securities?
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