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Indian Top Bankers Lack Knowledge and Fail To Understand A Gentleman’s Signals - They Only Know To Respond to Tough Talking
by
Rajesh Goyal
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About 3˝ years back (September 2011) I have written an article under the heading “ Even PS Banks Are Openly Defying RBI Signals to Control Inflation-Should RBI Not Intervene ?”, which is still available in our archives, wherein I had raised the question of regular defiance of RBI Governor by CMDs of all banks. It appears nothing has changed in these 3˝ years, except that the cycle of interest rate has reversed. At that time, In above article I have clearly indicated as to how CMDs of PS Banks as well as Private Sector banks are not ready to fall in line with the signals being given by RBI Governor at that time to raise the Base Rate to fight the inflation. These CMDs had the guts to show RBI Governor thumbs down. Having failed to make them understand the need of the nation, RBI Governor deregulated Saving Interest rates in October 2011. With this single stroke, he made all the defying banks to run for cover. They are still struggling to come out of that shock as PS bank’s CASA is falling, and banks who took the call to increase their SB interest rates have been successful in increasing their share of CASA. Till date PS banks and big private sector players have failed to read the writing on the wall that SB interest rates too needs to readjusted to market trends.
Now again in 2015, when RBI Governor reduced Repo Rate twice in quick succession and sent signals to CMDs of private as well as public sector banks to reduce their Base Rate, all of them, without exception, ignored him. It seems these top bankers either failed to read the signals of the regulator or their inflated egos led them to believe that RBI Governor is helpless fool and they can do whatever they wish to do. Finally on 7th April, 2015, the day when First Bi-monthly Monetary Policy Statement for 2015-16 was announced by RBI Governor, he made it clear that there will be no further cut as top bankers have failed to follow up with corresponding rate cuts in Base Rates. These bankers were given sufficient time to hold their Asset Liability Committee (ALCO) meetings and realign their Base Rates based on new costs etc. During this period they could have reduced their Deposit Rates to fall in line with the decreasing inflation as per signals given by RBI by reducing Repo Rates. However, no such thing had happened.
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Disgusted with such attitude of CMDs of both public and private sector banks, RBI Governor was forced to show his tough side and pointed out that “Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo,” He dismissed the logic of these CMDS and said it was “nonsense” to assume that cost of funds has not fallen and nudged them to reduce rates. He even had to add that earlier the banks cut rate the better it would be for the economy. Thus, in nutshell, he minced no words in retorting the banking top bosses for their inflated egos and attitude towards the regulator. Having been bashed for their attitude, these big guns immediately came into action and by evening SBI, ICICI Bank, HDFC Bank rushed to announce reduction in their Base Rate by the same evening itself.
This is one part wherein it becomes absolutely clear that all these big guns do not understand the basic methodology to be adopted in fixing the Base Rate. It will be pertinent to ask these CMDs, whether Base Rate has to be lower or increased when they get a dressing down from the regulator OR or based on certain calculations as prescribed by RBI. Anger shown by RBI Governor prompted these CMDs to come into action and reduce the Base Rates by same evening (it was a day when RBI has maintained status quo in Repo Rates and all other policy rates). It would have made a better sense that these CMDs / MDs / CEOs had read the signals earlier when Repo Rates were reduced and reworked their costs and then fixed their Base Rate accordingly. The funniest part of all these news was a statement by Ms Arundhati Bhattacharya. I had high regards for her as I felt she to be much better knowledgable as she is from SBI. It was a surprise for me to read her statement given to CNBC-TV 18, wherein she said, “(We) May also cut one-year bucket deposit rate by 25 basis points. We want to see whether this (15 bps cut) gives a fillip to credit growth which is what we would like to see and depending on how that pans out we will take a call going forward." As far as my knowledge goes, Base Rates are calculated based on cost of deposits, and not on the expansion of the credit. Thus, instead of reducing the Base Rate in a jerk manner, SBI should have first reduced the rate of interest on deposits, resulting in lower cost of funds and then on revised calculations, Base Rate should have been reduced by holding a proper discussions in the Asset Liability Committee (ALCO).
I know few people will raise doubts about my knowledge as I took VRS at a much lower level as compared to CMDs. However, one thing is clear that if I am wrong than RBI Governor is also wrong. If these CMDs were right, then they should not have caved in to the RBI Governor’s bashing, rather have produced evidence as to show as to how cost of funds has remained stable inspite of two cuts in Repo Rate.
The present Indian banking seems to be driven by sweet will of CMDs / MDs / CEOs rather than on analysis and cost calculations They do not adopt a consistent policy to arrive at Base Rates although RBI has prescribed the same. They can cut Base Rates without any calculations if they get a bashing from RBI Governor or else they can make fool of the public by keeping EMIs on higher side as per their own sweet will. Let us pray, God Save Indian Banking Industry.
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