by

Rajesh Goyal   

Now almost for a fortnight I was restraining myself to comment on some of the policy decisions being contemplated by GoI, specially our FM - Mr P. Chidambaram.  At the outset I would like to confess that a few years back I had a strong feeling that Mr Chidrambaram was one of the most sincere and reliable Ministers in the UPA.   However, with the new revelations coming through Kejeriwal and others that image started fading and a new image is emerging which indicates that he is now bent upon to destroy financial sector, specially Indian banking sector, which was once considered as quite robust purely owing to number of checks and balances.   I am sure some of our readers will not agree with me and I appreciate their right to dissent.   I hope they will not frown if I too express my views.

Today in this article I will refer to 3 news items which have appeared in last week or so and analyse the same in the light of my over 20 years experience in Treasury, Risk Management and FEX in one of the largest banks in India.   This will help our both, young and veteran,  bankers to not only update their knowledge but also know as to how slowly our banking industry can be made much risker.   Let us now examine them in brief :-

(A) Corporate Bonds May Soon Be Part of SLR (You can click to view the original news) : This news appeared on 20th November 2012.  The reports said "The Finance Ministry is readying a big booster dose for corporate bonds market that includes allowing banks to count their top-rated private sector bond purchases towards the mandatory investments and a reduction in funds that companies have to keep aside every year to redeem debentures issued".  The report also stressed that "Finance minister P Chidambaram has identified deepening of corporate bonds market as a priority area and has also asked the market regulator SEBI to call a meeting of leading corporate houses to deliberate measures".   

This news just sent a chilling sensation as I have worked in Treasury for over a decade and SLR investments are more or less considered as zero risk securities and are like holy cows.  FM wants that bonds issued by corporates (it can be like KFA, Deccan, Suzulon) to be considered as part of SLR.    There is no clarity whether government will guarantee such bonds ? In case government has decided to guarantee these, why FM is ready to open his big heart towards corporate at the expense of PS Banks.   If there is no guarantee by GoI, then why put such riskier bonds in the SLR portfolio of the banks. 

It is a clear move to destroy the inherent strength of Indian banks to absorb shocks at the expense of corporate who everybody agrees are creators of biggest black money in the country and cornering the wealth of India.  Can FM deny this statement?  We are also aware of earlier controversy of lowering CRR and SLR ratios.

Bankers, specially Bank unions needs to oppose any such move in future, as this will shatter the Indian banking.   I have seen closely as to how corporate bonds become Non Performing Investments (like NPA for credit) in a matter of few months.  However banks are able to continue these as performing investments due to weak norms in this regard.   I am strongly of the view that there is a need to put additional restrictions on investments in corporate bonds by banks as for such investments Banks have totally no control on the activities of the corporate except to receive annual  Balance Sheet.  Having worked in Mid office for quite long, I can vouch for the helplessness we faced when such investments were downgraded.    In credit at least banks have much better control to exercise, if they wish so.  I have still not forgotten the pressure exerted from the top for relaxing the norms for investment in corporate bonds / preference shares etc.   With some good people around me, we were able to resist such attempts on some occasions.   If corporate bonds are given status of SLR, nobody will be able to save the banks from sliding down.   Banks core business is to lend and not investment.   Corporate should be given loans by banks, and if these corporate wish to raise funds from bonds, they must tap general public and not look towards banks.

(B) FM nudges RBI on banking licences again  (You can click to view the original news)  :  This is another news which should worry bankers.   This news appeared a few days back and RBI issued certain clarifications.  Yet now on 24th November, 2012, FM has once again retorted RBI for not falling in line.    Mr Chidambaram said at Bancon "Let me emphasise that the three powers that RBI wants are already there with the RBI.  It is already there in the regulation, it is there in the powers to grant the banking licences,"   He further said "amendments to the Act are simply to formalise powers that the Central bank is seeking and bring them together into the legislation".    By common logic, one will certainly question, If present regulations allow these, then why government needs to formalise the same in this surcharged atmosphere where amendments are difficult to be passed in Parliament.   There seems to be something fishy.

It is not that I am against issuing of new bank licences to corporate, but I am worried about the hurry shown by FM to hasten the process without putting in place the guidelines and nudging RBI for starting the process of issuing new bank licences to corporate.   Raja too issued spectrum in great hurry.   The question arises why FM is in such a great hurry?  Is he afraid that his government may not last for long and then he will not be able to oblige corporate close to Congress?  Can this great hurry lead to some other scam.   Government has already lost all credibility.  RBIGovernor has clearly said that they are considering the same on merits and will initiate steps as soon as amendments are put on record.   Now let us suppose RBI clears these and later on this Government falls, then who will take responsibility for such action by RBI.  

What worries me is further that there is complete silence from top management of existing banks and even union leaders have not issued any statements supporting the cause of RBI Governor. Thus, I am forced to think that either both these classes do not understand the pitfalls of such a hurry or they too want to oblige the corporate world and can not take a stand against FM.    RBI Governor has been left to fend for himself.   Thank God, he alone has the guts to stand on his own like our CAG, Vinod Rai, who too is being hammered day in and day out as if he has done a fraud by pointing out 2G and Coalgate scams.  

(C) Chidambaram asks banks to fund Builders (You can click to view the original news) :  This news appeared in Economic Times (22nd November, 2012) and few other newspapers wherein it was reported  "Finance Minister P Chidambaram has asked banks to lend a helping hand to builders, particularly those involved in construction of residential properties, in order to revive faltering economic growth".  The report also says "The minister asked banks to fund those residential projects that are stuck for want of funds. This, according to him, will help kickstart the economy".   The best part of the report is when ET says 'Bankers who attended the meeting described the broad thrust of Chidambaram's comments, but declined to speak on record'.

The above few sentences of the report clearly indicates that FM is under the influence of Big Builders who are now facing the heat as they have pumped huge black money in the purchase of lands with hundreds of crores being shared by politicians for giving approvals for change in land use and increase of FAR etc etc.   They have jacked up prices thinking that people will be forced to buy as there is scarcity of houses.  However, with the slump in the economy, there are not sufficient people with White Money who can buy such costly flats.   The majority of the new projects are needed to be sold in white money as these needs to sold through open offers of advertisement etc.   Thus, new projects are stuck. as residential properties are out of the reach of common people.

I wonder whether our FM does not know the precarious condition of PS Banks owing to  NPAs.   I remember after 2008 fallout,   Kingfisher Airlines, Air India were given huge loans  in the name of saving the civil aviation industry.  What happened?   The promoters looted these companies and banks have been stuck with what I like to call "TITANIC DEFAULTS".   Business Standard is absolutely right when it says "FM diktat to PSU banks will only serve to increase their NPAs, as housing units will remain unsold due to skyrocketing prices".   However, top management of PS Banks are silent on the issue and may soon bring special schemes for Big Builders, who are thriving on black money and corruption given to politicians on regular basis.    Who will bell the cat?  A corrupt banker can not stand in front of FM as CBI is under Government control.   Forget about stalling such moves by FM,  our CMDs/EDs are afraid to even admit that FM said so in the meeting (see above sentence in red colour).

In addition to above three news items, there are number of other small issues which keep on cropping up from time to time.  Those steps are purely to erode the strengths of our financial system which withstood 2008 world recession.   But to oblige certain foreign powers, may be under certain pressures and / or corruption, we regularly see statements which are the initial steps to weaken our banking system. 

In the light of the above, bankers needs to be aware and resist such attempts by this Government to slowly destroy the foundations of our banking industry.   The leadership of workmen unions and officers unions needs to be raise these issues regularly with their cadre and hold regular press meets / briefs so that more and more public becomes aware of the intentions of the government.

With the grace of God, India has always seen some wonderful people (of course only a small percentage), who are honest and dedicated, and do not bend even under pressures.   In recent times we have seen people like RBI Governor, CAG Chief,  SEBI chief etc. who have resisted the government attempts to dilute our strong fundamentals.    I too will continue my crusade to expose such attempts and hope more and more bankers will at least morally support us so that our beloved banking industry and our great country is saved.   If you find yourself helpless in taking up these openly due to constraints, make a resolve that you will always morally support the right kind of people and their decisions.    By this method you will be able to isolate the corrupt people.  You should not be swayed by the propaganda launched by corrupt politicians.  Whenever possible, you must raise your voice against misdeeds in the banking industry.