Liquidity crisis facing the country is acute and government has taken one after other measures in the last two months to dilute the adverse effects of this liquidity crisis on the overall economy. I no doubt praise the sincere steps taken by Mr. P Chidambram Finance Minister and governor RBI to counter the financial attack caused by foreign based financial terrorists like Lehman Brothers ( not much different from Bin Laden , the renowned terrorist).
However It is astonishing that even after relentless efforts the problem of liquidity is not fully resolved (though RBI has been saying at the same time that banks have surplus fund and it is a fact too that banks are depositing their daily surplus with RBI despite low interest return).
It is to be understood why banks are hesitant to disburse credit to real estate sector or other SME or MSE sector inspite of easing liquidity.
It is to be assessed why businessmen are asking for bailout package when there is not much fall in sale and overall demand.
Government has to understand why there is normal tendency of borrowers not to repay the loan and advances availed by them from banks.
Government has to understand whether only cut in interest rate will stimulate the economy.
Is it not possible that too much cut in interest rate may cause disincentive to those who save and add to the problem of those old men whose livelihood depend on interest income.
Government must distinguish the liquidity crisis faced by individuals, banks, businessman, and the government itself from different angle of consideration.
I like to submit my views in brief which is though not exhaustive but point out some of the facts which may eventually lead to expose the real nature of liquidity crisis and enlighten the pros and cons of the matter.
Liquidity of Bank depends mainly on following three points: -----
1. Increase on deposits: As earning of people increases or expenses decreases, people deposit the same surplus in Banks or invest in other assets like home, vehicle etc., liquidity of bank will increase as much as people will deposit their surplus of income/profits in bank.
2. Loans and Advances made by banks: As credit by banks increases, the scope of trade or manufacturing or extending of services which in turn increases scope of creation of capital in the form of income. Liquidity of bank increases or decreases as advances of bank decreases or increases.
3. Repayment received from existing borrowers: When banks give loan to any person or institution, they expect the same is repaid by borrower in periodical installment or in case of working capital at least sale is deposited in bank. As such when all borrowers repays the banks loan regularly as per EMI (equated monthly installment) fixed by banks, banks are able to manage their Asset and Liability (called as ALM) gainfully without disturbing the liquidity. But when repayments are less than what are expected, banks face the problem of liquidity.
4. External factors like global slowdown causing huge withdrawal by FII or faulty policies of the government or weakness of the regulating and administrative systems and procedures or dilution in public trust on a particular bank causing panic in depositors and hence unwarranted withdrawal or large scale fraudulent affairs going on in any bank and so on ……
If we look at above four points seriously and ponder over the same we understand that liquidity is adversely affected by mainly
a. When deposit does not increase i.e. when income of people goes down or people start spending more than what they earn. Liquidity of Individuals or businessman when dries or shrinks, they contribute the same crisis to banks and financial institutions.
b. When banks extend loan and advances more than what they are capacitated to.
It is worthwhile to mention here that out of deposits received by bank, 24% of the same is deposited with government of India as SLR and 5% as CRR and at least 1% is used for infrastructure and establishment cost of the bank. Obviously maximum Credit deposit ratio may be allowed to be 70% (in the olden days CD ratio used to be less than 60%).
If any bank lends under pressure of the government more than 70% of available deposits it mobilizes, problem of liquidity is supposed to arise.
Also when banks writes off loan or sacrifices their money to bad borrowers either willfully or under instruction from the government more than the level of their absorbing capacity, banks face the problem of liquidity.
c. When people who have taken loan and advances from the bank do not repay the installment in time or when working capital financed by banks is either consumed by borrower or do not create turnover in bank. In common terminology, such type of loan is categorized as Non Performing Asset (NPA). As such when real NPA (not only what bank declare but also what banks hide) increases, liquidity problem in banks increases.
d. When bank is victim of mischievous and fraudulent employees or wrongful policies of the government and undue political interference in the banking system or incapability of recovery mechanism to recover the money from bad borrowers.
Here I would like to say that main reasons of liquidity crisis in banks may be as follows:
1. People’s expenses have increased far more than their increases in income. As such rate of savings has gone down.
2. Bank’s lending has increased more than their capacity. To make it more clear banks CD ratio has gone above 70% in many cases which forces banks either to offer higher rates on interest on deposits they acquire from the market or to borrow fund from RBI. Also banks deposit is not growing in the desired ratio due to sharp fall in earning of people and sharp increase in their spending.
3. Borrowers are not repaying the loan wither willfully or due to sickness in their business or due to higher spending. In other words real NPA of banks have increased abnormally due to vote bank politics prevailing in the country, the problem of liquidity in banks has aggravated.
4. Banks are unable to recover the bad loans from defaulters due to inefficient system and forced to write off large amount of bad loans or sacrifice large amount in compromising with large defaulters.
5. Large withdrawal of fund from depositors due to erosion in trust on the bank. When bank’s image is tarnished or bank is likely to fail due to internal irregularities , depositors are tempted to withdraw money from the bank even if they do not need and in this way they cause the shrinking of liquidity in banks or one can say they add fuel to fire.
I am of strong view that the present problem of liquidity is more due to faults in policies adopted by our government during last two decades of unregulated reformation, privatization and globalization and weaknesses of the system which may be poitical, social, judicial or administrative. It means that or system and procedure were not strengthened and empowered adequately to deal with the situation likely to arise in free economy. Our environment, infrastructure and our people are not as advanced, cultured and disciplined as it is in other developed countries which whom Indian economy intends to compete.
Obviously it will not be absolutely correct if we say that “Withdrawal by FII (Foreign Institutional Investors)” or “Global Financial Crisis caused by subprime mortgages” is the main reason behind liquidity crisis faced by the Indian banks.
Of course global crisis has added new dimension to crisis forcing government to reduce repo rate (6.5%), reverse repo rate (5%), CRR (5%) and SLR (24%) to historic low level and also to announce many other bailout packages for industries in line with the trend set by other developed countries of the world.
As such the global crisis has undoubtedly added fuel to already existing fire in the banks, but definitely is not the main and absolute reason of the crisis as claimed by our political leaders and as endorsed by sycophant economists.
If we do not assess the internal weakness of the banking and continue to claim that our banks are strong and harp on our achievements based on the fabricated and concocted figures, our banks will very soon lend in more severe trouble zone when most of the banks will be on the verge of bankruptcy as is presently happening in USA and other countries.
We must at least try to learn lessons from the failure of unimaginable big banks like Citi group and Lehman Brothers, in other countries to ensure real safety of our Indian banks and we must bring about desired improvement in the Indian banking system.
We must look deep into the balance sheet of different Indian Banks to understand the liquidity problem of individual banks and then try to diagnose. It will be prove to be harmful if government or RBI provides the same relaxation to all banks. This happens in the same way as liquidity problem happens in case of individual and which differs from person to person. Similarly liquidity problem of India differs from that of USA, Japan and other courties.
In our country if tax collection is less compared to government’s normal spending, our country will face liquidity problem. If our government uses the inflow of revenue in distributing charity and payment of interest on borrowings in greater numbers, government has to face liquidity problem.
As such need of the hour is true introspection of the system and rejuvenate the ailing system in time and not to blame entirely external factors for the prevailing liquidity crisis. Same medicine cannot be prescribed to all when the sickness of different individuals is different.
But as of now government appears to have injected same medicine in the blood of all ailing banks. Similarly government is trying to solve the problem of industrialists and traders by forcing banks to bring about reduction in lending rates.
Perhaps government is playing with fire only in view of forthcoming election and inclined to postpone taking harsh steps for the next government .Lest it should become too late to control the fire.
Danendra Jain,
Monday, December 8, 2008
You wish to understand liquidity crisis
Liquidity crisis facing the country is acute and government has taken one after other measures in the last two months to dilute the adverse effects of this liquidity crisis on the overall economy. I no doubt praise the sincere steps taken by Mr. P Chidambram Finance Minister and governor RBI to counter the financial attack caused by foreign based financial terrorists like Lehman Brothers ( not much different from Bin Laden , the renowned terrorist).
However It is astonishing that even after relentless efforts the problem of liquidity is not fully resolved (though RBI has been saying at the same time that banks have surplus fund and it is a fact too that banks are depositing their daily surplus with RBI despite low interest return).
It is to be understood why banks are hesitant to disburse credit to real estate sector or other SME or MSE sector inspite of easing liquidity.
It is to be assessed why businessmen are asking for bailout package when there is not much fall in sale and overall demand.
Government has to understand why there is normal tendency of borrowers not to repay the loan and advances availed by them from banks.
Government has to understand whether only cut in interest rate will stimulate the economy.
Is it not possible that too much cut in interest rate may cause disincentive to those who save and add to the problem of those old men whose livelihood depend on interest income.
Government must distinguish the liquidity crisis faced by individuals, banks, businessman, and the government itself from different angle of consideration.
I like to submit my views in brief which is though not exhaustive but point out some of the facts which may eventually lead to expose the real nature of liquidity crisis and enlighten the pros and cons of the matter.
Liquidity of Bank depends mainly on following three points: -----
1. Increase on deposits: As earning of people increases or expenses decreases, people deposit the same surplus in Banks or invest in other assets like home, vehicle etc., liquidity of bank will increase as much as people will deposit their surplus of income/profits in bank.
2. Loans and Advances made by banks: As credit by banks increases, the scope of trade or manufacturing or extending of services which in turn increases scope of creation of capital in the form of income. Liquidity of bank increases or decreases as advances of bank decreases or increases.
3. Repayment received from existing borrowers: When banks give loan to any person or institution, they expect the same is repaid by borrower in periodical installment or in case of working capital at least sale is deposited in bank. As such when all borrowers repays the banks loan regularly as per EMI (equated monthly installment) fixed by banks, banks are able to manage their Asset and Liability (called as ALM) gainfully without disturbing the liquidity. But when repayments are less than what are expected, banks face the problem of liquidity.
4. External factors like global slowdown causing huge withdrawal by FII or faulty policies of the government or weakness of the regulating and administrative systems and procedures or dilution in public trust on a particular bank causing panic in depositors and hence unwarranted withdrawal or large scale fraudulent affairs going on in any bank and so on ……
If we look at above four points seriously and ponder over the same we understand that liquidity is adversely affected by mainly
a. When deposit does not increase i.e. when income of people goes down or people start spending more than what they earn. Liquidity of Individuals or businessman when dries or shrinks, they contribute the same crisis to banks and financial institutions.
b. When banks extend loan and advances more than what they are capacitated to.
It is worthwhile to mention here that out of deposits received by bank, 24% of the same is deposited with government of India as SLR and 5% as CRR and at least 1% is used for infrastructure and establishment cost of the bank. Obviously maximum Credit deposit ratio may be allowed to be 70% (in the olden days CD ratio used to be less than 60%).
If any bank lends under pressure of the government more than 70% of available deposits it mobilizes, problem of liquidity is supposed to arise.
Also when banks writes off loan or sacrifices their money to bad borrowers either willfully or under instruction from the government more than the level of their absorbing capacity, banks face the problem of liquidity.
c. When people who have taken loan and advances from the bank do not repay the installment in time or when working capital financed by banks is either consumed by borrower or do not create turnover in bank. In common terminology, such type of loan is categorized as Non Performing Asset (NPA). As such when real NPA (not only what bank declare but also what banks hide) increases, liquidity problem in banks increases.
d. When bank is victim of mischievous and fraudulent employees or wrongful policies of the government and undue political interference in the banking system or incapability of recovery mechanism to recover the money from bad borrowers.
Here I would like to say that main reasons of liquidity crisis in banks may be as follows:
1. People’s expenses have increased far more than their increases in income. As such rate of savings has gone down.
2. Bank’s lending has increased more than their capacity. To make it more clear banks CD ratio has gone above 70% in many cases which forces banks either to offer higher rates on interest on deposits they acquire from the market or to borrow fund from RBI. Also banks deposit is not growing in the desired ratio due to sharp fall in earning of people and sharp increase in their spending.
3. Borrowers are not repaying the loan wither willfully or due to sickness in their business or due to higher spending. In other words real NPA of banks have increased abnormally due to vote bank politics prevailing in the country, the problem of liquidity in banks has aggravated.
4. Banks are unable to recover the bad loans from defaulters due to inefficient system and forced to write off large amount of bad loans or sacrifice large amount in compromising with large defaulters.
5. Large withdrawal of fund from depositors due to erosion in trust on the bank. When bank’s image is tarnished or bank is likely to fail due to internal irregularities , depositors are tempted to withdraw money from the bank even if they do not need and in this way they cause the shrinking of liquidity in banks or one can say they add fuel to fire.
I am of strong view that the present problem of liquidity is more due to faults in policies adopted by our government during last two decades of unregulated reformation, privatization and globalization and weaknesses of the system which may be poitical, social, judicial or administrative. It means that or system and procedure were not strengthened and empowered adequately to deal with the situation likely to arise in free economy. Our environment, infrastructure and our people are not as advanced, cultured and disciplined as it is in other developed countries which whom Indian economy intends to compete.
Obviously it will not be absolutely correct if we say that “Withdrawal by FII (Foreign Institutional Investors)” or “Global Financial Crisis caused by subprime mortgages” is the main reason behind liquidity crisis faced by the Indian banks.
Of course global crisis has added new dimension to crisis forcing government to reduce repo rate (6.5%), reverse repo rate (5%), CRR (5%) and SLR (24%) to historic low level and also to announce many other bailout packages for industries in line with the trend set by other developed countries of the world.
As such the global crisis has undoubtedly added fuel to already existing fire in the banks, but definitely is not the main and absolute reason of the crisis as claimed by our political leaders and as endorsed by sycophant economists.
If we do not assess the internal weakness of the banking and continue to claim that our banks are strong and harp on our achievements based on the fabricated and concocted figures, our banks will very soon lend in more severe trouble zone when most of the banks will be on the verge of bankruptcy as is presently happening in USA and other countries.
We must at least try to learn lessons from the failure of unimaginable big banks like Citi group and Lehman Brothers, in other countries to ensure real safety of our Indian banks and we must bring about desired improvement in the Indian banking system.
We must look deep into the balance sheet of different Indian Banks to understand the liquidity problem of individual banks and then try to diagnose. It will be prove to be harmful if government or RBI provides the same relaxation to all banks. This happens in the same way as liquidity problem happens in case of individual and which differs from person to person. Similarly liquidity problem of India differs from that of USA, Japan and other courties.
In our country if tax collection is less compared to government’s normal spending, our country will face liquidity problem. If our government uses the inflow of revenue in distributing charity and payment of interest on borrowings in greater numbers, government has to face liquidity problem.
As such need of the hour is true introspection of the system and rejuvenate the ailing system in time and not to blame entirely external factors for the prevailing liquidity crisis. Same medicine cannot be prescribed to all when the sickness of different individuals is different.
But as of now government appears to have injected same medicine in the blood of all ailing banks. Similarly government is trying to solve the problem of industrialists and traders by forcing banks to bring about reduction in lending rates.
Perhaps government is playing with fire only in view of forthcoming election and inclined to postpone taking harsh steps for the next government .Lest it should become too late to control the fire.
Danendra Jain,
However It is astonishing that even after relentless efforts the problem of liquidity is not fully resolved (though RBI has been saying at the same time that banks have surplus fund and it is a fact too that banks are depositing their daily surplus with RBI despite low interest return).
It is to be understood why banks are hesitant to disburse credit to real estate sector or other SME or MSE sector inspite of easing liquidity.
It is to be assessed why businessmen are asking for bailout package when there is not much fall in sale and overall demand.
Government has to understand why there is normal tendency of borrowers not to repay the loan and advances availed by them from banks.
Government has to understand whether only cut in interest rate will stimulate the economy.
Is it not possible that too much cut in interest rate may cause disincentive to those who save and add to the problem of those old men whose livelihood depend on interest income.
Government must distinguish the liquidity crisis faced by individuals, banks, businessman, and the government itself from different angle of consideration.
I like to submit my views in brief which is though not exhaustive but point out some of the facts which may eventually lead to expose the real nature of liquidity crisis and enlighten the pros and cons of the matter.
Liquidity of Bank depends mainly on following three points: -----
1. Increase on deposits: As earning of people increases or expenses decreases, people deposit the same surplus in Banks or invest in other assets like home, vehicle etc., liquidity of bank will increase as much as people will deposit their surplus of income/profits in bank.
2. Loans and Advances made by banks: As credit by banks increases, the scope of trade or manufacturing or extending of services which in turn increases scope of creation of capital in the form of income. Liquidity of bank increases or decreases as advances of bank decreases or increases.
3. Repayment received from existing borrowers: When banks give loan to any person or institution, they expect the same is repaid by borrower in periodical installment or in case of working capital at least sale is deposited in bank. As such when all borrowers repays the banks loan regularly as per EMI (equated monthly installment) fixed by banks, banks are able to manage their Asset and Liability (called as ALM) gainfully without disturbing the liquidity. But when repayments are less than what are expected, banks face the problem of liquidity.
4. External factors like global slowdown causing huge withdrawal by FII or faulty policies of the government or weakness of the regulating and administrative systems and procedures or dilution in public trust on a particular bank causing panic in depositors and hence unwarranted withdrawal or large scale fraudulent affairs going on in any bank and so on ……
If we look at above four points seriously and ponder over the same we understand that liquidity is adversely affected by mainly
a. When deposit does not increase i.e. when income of people goes down or people start spending more than what they earn. Liquidity of Individuals or businessman when dries or shrinks, they contribute the same crisis to banks and financial institutions.
b. When banks extend loan and advances more than what they are capacitated to.
It is worthwhile to mention here that out of deposits received by bank, 24% of the same is deposited with government of India as SLR and 5% as CRR and at least 1% is used for infrastructure and establishment cost of the bank. Obviously maximum Credit deposit ratio may be allowed to be 70% (in the olden days CD ratio used to be less than 60%).
If any bank lends under pressure of the government more than 70% of available deposits it mobilizes, problem of liquidity is supposed to arise.
Also when banks writes off loan or sacrifices their money to bad borrowers either willfully or under instruction from the government more than the level of their absorbing capacity, banks face the problem of liquidity.
c. When people who have taken loan and advances from the bank do not repay the installment in time or when working capital financed by banks is either consumed by borrower or do not create turnover in bank. In common terminology, such type of loan is categorized as Non Performing Asset (NPA). As such when real NPA (not only what bank declare but also what banks hide) increases, liquidity problem in banks increases.
d. When bank is victim of mischievous and fraudulent employees or wrongful policies of the government and undue political interference in the banking system or incapability of recovery mechanism to recover the money from bad borrowers.
Here I would like to say that main reasons of liquidity crisis in banks may be as follows:
1. People’s expenses have increased far more than their increases in income. As such rate of savings has gone down.
2. Bank’s lending has increased more than their capacity. To make it more clear banks CD ratio has gone above 70% in many cases which forces banks either to offer higher rates on interest on deposits they acquire from the market or to borrow fund from RBI. Also banks deposit is not growing in the desired ratio due to sharp fall in earning of people and sharp increase in their spending.
3. Borrowers are not repaying the loan wither willfully or due to sickness in their business or due to higher spending. In other words real NPA of banks have increased abnormally due to vote bank politics prevailing in the country, the problem of liquidity in banks has aggravated.
4. Banks are unable to recover the bad loans from defaulters due to inefficient system and forced to write off large amount of bad loans or sacrifice large amount in compromising with large defaulters.
5. Large withdrawal of fund from depositors due to erosion in trust on the bank. When bank’s image is tarnished or bank is likely to fail due to internal irregularities , depositors are tempted to withdraw money from the bank even if they do not need and in this way they cause the shrinking of liquidity in banks or one can say they add fuel to fire.
I am of strong view that the present problem of liquidity is more due to faults in policies adopted by our government during last two decades of unregulated reformation, privatization and globalization and weaknesses of the system which may be poitical, social, judicial or administrative. It means that or system and procedure were not strengthened and empowered adequately to deal with the situation likely to arise in free economy. Our environment, infrastructure and our people are not as advanced, cultured and disciplined as it is in other developed countries which whom Indian economy intends to compete.
Obviously it will not be absolutely correct if we say that “Withdrawal by FII (Foreign Institutional Investors)” or “Global Financial Crisis caused by subprime mortgages” is the main reason behind liquidity crisis faced by the Indian banks.
Of course global crisis has added new dimension to crisis forcing government to reduce repo rate (6.5%), reverse repo rate (5%), CRR (5%) and SLR (24%) to historic low level and also to announce many other bailout packages for industries in line with the trend set by other developed countries of the world.
As such the global crisis has undoubtedly added fuel to already existing fire in the banks, but definitely is not the main and absolute reason of the crisis as claimed by our political leaders and as endorsed by sycophant economists.
If we do not assess the internal weakness of the banking and continue to claim that our banks are strong and harp on our achievements based on the fabricated and concocted figures, our banks will very soon lend in more severe trouble zone when most of the banks will be on the verge of bankruptcy as is presently happening in USA and other countries.
We must at least try to learn lessons from the failure of unimaginable big banks like Citi group and Lehman Brothers, in other countries to ensure real safety of our Indian banks and we must bring about desired improvement in the Indian banking system.
We must look deep into the balance sheet of different Indian Banks to understand the liquidity problem of individual banks and then try to diagnose. It will be prove to be harmful if government or RBI provides the same relaxation to all banks. This happens in the same way as liquidity problem happens in case of individual and which differs from person to person. Similarly liquidity problem of India differs from that of USA, Japan and other courties.
In our country if tax collection is less compared to government’s normal spending, our country will face liquidity problem. If our government uses the inflow of revenue in distributing charity and payment of interest on borrowings in greater numbers, government has to face liquidity problem.
As such need of the hour is true introspection of the system and rejuvenate the ailing system in time and not to blame entirely external factors for the prevailing liquidity crisis. Same medicine cannot be prescribed to all when the sickness of different individuals is different.
But as of now government appears to have injected same medicine in the blood of all ailing banks. Similarly government is trying to solve the problem of industrialists and traders by forcing banks to bring about reduction in lending rates.
Perhaps government is playing with fire only in view of forthcoming election and inclined to postpone taking harsh steps for the next government .Lest it should become too late to control the fire.
Danendra Jain,
Sunday, November 16, 2008
How to stop price rise
FII from our country are withdrawing their fund from stock market and slowly repatriating the same to America. Inspite of the fact that our experienced finance minister who had put ban and some restrictions last year on use of PN by FII in fear of terrorist money being pumped into the system has in the last month removed the said restriction and made it easy for FII to bring fund into our country. But the fact is that when FII is in acute demand of dollars in their own country they have no option but to withdraw the money from stock market. It is just when a person is serious and hospitalized; his caretaker or the guardian will withdraw the saved money from the bank even if the bank offers double the normal rate of interest. It is therefore that the step of FM failed to stop FII withdrawing fund form or country.
When FII will withdraw money from stock market, it is but natural that there will be fall in the stock value. There will be comparatively more downfall in the script in which FII invested more and there will be less affect on other scripts where exposure of FII is less. As a result of their exit from stock they will need dollars from the bank and give rise to liquidity crisis. But the fact is that liquidity crisis in bank as perceived and conceived by regulators is far more than that of money withdrawn by FII. Obviously money is going out of banking system from bank due to other reasons too.
We have to analyse, ascertain and find out other sources of withdrawal of fund from the bank which are contributing in aggravating the liquidity crisis in the bank.
It is to be noted here that dollars are coming out of financial system of all countries other than America and all such withdrawn fund is going into the American financial system. Still America is also said to be in liquidity crisis. Obviously there are also other reasons behind the present turmoil which needs to be diagnosed honestly, sincerely and on priority.
Even if we visualize FII reserves and rate of inflow of dollars into our financial system two years ago we find that there was not such a severe and critical position of liquidity in our country as it is today when the dollar reserve is still more than what it was two years ago..
RBI has taken several praiseworthy and timely actions to dilute the impact of the crisis. But still the banks are facing the brunt of FII withdrawal and subsequent redemption pressure in MF.
Undoubtedly there are some other reasons which are adding fuel to fire.
The reason may be obviously excessive lending at lower and lower rate of interest. It may be caused by non repayment of installments by borrowers in time which cause undue pressure on liquidity.
In the olden days there use to be 33 to 35 percent SLR and 10% as CRR and banks were left with hardly 50% of their deposts for lending to borrowers. Credit Deposit ratio was hardly 55 to 60%. Now a days CRR has come down to roughly 5% and SLR has come down to the level of 25%. As such banks have got additional capacity of 15 % of their deposits for extending credit. In such position banks are pressed to go for more and more lending. If the borrowers fail to repay or do not willfully repay the installments in time, the bank’s good money is blocked in the hands of such bad borrowers. This has given birth to bad assets in large proportion.
Banks may say that their net NPA ( Bad assets) is less than 1% but the fact is that bad assets is even upto 20% in many banks . Bank may claim that they are adequately capitalized and their Capital Adequacy ratio is more than stipulated ratio of 10% as per Basel;s norms. If banks properly look into their asset portfolio and truly distinguish between good assets and bad assets as per RBI norms I think all banks will face erosion in capital and their actual CAR will fall short ot stipulated norms to a considerable extent. Obviously such exposure will precipitate the real reason of liquidity crisis in the banks. Over lending and less recovery of loans may be a great contributor of liquidity crisis.
Secondly banks have started lending more in retail sector like housing and auto loans and personal loans where repayment period and gestation period is more .Besides all lending in real estate sector or sensitive sector is not productive to that extent as happens in case of financing directly in manufacturing and agriculture sector. Financing to brokers, MFs, NBFC, s, builders may increase the advance portfolio of banks but fail to contribute in actual growth of GDP which may help in alleviating the problems of poor and middle class families, It is worthwhile to mention here that entire talk of GDP growth is meaningless for ninety nine percent of population of the country. The so-called reformation measure initiated by learned FM and PM in the year 1991 are getting exposed slowly not only in India but in the entire world where blind policy of globalization was followed without strict monitoring and continued assessment of the results of freedom granted to private sector.
Thirdly government needs to introspect whether import is growing in undesirable sector causing unwarranted outflow of dollars. It is to be assessed whether genuine exporters are reducing their export only due to sharp fluctuation in exchange rates. Both taken together may cause not only disproportionate outflow of dollars and trade deficit but also tell upon manufacturing sector and service sector of our own country.
Lastly government has to stop giving undue freedom to private sector or government sector and stop encouraging unwarranted competition in interest rate and exchange rate. Government should stop wasteful trading in commodity futures, currency futures, and interest rate futures which has contributed in price rise in most of the commodities. Real estate and stock market has seen manifold rise and unrealistic rise in their price during the year 2007 and hence if the same prices are coming down it should not bother our FM and PM .After all those who invest in shares and those who buy home of more than 30 lacs rupees are not poor and middle class families of the country .
Need of the hour is to honestly understand the utility of privatization and globalization and learn the lesson from the present liquidity crisis and revamp the financial sector without any hesitation before it is too late. I reiterate here at the cost of repetition that FII ‘s are not the real culprit for present liquidity crisis and economic experts has to come forward and prescribe the best medicine to cure the ailing system .It is to be kept in mind that America is entirely a different type of country and India need not copy what Americans are doing or what they suggest us to do to cope with the present crisis.
When FII will withdraw money from stock market, it is but natural that there will be fall in the stock value. There will be comparatively more downfall in the script in which FII invested more and there will be less affect on other scripts where exposure of FII is less. As a result of their exit from stock they will need dollars from the bank and give rise to liquidity crisis. But the fact is that liquidity crisis in bank as perceived and conceived by regulators is far more than that of money withdrawn by FII. Obviously money is going out of banking system from bank due to other reasons too.
We have to analyse, ascertain and find out other sources of withdrawal of fund from the bank which are contributing in aggravating the liquidity crisis in the bank.
It is to be noted here that dollars are coming out of financial system of all countries other than America and all such withdrawn fund is going into the American financial system. Still America is also said to be in liquidity crisis. Obviously there are also other reasons behind the present turmoil which needs to be diagnosed honestly, sincerely and on priority.
Even if we visualize FII reserves and rate of inflow of dollars into our financial system two years ago we find that there was not such a severe and critical position of liquidity in our country as it is today when the dollar reserve is still more than what it was two years ago..
RBI has taken several praiseworthy and timely actions to dilute the impact of the crisis. But still the banks are facing the brunt of FII withdrawal and subsequent redemption pressure in MF.
Undoubtedly there are some other reasons which are adding fuel to fire.
The reason may be obviously excessive lending at lower and lower rate of interest. It may be caused by non repayment of installments by borrowers in time which cause undue pressure on liquidity.
In the olden days there use to be 33 to 35 percent SLR and 10% as CRR and banks were left with hardly 50% of their deposts for lending to borrowers. Credit Deposit ratio was hardly 55 to 60%. Now a days CRR has come down to roughly 5% and SLR has come down to the level of 25%. As such banks have got additional capacity of 15 % of their deposits for extending credit. In such position banks are pressed to go for more and more lending. If the borrowers fail to repay or do not willfully repay the installments in time, the bank’s good money is blocked in the hands of such bad borrowers. This has given birth to bad assets in large proportion.
Banks may say that their net NPA ( Bad assets) is less than 1% but the fact is that bad assets is even upto 20% in many banks . Bank may claim that they are adequately capitalized and their Capital Adequacy ratio is more than stipulated ratio of 10% as per Basel;s norms. If banks properly look into their asset portfolio and truly distinguish between good assets and bad assets as per RBI norms I think all banks will face erosion in capital and their actual CAR will fall short ot stipulated norms to a considerable extent. Obviously such exposure will precipitate the real reason of liquidity crisis in the banks. Over lending and less recovery of loans may be a great contributor of liquidity crisis.
Secondly banks have started lending more in retail sector like housing and auto loans and personal loans where repayment period and gestation period is more .Besides all lending in real estate sector or sensitive sector is not productive to that extent as happens in case of financing directly in manufacturing and agriculture sector. Financing to brokers, MFs, NBFC, s, builders may increase the advance portfolio of banks but fail to contribute in actual growth of GDP which may help in alleviating the problems of poor and middle class families, It is worthwhile to mention here that entire talk of GDP growth is meaningless for ninety nine percent of population of the country. The so-called reformation measure initiated by learned FM and PM in the year 1991 are getting exposed slowly not only in India but in the entire world where blind policy of globalization was followed without strict monitoring and continued assessment of the results of freedom granted to private sector.
Thirdly government needs to introspect whether import is growing in undesirable sector causing unwarranted outflow of dollars. It is to be assessed whether genuine exporters are reducing their export only due to sharp fluctuation in exchange rates. Both taken together may cause not only disproportionate outflow of dollars and trade deficit but also tell upon manufacturing sector and service sector of our own country.
Lastly government has to stop giving undue freedom to private sector or government sector and stop encouraging unwarranted competition in interest rate and exchange rate. Government should stop wasteful trading in commodity futures, currency futures, and interest rate futures which has contributed in price rise in most of the commodities. Real estate and stock market has seen manifold rise and unrealistic rise in their price during the year 2007 and hence if the same prices are coming down it should not bother our FM and PM .After all those who invest in shares and those who buy home of more than 30 lacs rupees are not poor and middle class families of the country .
Need of the hour is to honestly understand the utility of privatization and globalization and learn the lesson from the present liquidity crisis and revamp the financial sector without any hesitation before it is too late. I reiterate here at the cost of repetition that FII ‘s are not the real culprit for present liquidity crisis and economic experts has to come forward and prescribe the best medicine to cure the ailing system .It is to be kept in mind that America is entirely a different type of country and India need not copy what Americans are doing or what they suggest us to do to cope with the present crisis.
Monday, November 3, 2008
American treatment to Indian Banks
American banks have understood the real reason of financial crisis in banks. They have rightly tightened the lending norms and started reviewing, monitoring and taking appropriate steps to recover money from defaulters to improve the health of their asset portfolio.
On the contrary our finance minister is treating the bank still as vote bank. FM pressurizes for more and more lending at lower and lower rate of interest.
There is avoidable competition in lending and also in cut in lending rates among banks to please our FM without taking care of increasing defaults in repayment of loan. Banks are unable to cut in deposit rates due to fund crisis but they are ready to cut in lending rates to please the government. This is Indian style of reformation and freedom to banks.
Actual Non Performing Assets has been increasing rapidly and it is astonishing that instead of motivating banks to recover money blocked in NPA, our FM has promised to buy bad assets by introducing Special Purpose Vehicle (SPV). .Our government is least bothered whether money lent by banks are recycled or not, assets shown in the balance sheets are really healthy or not, money lent by banks in retail sector are productive or not.
Increasing defaults in repayment of loan is the root cause of present liquidity crisis which American Authorities have understood and now making sincere efforts to correct the past mistakes. But our FM is wise enough to pin point global crisis to hide mistakes of Indian banks.
Unfortunately our FM and PM find it easy to write off the bad loans, or provide capital to banks which are below bench mark in Capital Adequacy Ratio. They are mainly bothered of their vote banks. They do not want to displease big corporate who are defaulters but who provide political fund to political parties for fighting election. They do not want to recover the money from farmers because they are poor.
And if banks tighten their tools to recover the money from either farmers or from big companies there will be protests from political workers, pressure on banks and local threatening on bank officers. As such Bank officers as also executive officers in the government think it wise to avoid efforts for recovery of loans from defaulters.
Our banks are therefore kept on ventilator by our finance minister and one after other oxygen cylinder is provided to banks in the form of CRR cut, Repo cut , SLR to keep bank alive at least final outcome of Parliament election. But how long such treatment will keep banks alive is a billion dollar question? America has learnt lesson from the crisis ,they are now actually alert and hope they will reduce the intensity of damage as they did for their country after 9/11 terror attack. On the contrary we have learnt to live with terror attacks or even successive bank failures.
On the contrary our finance minister is treating the bank still as vote bank. FM pressurizes for more and more lending at lower and lower rate of interest.
There is avoidable competition in lending and also in cut in lending rates among banks to please our FM without taking care of increasing defaults in repayment of loan. Banks are unable to cut in deposit rates due to fund crisis but they are ready to cut in lending rates to please the government. This is Indian style of reformation and freedom to banks.
Actual Non Performing Assets has been increasing rapidly and it is astonishing that instead of motivating banks to recover money blocked in NPA, our FM has promised to buy bad assets by introducing Special Purpose Vehicle (SPV). .Our government is least bothered whether money lent by banks are recycled or not, assets shown in the balance sheets are really healthy or not, money lent by banks in retail sector are productive or not.
Increasing defaults in repayment of loan is the root cause of present liquidity crisis which American Authorities have understood and now making sincere efforts to correct the past mistakes. But our FM is wise enough to pin point global crisis to hide mistakes of Indian banks.
Unfortunately our FM and PM find it easy to write off the bad loans, or provide capital to banks which are below bench mark in Capital Adequacy Ratio. They are mainly bothered of their vote banks. They do not want to displease big corporate who are defaulters but who provide political fund to political parties for fighting election. They do not want to recover the money from farmers because they are poor.
And if banks tighten their tools to recover the money from either farmers or from big companies there will be protests from political workers, pressure on banks and local threatening on bank officers. As such Bank officers as also executive officers in the government think it wise to avoid efforts for recovery of loans from defaulters.
Our banks are therefore kept on ventilator by our finance minister and one after other oxygen cylinder is provided to banks in the form of CRR cut, Repo cut , SLR to keep bank alive at least final outcome of Parliament election. But how long such treatment will keep banks alive is a billion dollar question? America has learnt lesson from the crisis ,they are now actually alert and hope they will reduce the intensity of damage as they did for their country after 9/11 terror attack. On the contrary we have learnt to live with terror attacks or even successive bank failures.
Sunday, October 19, 2008
Reality of Crisisi in Banks
It is now wave of fear and distrust that has adversely affected the banking, stock market and financial sector in the world. Measure taken by Bush administration has not produced any fruitful, effective and positive results neither in banking nor in share market.
Bailout package of 700 billion dollar accompanied by aid to AIG and other financial Institutes has generated more demand from corporate as also falling banks for further increase in bailout package. Not only this, all major countries have been constrained to follow this path of bailout package.
In India corporate sector has demanded for Rs.one lac crore worth bailout package inspite of the fact that FM Mr. Chidambram claimed a few days ago that India is not affected by foreign bank crisis and Indian banks are strong and stock market is wisely regulated.
On the one hand government claims that prices under free economy is decided by market forces and government has nothing to intervene, on the other they do not hesitate to withdraw restriction of Participatory Notes (PN) knowing very well that the same PN had created bad effects in share market and caused loss of income tax .Same PN was treated as source of terror fund coming into our system.
It seems to me FM does not want to understand that the real cause of present crisis is not what he pretends to understand. As a matter of fact all foreign countries have now started thinking in terms of nationalization of banking sector, directly or indirectly through bailout package in return of equity rights.
There is no doubt to me that extraordinary freedom to banking to create so called competitiveness in the name of unwarranted globalization, privatization and liberalization has caused the current crisis and bankers in the name of growth has forgotten the basis principles of banking and started reckless financing with collateral or without collateral.
In the sphere of real estate or commonly known retail sectors, bankers are moving fanatically in the market in search of loan takers, either for purchase of home or vehicle. Banker are ready to extend even personal loan without taking any security in the greed of higher rate of interest in the same way as private lenders in the past used to do. They have neither time nor will to verify the creditworthiness of the prospective borrower because they are under pressure to achieve the unachievable target given to them. Bankers do not take pain even to assess the value of flat or apartment or the house which they are going to finance. They are more worried about their target and survival than the quality of lending as also survival of bank.
Out leaders know very well that government or the bank cannot recover the money from defaulters due to faulty and ineffective administrative as also judicial system. In their fear of erosion of vote banks ,Our leaders think it wise and prudent to write off /Rs70000/- crores than to ensure effective delivery of credit. To add fuel to fire Government vitiate the culture of recovery by prompting PSU banks writing off the loan of some sector or the other to please their friendly corporate houses or in their desire to enrich their vote banks.
That is why I say the real cause of the present turmoil in banking is reckless financing and lack of effective tools to recover the money from defaulters. Otherwise one cannot imagine the reason for sudden erosion of bank’s capital all over the world needing bailout package.
Reign of target and blind competition has given rise to rise in default and sharp fall in bad assets and also fraudulent disbursal of credit resulting in ultimate loss. And now falling of banks like playing cards have resulted in panic in investors. People have started withdrawal of money and this stormy wave of exit from banks as also stock market is causing liquidity crisis to deepen further. People have started withdrawing their hard earned money from banks and Mutual fund only because banks have lost faith in the market. Even Insurance sector has become victim of this liquidity crunch, astonishing indeed.
Under such critical juncture government need to introspect where they are wrong and what types of mistakes are being repeatedly committed by bankers in the name of competition and growth. Authorities responsible to regulate the system must punish without delay all those who contributed largely in creating the current crisis.
Bailout package is the temporary solution but the permanent remedy will come out only when the mistake of the past is not repeated and the real culprit is booked to task.
It is worthwhile to stress here that it will be gross blunder if Banks in India try to blame global crisis for irregularities in our banking system. Our problem of inflation, liquidity, falling share market, withdrawal of FII fund and irrecoverability of bad loans has been persisting since long whereas global crisis has come in picture only in the month of Septembr08. Our banks have been hiding bad loans for last several years and presenting false picture .As such position of Indian banks is much more alarming and dangerous. When Indian banks show correct picture even RBI and government of India fail to provide required bailout package.
Banks can be run really profitably only by honest, sincere, devoted and loyal persons. Present crisis can be combated by sincere honest workers and honest politicians to restore the lost faith and confidence. Policies based on vote bank cannot help in strengthening of the bank. Financial sector is after all the backbone of the economy and the nation as a whole and hence need preferred attention and it cannot survive long on ventilator of bailout package.
I Pray God that wisdom prevails upon our Finance Minister, Prime Minister and other responsible officers in the government on whom depend the fate of the country.
Danendra Jain
Bailout package of 700 billion dollar accompanied by aid to AIG and other financial Institutes has generated more demand from corporate as also falling banks for further increase in bailout package. Not only this, all major countries have been constrained to follow this path of bailout package.
In India corporate sector has demanded for Rs.one lac crore worth bailout package inspite of the fact that FM Mr. Chidambram claimed a few days ago that India is not affected by foreign bank crisis and Indian banks are strong and stock market is wisely regulated.
On the one hand government claims that prices under free economy is decided by market forces and government has nothing to intervene, on the other they do not hesitate to withdraw restriction of Participatory Notes (PN) knowing very well that the same PN had created bad effects in share market and caused loss of income tax .Same PN was treated as source of terror fund coming into our system.
It seems to me FM does not want to understand that the real cause of present crisis is not what he pretends to understand. As a matter of fact all foreign countries have now started thinking in terms of nationalization of banking sector, directly or indirectly through bailout package in return of equity rights.
There is no doubt to me that extraordinary freedom to banking to create so called competitiveness in the name of unwarranted globalization, privatization and liberalization has caused the current crisis and bankers in the name of growth has forgotten the basis principles of banking and started reckless financing with collateral or without collateral.
In the sphere of real estate or commonly known retail sectors, bankers are moving fanatically in the market in search of loan takers, either for purchase of home or vehicle. Banker are ready to extend even personal loan without taking any security in the greed of higher rate of interest in the same way as private lenders in the past used to do. They have neither time nor will to verify the creditworthiness of the prospective borrower because they are under pressure to achieve the unachievable target given to them. Bankers do not take pain even to assess the value of flat or apartment or the house which they are going to finance. They are more worried about their target and survival than the quality of lending as also survival of bank.
Out leaders know very well that government or the bank cannot recover the money from defaulters due to faulty and ineffective administrative as also judicial system. In their fear of erosion of vote banks ,Our leaders think it wise and prudent to write off /Rs70000/- crores than to ensure effective delivery of credit. To add fuel to fire Government vitiate the culture of recovery by prompting PSU banks writing off the loan of some sector or the other to please their friendly corporate houses or in their desire to enrich their vote banks.
That is why I say the real cause of the present turmoil in banking is reckless financing and lack of effective tools to recover the money from defaulters. Otherwise one cannot imagine the reason for sudden erosion of bank’s capital all over the world needing bailout package.
Reign of target and blind competition has given rise to rise in default and sharp fall in bad assets and also fraudulent disbursal of credit resulting in ultimate loss. And now falling of banks like playing cards have resulted in panic in investors. People have started withdrawal of money and this stormy wave of exit from banks as also stock market is causing liquidity crisis to deepen further. People have started withdrawing their hard earned money from banks and Mutual fund only because banks have lost faith in the market. Even Insurance sector has become victim of this liquidity crunch, astonishing indeed.
Under such critical juncture government need to introspect where they are wrong and what types of mistakes are being repeatedly committed by bankers in the name of competition and growth. Authorities responsible to regulate the system must punish without delay all those who contributed largely in creating the current crisis.
Bailout package is the temporary solution but the permanent remedy will come out only when the mistake of the past is not repeated and the real culprit is booked to task.
It is worthwhile to stress here that it will be gross blunder if Banks in India try to blame global crisis for irregularities in our banking system. Our problem of inflation, liquidity, falling share market, withdrawal of FII fund and irrecoverability of bad loans has been persisting since long whereas global crisis has come in picture only in the month of Septembr08. Our banks have been hiding bad loans for last several years and presenting false picture .As such position of Indian banks is much more alarming and dangerous. When Indian banks show correct picture even RBI and government of India fail to provide required bailout package.
Banks can be run really profitably only by honest, sincere, devoted and loyal persons. Present crisis can be combated by sincere honest workers and honest politicians to restore the lost faith and confidence. Policies based on vote bank cannot help in strengthening of the bank. Financial sector is after all the backbone of the economy and the nation as a whole and hence need preferred attention and it cannot survive long on ventilator of bailout package.
I Pray God that wisdom prevails upon our Finance Minister, Prime Minister and other responsible officers in the government on whom depend the fate of the country.
Danendra Jain
Sunday, May 18, 2008
How to win with Inflation or terrorism
Inflation is nothing but continuous rise in prices of required commodities which result in reduction of purchasing power of the consumer. We have no remedy to control inflation. It is only government whose unwise policies results in rise in prices.
Businessmen want to earn more and more profit. Even government owned PSU's are targeted to earn maximum profit. This profit eats away the hard earned money of general mass.
Inflation causes pain to poor and middle class people. Rich people are least bothered whatsoever may be the prices. Corrupt officers are also not affected by inflation.
Poor general mass has one and only one remedy to fight with inflation is to reduce the expenses and make effort to increase the earnings. The worst sufferers are pension earners and those whose income are very low and have no scope to increase in old age.
What is the solution for unbridled price rise is a billion dollar question. Now ministers are blaming global crisis which is unacceptable .It is not that Inflation is invincible. It needs strong will of the government to deal with those businessmen who are hoarding essential commodities and charging exorbitant rates. On the pretext of globalization, liberalization and privatization our rulers have given freehand to traders and big shots to exploit illiterate and poor mass of the country.
It is worthwhile to mention here that during BJP rule or erstwhile Janta Party rule there was full control on price rise and general mass were happy. But unfortunately on the plea of secularism Congress party and other so called secular party are giving enormous trouble to Aam Admi of the country.
Even in the matter of safety and security of Indian people our present government failed completely to deal with sternly with terrorist only to appease Muslims. Whenever there is terror attack or naxal attacks they blame BJP. Congress Party has lame excuse in their almirah to shut the mouth of BJP because during the regime of NDA terrorist attacked Parliament. They forget that BJP framed POTA to fight with terrorists which Congress Party and UPA abandoned just to appease Muslims.
Similarly BJP minister took hardcore terrorist to Kandhar for release of hostages and on this plea Congress Party has stayed the execution of Afzal Guru who is sentenced to death by Supreme Court.
Political parties have to discard blame game in the interest of Nation on the issues which pertain to welfare of Indian mass, it may be the problem of safety or survival of general mass. It may be inflation or terror attack.
It is painful that our leaders talk more, work less. They plan the best but fail in execution on all fronts. Real solution lies in long term policy with future vision to combat all ills of the society and all dangers to the nation.
Businessmen want to earn more and more profit. Even government owned PSU's are targeted to earn maximum profit. This profit eats away the hard earned money of general mass.
Inflation causes pain to poor and middle class people. Rich people are least bothered whatsoever may be the prices. Corrupt officers are also not affected by inflation.
Poor general mass has one and only one remedy to fight with inflation is to reduce the expenses and make effort to increase the earnings. The worst sufferers are pension earners and those whose income are very low and have no scope to increase in old age.
What is the solution for unbridled price rise is a billion dollar question. Now ministers are blaming global crisis which is unacceptable .It is not that Inflation is invincible. It needs strong will of the government to deal with those businessmen who are hoarding essential commodities and charging exorbitant rates. On the pretext of globalization, liberalization and privatization our rulers have given freehand to traders and big shots to exploit illiterate and poor mass of the country.
It is worthwhile to mention here that during BJP rule or erstwhile Janta Party rule there was full control on price rise and general mass were happy. But unfortunately on the plea of secularism Congress party and other so called secular party are giving enormous trouble to Aam Admi of the country.
Even in the matter of safety and security of Indian people our present government failed completely to deal with sternly with terrorist only to appease Muslims. Whenever there is terror attack or naxal attacks they blame BJP. Congress Party has lame excuse in their almirah to shut the mouth of BJP because during the regime of NDA terrorist attacked Parliament. They forget that BJP framed POTA to fight with terrorists which Congress Party and UPA abandoned just to appease Muslims.
Similarly BJP minister took hardcore terrorist to Kandhar for release of hostages and on this plea Congress Party has stayed the execution of Afzal Guru who is sentenced to death by Supreme Court.
Political parties have to discard blame game in the interest of Nation on the issues which pertain to welfare of Indian mass, it may be the problem of safety or survival of general mass. It may be inflation or terror attack.
It is painful that our leaders talk more, work less. They plan the best but fail in execution on all fronts. Real solution lies in long term policy with future vision to combat all ills of the society and all dangers to the nation.
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