The Hindu Business Line : Protecting core entities

Excellent performance of the banking sector, as reflected in the third quarter results, with an impressive average net profit growth of 58 per cent posted by the top 20 banks, should be a shot in the arm to an otherwise morose economy showing visible signs of a slowdown. Higher margins due to the cash reserve ratio cut, coupled with higher treasury income, appear to have done the trick. Added to the overall income growth is the improvement effected in the net interest margins by many banks. Amidst this silver lining, there is a nagging concern, thrown up by the worrisome rider that sustaining net interest margins at these levels may be a challenge in future with the fall in lending rates and reduced yield on investments.

Role of the RBI

The Reserve Bank of India’s decision to maintain the status quo on policy rates, as revealed by its third quarter review of monetary policy, in the backdrop of its over-drive since September, has generally been well-received. Having provided the necessary impetus, the restraint now exercised, brings in a breath of fresh air in monetary policy. In fact, the lurking fear in some quarters as to whether this prestigious institution is losing its autonomous status has also been put to rest.The former RBI Governor, Dr Y. V. Reddy’s measures of banning off-balance sheet vehicles, increased risk-weightages on commercial buildings, etc., were hailed as steps intended to ensure that Indian banks did not get caught in the bubble. It was proudly announced that none of the Indian banks required the kind of emergency injections of capital that their Western counterparts did!

With the kind of reputation that this august institution commands, the expectation that there is scope for further cuts in lending and deposit rates combined with the anticipated credit growth of 24 per cent — up by 4 per cent from the original figure of 20 per cent for 2008-09 — is indicative of the pressure that the central bank probably faces to raise GDP growth to earlier levels.

Some of the CEOs of reputed banks have rightly expressed their anxiety about asset quality and the possibility of rising non-performing assets. Ironically, the private sector banks have shown only 12 per cent lending growth, against 20-22 per cent for public sector banks. Foreign banks have also recorded a steep decline from 31 per cent last year to 17 per cent this year.

While the Government’s desire to boost the growth rate and arrest the slow-down is well intentioned, the measures initiated should not jeopardise the safety and soundness of the country’s core financial system, namely the banking sector. As Nobel Laureate and economist Joseph Stiglitiz warns ‘adequate ring-fencing of these core-financial institutions’ is a must if the country is to insulate itself from the kind of financial disaster that overtook the West!

Industry’s response

Industry has argued that with inflation well under control and the rosy prediction of a further drop before March, there is enough leeway for banks to reduce rates and provide the required fillip. But the double-digit Consumer Price Index, which tells the story of the aam admi’s living conditions, is still a matter for worry. Industry must demonstrate its willingness to meet half-way the challenges facing the economy, without expecting the Government to perform miracles. After all, in a free, globalised economy, business cycles are routine and must run their course!

(The author is a former Financial Commissioner, Indian Railways.)

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