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India warns against low bank interests; calls for fast IMF-WB reforms; Domestic deposit rates be fixed at 9 percent to cut NPAs

India has warned about the risks of low and negative interest rates and “significant loan impairments” in the world banking system.

It affects financial stability across the globe. Finance Minister Arun Jaitley addressing the recent annual meeting of World Bank and IMF said that disorderly deleveraging of private debt could also impact growth. He stressed that risks to financial stability persist because of low and negative interest rates and “significant loan impairments in the banking system.

The statement is profound. He also called for early IMF quota review and recapitalization of World Bank to enhance funding for pro-poor programmes.

It hits the emerging markets, India stressed. India itself is suffering because of IMF, WB, IFC and IDA reform delays. During the last fiscal year, fresh commitments delivered were only $3.8 billion as against the requirement of $5-7 billion.

The IMF-WB needs to be more agile and less expensive so that the poor nations can enhance global growth. However, IMF-WB put the reforms off to 2019 instead of scheduled for 2016.

A significant aspect of the world economy is that India is doing much better even with low soft funding by the IMF-WB. Its growth remains around 7.6 percent. In fact, growth in the subcontinent averages better than rest of the world with Bangladesh at 6.3 per cent, Sri Lanka at about 5.3 per cent and Bhutan at 6.8 per cent. With better funding by the international institutions, these nations could lead the world growth.

Most other emerging economies are doing better though it remains uneven. This calls for enlarging the lending programme of IFC, IDA, IMF and WB. But domination by the West and concern about the large economies has withheld the reforms.

The growth of India and its sub-continental neighbours speak that regional variations are possible with better policy initiatives. But in a globalised world these have risks particularly as isolationist approach increases as is seen during the US presidential campaign. Brexit and trends in Europe also suggest that isolationism is increasing in the developed countries.

So expansion of groups like Shanghai Cooperation Council, BRICS, which is meeting now in India, BIMSTEC -The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation involving a group of countries in South Asia and South East Asia, may be the futuristic solution. The BIMSTEC includes Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal.

As the Pacific groupings and ASEAN also strengthen, the world may see a shift gradually. It may, however, take time. Let us accept one fact that the globe is presently being stirred by the western nations. Their banking system hits the world. A sneeze in their system in 2008, largely due to low and negative interest rates, reckless grant of loans led to the collapse of their banking system, which spread beyond the Lehman and US giant AIG.

It has also exposed that despite not so close banking links, India suffered the post-2008 crisis the most.

Countries like India also have to be careful about the sermons that it is giving to the world. Its banking system remains fragile. India’s banks are capitalized by the poor and salaried depositors. An upheaval in the system could have severe repercussions on the programmes of the government. As more and more poor are being made to join it, government subsidies are channeled through the banks, India has to take steps strengthen the system.

The banks are run with poor man’s money. Low interest rates, large corporate funding, and certain bank practices like asset quality review (AQR) – loan restructuring – have resulted in sharp surge in bad debts, though technically these may not be non-performing assets (NPA).

Gross bad loans at commercial banks could increase to 8.5 per cent of total advances by March 2017, from 7.6 per cent in March 2016, according to the latest RBI Financial Stability Report. It says, “If the macro situation deteriorates in the future, the gross NPA ratio may increase further to 9.3 percent by March 2017.”

The resultant sharp surge in provisions for bad debts has eroded profitability, especially at state-owned banks, in recent quarters. The gross bad loans of public sector banks increased to 9.6 per cent as of March 2016, from about 6 per cent a year earlier, RBI data showed.

There was an almost 80 per cent jump in gross bad loans in 2015-16, according to the report. Gross bad loans of Indian banks widened to 7.6 per cent from 5.1 per cent in September and from 4.6 per cent in March 2015. In 2004, gross bad loans in the Indian banking sector touched 7.8 per cent, while the ratio was 11.1 per cent in 2002. The stress in the banking sector mirrors the stress in the corporate sector, the RBI observed.

RBI said subsequent to the AQR, loan restructuring, gross NPAs rose 79.7 per cent year-on-year in March 2016.

It has also observed that the relief RBI was giving in repo rates – interest rates – to banks was not being transferred to the lenders but depositors were suffering cuts – a double whammy.

It is stated that banks were trying to cover up their losses at the cost of their depositors.

The country’s credit growth has also suffered. This indicates that in future the banks’ earnings may be hit. Low credit growth means the banks would earn less from lending. It is a king of a warning for the depositors. They may suffer a further cut in interest earnings.

RBI’s monthly credit growth data since June 2013 shows that the year-on-year credit growth for the sector has come down sharply – from a high of 19.1 per cent in June 2013 to 8.4 per cent in December 2015. It had even hit a low of 8.2 per cent in August 2015.

Loans by public sector banks grew at 4 per cent while it was 24.6 per cent for private banks. Deposits of state-run banks grew by 5.2 per cent, while for private banks it was 17.3 per cent.

India has to learn from its recent mistakes as well as what it is telling the world. Lenders have easy ways to default but depositors’ principal amounts are at risk. India has to fix the minimum deposit rates, which should be at 9 percent. This would help depositors, decide floor lending rates and could be a saviour for the banks.

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