Economic Highlights
New
Delhi, 17 October, 2016
India Warns: No Low Bank Interests;
IMF-WB PLEASE FAST TRACK REFORMS
By Shivaji Sarkar
India has warned about the risks of low
and negative interest rates and “significant loan impairments” in the world
banking system as it affects financial stability across the globe. Alongside
disorderly deleveraging of private debt could also impact growth, said Finance
Minister Jaitley addressing the annual World Bank and IMF meeting recently.
Further, he stressed that risks to
financial stability persist because of low and negative interest rates and
“significant loan impairments in the banking system. Undoubtedly, a profound
statement as Jaitley called for early IMF quota review and recapitalization of
World Bank (WB) to enhance funding for pro-poor programmes.
Pertinently, this hits emerging
markets wherein 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.
Consequently, the IMF-WB needs to be
more agile and less expensive so that poor nations can enhance global growth.
However, instead of going ahead with reforms scheduled for 2016 both put them off
till 2019.
Interestingly, a significant aspect
of the world economy is that India
is doing much better even with low soft funding by the IMF-WB. Not only does its
growth remain around 7.6 per cent but in fact, it leads growth in the sub-Continent
which averages better than the 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.
Besides, most other emerging
economies are doing better though it remains uneven. This calls for enlarging
the lending programme of IFC, IDA, IMF and WB. However, domination by the West
and concern about large economies has withheld reforms.
The growth of India and its
sub-Continental neighbours showcase 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. Britain’s exit
(Brexit) from the EU and trends in Europe also
suggest that isolationism is increasing in developed countries.
Therefore, 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 Pacific
groupings and ASEAN also strengthen, the world may see a shift gradually. This,
however, might take time. Nevertheless, let us accept one fact: The globe is
presently being stirred by Western nations whereby their banking system hits
the world. An example, a sneeze in their system in 2008 (Lehman crash), largely
due to low and negative interest rates and reckless grant of loans led to the
collapse of their banking system, which spread beyond Lehman and US giant AIG.
Moreover, it also exposed
that India
too suffered the post-2008 crisis notwithstanding having no close banking
links, the most.
Thus, countries
like India
also have to be careful about the sermons they are giving to the world. Take
our country, its banking system remains fragile as the banks are capitalized by
the poor and salaried depositors. Hence, an upheaval in the system could have
severe repercussions on the Government’s programmes.
As more and more of
the poor are being made to join the banking system and Government subsidies are
being channeled to them through the banks, India needs to take steps and strengthen
the system.
Arguably, the banks
are being run with a poor man’s money. With low interest rates, large corporate
funding and certain bank practices like asset quality review (AQR) --- loan
restructuring have resulted in a sharp surge in bad debts, though technically
these might not be non-performing assets (NPA).
In addition, 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 Reserve Bank of India
(RBI) Financial Stability Report. It states, “If the macro situation
deteriorates in the future, the gross NPA ratio may increase further to 9.3 per
cent 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.
Also, 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.
As a result, the stress in the banking sector mirrors the pressure in the
corporate sector, the RBI observed.
Furthermore, the Central bank subsequent
to the AQR and loan restructuring, the gross non-performing assets (NPAs) rose
79.7 per cent year-on-year in March 2016.
It also discovered that the relief the
RBI was giving in repo rates – interest rates – to banks was not being
transferred to the lenders and depositors were suffering cuts – a double
whammy. In other words, 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 might be hit. Low
credit growth means the banks would earn less from lending. It is a king of
warnings for the depositors. They might suffer a further cut in interest
earnings.
Additionally, 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.
What’s more loans by public sector
banks grew at 4 per cent while it was 24.6 per cent for private banks. Whereas
deposits of State-run banks grew by 5.2 per cent, those for private banks rose
by 17.3 per cent.
Clearly, 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. We have to fix the
minimum deposit rates, which should be at 9 per cent. This would help
depositors, decide floor lending rates and could be a saviour for banks. -----
INFA
(Copyright, India
News and Feature Alliance)
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