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India Warns: No Low Bank Interests;:IMF-WB PLEASE FAST TRACK REFORMS, By Shivaji Sarkar, 17 Oct, 16 Print E-mail

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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