Star Of Mysore Online BANKING IN BLUDERLAND 6TH AUGUST

Star Of Mysore Online

Banking in Blunderland



Now that the Global Trust Bank (GTB) has failed, what next ? asked my friend and colleague, when we met during the lunch break.


'Why should we worry about it ? I am not a customer of GTB. Neither are you,'


'Yet, to think that one million depositors of the Bank are facing a grave risk of loss...'


'No fears ! Don't you know that nothing is lost when a candle burns?'


'Don't try to philosophise the incident. Today it is GTB. Tomorrow it may be another. It may be your bank, my bank or our bank ! Who knows ?'


Risk-ridden world


'No one knows. In this highly risk-ridden world anything is possible. Suddenly a vein in the body may snap and the person may collapse, thus bringing a sudden end to all the achievements of the individual ! What a tragedy, as Dr. K.M. Panikkar once said. His own end was no different.'


'Again don't philosophise. You are in a very pensive mood today. You are also affected by the incident, though you refuse to admit it.'


'Forget it. Let us enjoy the cup of coffee. Tomorrow ! Why, tomorrow we may be with seven thousand yesterdays, as Omar Khayyam says. Think of yesterdays. How many banks have failed, not only in the distant past, even recently. History repeats itself, not in circles but in spirals; every time a bank fails the consequences appear to be more serious than in the past, with increasing complexity and gianticity of the situation. Along with it, the regulating mechanism also is being perfected. Yet the malaise continues'.


'You said that history repeats itself. You also spoke of the remote past and recent past. Would you explain ?'


'But remember that during the lunch break or coffee break, whatever it may be, we have to refresh ourselves after half-a-day's hard work. Why worry about all these ?'


'But you have aroused my curiosity by saying so many things not found in the papers. Don't you think that when our government embraced a policy of liberalisation and initiated economic reforms, it opened the banking sector to more private banks. Private sector banks were deem-ed to compete successfully with nationalised banks and usher in a new era of efficiency.'


'In the distant past, before we got our freedom, there were many banks in the private sector. But just as our country is known for a large percentage of infantile mortality, history of our banks is the history of failures. We have brought back the private sector after tinkering with nationalisation and realising that the public sector is the breeding ground of many unhealthy practices. But with the revival of private sector banks, the long-forgotten ills have once again come to the forefront. We don't seem to have learnt much from history'.


'How do you say so? We are told that post-nationalisation banking scene is much better. Fresh wind is blowing. Public sector banks also are given much freedom. Old statutory restrictions are relaxed. Compulsory investment in government securities, priority sector lending, lending a helping hand to sick industries, etc., are no longer strictly obligatory. Loan melas are long being forgotten.'


Unrealisable debts


'The Narasimham Committee Reports on reforms in the banking sector are being implemented. There is consolidation. A number of modern private banks are competing with the public sector banks. New products and electronic banking are being introduced. The accumulation of non-performing assets is being prevented. Provisioning for unrealisable debts and the introduction of capital alequacy norms have made banks stronger and there is a feeling of confidence among the bankers'.


'No doubt there are many plus points. Productivity, profitability, resilience and concern for the consumer are the sine qua non of banking. All these are good. But look at the structure and ownership of some of the modern private sector banks. For example, the Global Trust Bank.


Professional running


Today banking is a very highly specialised sector. It is harmful if a large chunk of the capital of the bank were to be in the hands of a single person or a few persons. Diversification of ownership and professional running are essential. If a single shareholder has a dominant role, it is dangerous. Even in western countries there is diversification and professionalism. This norm was forgotten while granting bank licences. Personal interest or the interest of one's own business should not get precedence.


Nascent capitalists


In the days of British rule, particularly after the American Civil War, when Indian cotton exporters had a heyday, capital came to be accumulated in a few hands. The nascent capitalists started a number of industries, banks and insurance companies.


Banks and insurance companies had to feed their industries with finance. There was interlocking of directorates. The result was disaster. There was infantile mortality on a large scale. The nationa-lisation of major banks undid this tendency. But it created fresh problems.


Liberalisation was an antidote to the evils of public ownership. But care was not taken to see that the old disease did not recur. Micro-banking is not the answer to macro-banking. The Global Trust Bank, started in the year 1992, has been ailing almost from its inception.


Instead of piling up profits, the Bank piled up non-performing assets. The auditors drew the attention of the management to the several irregularities. The Reserve Bank also noticed that all was not well. It asked the Bank to honour capital adequacy norms. It had to raise its owned capital to a minimum of 8 per cent of the net weighted assets. The management did not heed the advice. The RBI had to ask the Bank to suspend operations. It had to be done immediately to avoid flight of resources. It appears that some people had already got scent of it and had begun to withdraw funds.


'So you think that the people have lost faith in private sector banking ?'


'I don't think so. There are weak banks in the public sector also. But they have the support of the government. The government came to the rescue of UTI and IBRD. GTB is now tagged on to OBC —Oriental Bank of Commerce. Public or private, there are only strong banks, large banks and other banks. So the drama goes on. Now, let us go back to work.