Sunday, August 5, 2007

The Reforms I Expect in India - Banking Reforms

Dr P V Sesha Sai Aswamedhayaaji Camp: Memphis USA, e mail, web, blog Cell 901 592 9130 4th August 2007
The Reforms I Expect in India – Banking Reforms
When I thought of writing on “Banking Reforms” I only thought of the apex bank – the controlling bank, Reserve Bank of India. It is not only a controlling bank, but also a friend, philosopher and guide to the Nation and also to the Banking Industry. As a parent organization, the failures in the banking industry are to be necessarily to be owned by it.
In the recent past several banks in the cooperative sectors failed utterly and the depositors are virtually standing on the roads – for the simplest mistake they did – they trusted the Deposit Insurance and Credit Guarantee Corporation which is at the nose of RBI and which assures payment of a lakh of rupees in the event of any bank failure. I really wonder as to why the RBI could not realize and understand that a depositor is the back bone of any bank. Safeguarding their interest is of utmost primary importance for the survival of any bank. Unfortunately creditors are well protected than the depositors.
The depositors provide the financial strength to any bank to lend and make profits. I do not understand why DICGC or RBI fail to arrange for payment of a lakh of rupees maximum guaranteed amount to the deposits when once any bank fails. What is the fun of the depositors going round the creditors with whom they have no absolute concern. This really happened in many cases. Time to time monitoring of the credit portfolio of any bank, conducting audits, making enquiries, obtaining public opinion and all such are the duties of RBI.
Only when RBI fails in its duties, banks in any sector fail. RBI has also the watch dog business in the Banking sector. How and why poor, innocent depositors are dragged onto the roads for the gross negligence of RBI, is a matter worth discussing now. Why at all the RBI displays in every bank a notice to the effect that every deposit is guaranteed to the extent of a lakh of rupees when it does not honor its guarantee? How many such settlements were made when banks failed? Why RBI – the controlling machinery could not smell the failure or mismanagement of a bank well in advance? Any answer from RBI – perhaps NO.
Many small depositors gave up their lives and many girls could not be married due to non availability of funds on time; many small young children could not further their studies due to blocking up of saved funds of small depositors. These are all facts and RBI is aware of this. These mistakes are to be owned by RBI
If RBI is not in a position to upkeep its guarantee for refunding of the depositors money as promised, what fun it is to write a promise on a currency note which has basically no value in these circumstances.
Another interesting child of RBI is Banking Ombudsman. I have seen banks not at all responding to the letters, notices of Banking Ombudsman. It is a puppet creation, perhaps, an eyewash organization created by RBI. I do not know what powers this particular set up has, to take any action against any bank. It is a feather of the same bird and nothing much can be expected of it.
Today we have another problem – a totally different problem and the most important point now is, many foreign banks have entered the banking sector of India and are competing with the banks of Indian origin. The competition is in such a cut throat way, RBI has become a silent spectator.
I really wonder as to how a bank can take a decision for granting of lakhs and lakhs of rupees loan in a few seconds and why are they permitted to allure public in such a fashion and why at all did RBI is watching all this and taking it for granted. Does RBI not aware that it is public money and any bank cannot play with public money in such a fashion?. A decent publicity that any loan does take a few days time for processing and finalization is most welcome than giving a publicity as if the doors are open for the public to carry public money just like that. Is it not the duty of RBI to resist such alluring ads?
At least now, it is time for RBI to reassure public that the deposits are guaranteed up to a lakh of rupees and in the event of any bank’s failure, the amount up to the assured sum would be refunded within a specific period of time, say, three months from the day of failure of the bank.
The second point is resisting all banks to go for undesirable publicity in such a manner that the depositors feel that their saving or investment is casually spent by the banks. In the absence of a proper assurance, people prefer other sectors other than investment in banks which would lead to many other problems to the Nation.
In the recent past, after the failure of RBI to repay the deposit the amount as per guarantee terms, people preferred to invest their surplus in the unorganized/speculative/unhealthy money market – like local chit fund companies etc. many of which have over a period of time turned their boards. The money in the non banking sector is resulting into inflationary trend. Some investments have gone to stock markets, some to Gold market, and some to real estate business, thus we find an upward trend in all these sectors within the past few years – in addition to global market changes.
A deposit in a bank is helping the priority sectors/ neglected sectors in the society, as per the action plan envisaged and this helps the sectoral deployment of credit to support overall plan of a country. Whereas the flow of money into speculative markets, gold markets etc is, in no way helpful to any neglected sectors where support is essential. The other danger in diversion of funds from banking sector to the other sectors is that it amounts to growth of black money, as people do not prefer to declare their profits and legitimately pay the taxes on it. The undisclosed or hidden purchasing power in the hands of public is the main cause for the inflationary trend in the Country. This has created a big gap between rich and poor, for, rich becoming richer and the poor becoming poorest. A danger is ahead of us where a revolutionary check makes us all victims.
Therefore, it is necessary for the RBI to retain public confidence on its policies.
The banking ombudsman’s powers also should be increased to such a level that his position should be delinked from RBI. No officer of any Bank should be given this position as they get influenced to take any decision. A third party – totally independent from the influence of RBI, preferably a retired bank officer – a senior officer, be appointed as a Banking Ombudsman and sufficient powers be given to him to decide the cases. He should have powers to summon even any Bank Chief Executive if needed. Sufficient overall controlling powers alone can make the position of a banking ombudsman respectful and useful to the public.
All cases referred to Banking Ombudsman should also be settled within a time framework of say, three months. This time restriction will help the public that a timely justice is very much assured and anticipated.
This is also a fact that some of the banks – particularly the banks of recent origin, have adopted unfair practices of sending goondaas etc. for recovery of the dues. This speaks that the banks have no faith in judicial system or other remedial methods. They only believe this uncivilized, aged old, practice of unethical banking just to upkeep their recovery. Is it not a shameful act?. It shows the poor administrative capacities of RBI. Why can’t a law be made on par with Revenue Recovery Act granting powers to any bank to recover their monies in times of difficulty? This would have been more a fair deal than observing silence to the unethical acts of the banks.
The growth which is seen in the banking sector is nothing but a paradoxical error for the reason whether banks try for increase of deposits or not, the interest earned/accrued on the deposits is accounted every half year as a deposit only thereby giving a boost to the deposits. Though there is growth in real cash deposits, it is surely not according to the investment capacities of public as the money is flowing out to other markets. This is evidently seen due to flatness of the rates compared to last three years.
It is quite difficult for RBI to administer all this in a vast country like India with multi-dimensional problems, but at least something should be done as per the expectations of the public and to retain its image. If RBI’s image is lost, Rupee image is also lost and then what?................................Dr P V Sesha Sai Aswamedhayaaji

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