Daily Editorial Analysis for 20th February 2020

For bank deposits, private banks are back as preferred choice

Paper: III

For Prelims: Specialized Supervisory and Regulatory Cadre (SSRC).

For Mains: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context of News:

• In a reversal, depositors over the last six months have preferred to park their money with private banks rather than state-owned banks.
• While depositors have been moving towards private sector banks over the last three years, the first half of the calendar year 2019 saw state-owned banks getting back in the game with a sharp increase in incremental deposits.

Specialized Supervisory and Regulatory Cadre (SSRC):

• On November 1, 2019, RBI decided to reorganise its regulation and supervision departments. It merged the three regulatory departments (department of banking, non-banking and cooperative bank) into one and did likewise for the three supervisory departments.
• As a result, there is only one supervisory department which looks after supervision of banks, NBFCs and cooperative banks and only one regulatory department for these three.
• The move was aimed at dealing more effectively with potential systemic risk that could come about due to possible supervisory arbitrage and information asymmetry.
• The Reserve Bank of India (RBI) has decided to recruit 35% of the specialised supervisory and regulatory cadre (SSRC) from the market while the remaining 65% will be recruited via internal promotions.

Reasons for Choosing Private Bank over State owned Bank:

• India’s public-sector banks lost market share in the bank deposit market in last couple of months, even after various failure of private banks. Contrary to perception this shift may have been driven more by an error in interest rate strategy, rather than concerns over the health of public-sector banks.
• One reason for changing preference could be the lower bulk deposit rates offered by public-sector banks, which were slow to raise rates after the rush of liquidity from demonetisation faded.
• Facilities provided by private banks are of now match compare to public owned bank. Penetration level of Private Banks is deep and wide reaching wide range of public. Private sector bank even provides door service for many works, which raise their customer audience.

Major Problems Faced by India’s Nationalized Banks:

• Non-Performing Assets:
• The commercial banks at present do not have any machinery to ensure that their loans and advances are, in fact, going into productive use in the larger public in­terest. Due to a high proportion of non-performing assets or outstanding due to banks from borrowers they are incurring huge losses. Most of them are also unable to maintain capital adequacy ratio.
• Advance to Priority Sector:
• As far as ad­vances to the priority sectors are concerned, the progress has been slow. This is partly attributable to the fact that the bank officials from top to bot­tom could not accept nationalisation gracefully, viz., and diversion of a certain portion of resources to the top priority and hitherto neglected sectors. This is also attributable to the poor and unsatis­factory loan recovery rates from the agricultural and small sectors.
• Gap between Promise and Performance:
• One major weakness of the nationalised banking system in India is its failure to sustain the desired credit pattern and fill in credit gaps in different sectors. Even though there has been a reorientation of bank objectives, the bank staff has remained virtually static and the bank procedures and prac­tices have continued to remain old and outmoded.
• The post-nationalisation period has seen a widen­ing gap between promise and performance. The main reason seems to be the failure of the bank staff to appreciate the new work philosophy and new social objectives.
• Political Pressures:
• The smooth work­ing of nationalised banks has also been hampered by growing political pressures from the Centre and the States. Nationalised banks often face lots of difficulties due to various political pressures. Such pressures are created in the selection of personnel and grant of loans to particular parties without considering their creditworthiness.

Way Forward:

• India banking is not simply an institution to save money, but a way of life, part of life. Any major activity like marriage, seeding, education would not start without withdrawing money from bank. Although banks don’t offer big interest rates , people deposit money out of Nostalgia, safe venture or out of habit. But now this great sector now facing many scandals . Some people are using banks to become richer, willfully not paying bank loans.
• In that case how banks give loans to start ups, as bank do business by earning interest on providing loans. Agriculture sector alone need 11 lakh crore loans, how we meet huge demand if banking sector in crisis. So both Government and RBI must implement all steps to regain credibility of banking, and people should also not lose faith and start panicking by hearing fake news of bank failure.

Tuning Fine line between RBI and Government

Paper: II

For Prelims: Monetary Stability.

For Mains: Statutory, Regulatory and various Quasi-judicial Bodies.

Context of News:

• When present governor took over the reins of the Reserve Bank of India, RBI governor’s top priorities would have been to mend bridges between North Block and Mint Street. Relations between the two deteriorated precipitously in the tenure of his predecessor, Urjit Patel. Patel’s abrupt departure, and the unfortunate events preceding it, had raised troubling questions over government interference in the working of the central bank and cast a shadow over its claims of independence and autonomy.
• There were lot of questions being asked pertaining to autonomy of RBI and role of government in finning a tune that suits both parties.

Monetary Stability:

• Monetary stability means stable prices and confidence in the currency. Stable prices are defined by the Government’s inflation target, which the Bank seeks to meet through the decisions taken by the Monetary Policy Committee.
• Price stability implies avoiding both prolonged inflation and deflation. Inflation is a rise in the in the general price level of goods and services in an economy over a longer period of time resulting in a decline in the value of money and purchasing power.
• Monetary policy increases liquidity to create economic growth. It reduces liquidity to prevent inflation. Central banks use interest rates, bank reserve requirements, and the amount of government bonds that banks must hold. All these tools affect how much banks can lend.

Why working intendem of RBI and Government is need of an hour:

• Given how the financial system looks shaky with the banks still not out of the woods and IL&FS threat and PMCB made thing far worst, and not just in the banking sector. The country needs both RBI and the government to work together, not snipe at one another. When government and RBI have worked together, they have come up with strong policies they have both agreed upon as inflation targeting and stopping the automatic monetization of government deficits as two success stories.
• Existing scenario of slowdown is very scary, with food inflation touching sky high and unemployment rate is at 45 years high, this is the time that RBI and government should work on 5^th gear on fine line for Country.

Existing Problems between RBI and Government:

• Transfer of capital reserves to the government:
• The latest issue of conflict is the government’ demand for the transfer of a part of the capital reserves with the RBI. RBI is having a capital reserve of 28% or around 9.5 lakh crores and is highly capitalized central banks in the world.
• The logic of capital reserve is that like commercial banks, the RBI should have enough capital to manage its liquidity operations banks (Commercial banks have a minimum CRAR of 9%).
• The RBI accumulated capital from its retained profit after sharing the profit with the government. But in recent years, the government is demanding full profit transfer and is not letting the RBI to hold other reserves like contingency funds.
• Autonomy of the RBI:
• More than just a fund transfer, capital for RBI is highly correlated with its autonomy and independence. When there is sizable capital, the RBI need not approach the government in a contingency situation to manage its loans operations to financial institutions like banks.
• When the RBI has to independently operate its liquidity interventions, sizable capital reserves gives it confidence. In the past, several central banks were recapitalized by governments when the latter lacked funds to provide liquidity to banks. This was mainly due to high level of profit transfer by the central banks to the government. Of all issues, the capital reserve transfer is the core area of the conflict between the RBI and the government.

Way Forward:

• As of now RBI–government conflict is now in the past, this was, by no means, the last such encounter. After all, the world of regulatory institutions and their governance is constantly evolving; it mirrors the market, the players, the consumers; and it changes to adapt. With technologies also having a multifaceted impact in society, there is no reason to believe that regulatory institutions will remain unaffected. Conflicts are now embedded in the central bank and the government relationship; they are par for the course.
• As agents of change, it imperative that the government deliver benefits to society. The political economy of every democracy ensures that incentives are aligned with this change. On the other hand, regulators such as the RBI are driven by rules and regulations, stability and liquidity, interest rates and inflation targeting. While the government has the power to issue directions as well as change the board, it must do so with extreme caution and give the RBI the flexibility to function within the ambit of its constraints.
• Both the government and the RBI must avoid breakdowns in communication. Given that egos, preferences, and divergent views and opinions on matters of policy do exist, there is a need for greater sensitivity and respect on both sides. Above all, any long-running public display of antipathy is simply unacceptable from high-ranking officials, as it attracts nothing but contempt from the public and corrodes the credibility of the institutions.