The banking system has to get together and take a professional look at its future directions of growth
It is no news that gold is losing its glitter. However, it may be news that gold prices are likely to decline further. Strong selling of gold in China, and institutional investors and the prospect of higher interest rates from the US, will further have a negative impact on the price of gold.
Prices of gold plunged to its lowest level in five years between July 24 and July 25. The price of the precious metal was $1,090 per troy ounce. Expectations are that by the end of this year, it may be around $1,000 per troy ounce. The trend is obvious: Pull out money from gold and invest in the US Government paper.
With such fundamental seismic movements, the financial world will clearly throw up a serial turbulence. The age-old problem of lack of intermediary institutions such as banks in countries such as India will multiply. The columns of newspapers will be talking about the turbulence in banks such as the Syndicate Bank or the Union Bank of India. They are not the only banks in this category. However, just to remind ourselves that there are others too, does not mitigate the danger.
Nearly two years ago, when this writer was a part of the selection process of the chief executive officers for public sector undertakings, his colleagues on the panel were former Deputy Governors of the Reserve Bank of India: A Ghosh and SS Tarapore. The Additional Secretary(s) who used to sit with him were
Y Venugopal Reddy and RD Gupta. The former became the Governor of the Reserve Bank of India and the latter a Deputy Governor. This writer remembers that one of the Deputy Governors of the RBI even shared his doubts when it came to four of the PSUs.
It is amazing how the state of these banks have remained constant over the last two decades. Whether it is pleasing or worrying, it is a matter of fact on which side you are. Of course, careers are being made by stating the obvious. Market expert Anil Rego has asked for an unemotional investment process based on assets allocation. He has also pleaded for a long-term horizon and regularity of investment.
This writer is sure in saying this that Mr Rego is not staking any claims at originality. But that is another story. It may be more relevant to notice that there are organisations, who only a few months ago, when in need of capital, sold short-term bonds directly to the investors at more favourable interest rates than going to the bank. Deepak Nitrite can be a case in point here.
Similarly, the issuance of this sort of debt — commercial paper has been increasing in India. The banks by and large continue to be a trigger and their believe to seek multiple in-demnifications on the same issue is high professionalism. Mutual funds threaten to sell deposits at prevailing net asset value if they find know your customer at any point of time unsatisfactory. Only nobody knows what will cause this dissatisfaction.
It does not seem to bother anybody in particular. The unthinking happily sign unreadable photocopied deposit performa and the thinkers just ignore it. The race to key positions in regulating bodies continues unabated with the booty often going to paratroopers of non-resident Indian affiliation.
Talking of all this is a taboo, because it takes away from the frozen dignity, many financial specialist who insist on looking very starchy with stiff upper lip. This is not likely to fuel solutions. Even internationally, they are rumblings.
For example, in Australia, banks have rejected the International Monetary Fund’s claim that there would be little microeconomic cost in forcing lenders to de-leverage. Regulators should be asked, it is argued, to prioritise the implementation of the Murray financial systems inquiry’s recommendation. It is felt that it will substantially increase bank capital levels; its advisability or otherwise was not to be seen as a problem.
If one adds to it the fact that banks, globally, are not amongst the best capitalised institutions; it is not difficult to come to the reality of Indian banks. They continue to be slow, to pass along RBI’s rate cuts to the customers. Cheaper funds are available by going directly to the capital market. The Government persists with the failed interventions of recapitalisation
It’s time the banking system, especially the PSUs, get together to take a collective, professional look at its future directions of growth.