Bank woes: 'When they need surgery, they are using a bandage'

'The day-to-day control of banks is in the hands of political bosses and bureaucrats who are not answerable.'
'The political system uses the banks as a helicopter to throw money to the sector they want to patronise in order to win the next election.'

 

S Muralidharan retired as the managing director of BNP Paribas after serving the bank for 20 years. He started with the State Bank of India and worked there for 12 years.

The banker, bottom, left, tells Shobha Warrier/Rediff.com what ails the banking sector and how it can be nurtured back to good health.

Currently, there is panic in India about public sector banks. As a former banker, do you feel there is reason to panic?

There is good reason to panic, but it is not good to panic.

If you want to take calm and collective action, you cannot panic. When you panic, you take bad decisions.

Banking has, over several decades, emerged as the single most important sector in the economy. If something goes wrong with the banking sector, it can cause havoc in all the other sectors.

For example, in the 2007-2008 meltdown, one investment bank failed and the panic resulted in the collapse of many more banks.

As a result, no bank was lending money to another bank even though, earlier, they had been doing it everyday to the tune of hundreds of billions of dollars.

When they stopped doing what is called overnight lending, the entire banking system came to a standstill.

When the banking sector comes to a standstill, everything including small time borrowing and lending or any kind of transaction between any two people comes to a halt.

Panic between banks is a bad thing. It can make the entire economy collapse.

Do you think the Reserve Bank of India is responsible for the present mess in the banking sector?

The short answer is no. As a banking regulator, it is the job of the RBI to regulate banks. It is like holding a parent responsible because the parent pointed out the wrongdoing of the child.

Similarly, because the RBI identified your non-performing assets and bad loans, you cannot say the RBI is responsible for the bad loans you created. The argument of the banks that they had bad loans, but didn't want the RBI to point it out is ridiculous.

Okay, there is some merit in the banks in saying that the RBI can't suddenly come down on them like a ton of bricks.

For the record, the RBI has been saying for a long time that the norms for recognising NPAs is fishy and that they (the banks) should come down from the one year norm to 180 days to 90 days, etc. This has been going on for many years.

So the banks' stand that the RBI is responsible is utterly ridiculous.

Another criticism is that the Indian banking sector is not ready for international norms like Basel 3. Do you agree?

This is what I call Indian exceptionalism. For each and every thing, they say India is different and it will not work in India.

Does India have three legs and two heads? The fact is, we are not different behaviourally from anybody else.

So you feel in a globalised world, at some point or the other, such common norms have to be implemented?

Absolutely yes. For any industry to function, there have to be norms. You can't have a free-for-all system in any business and more so in banking.

Whether you like it or not, the reality is that banking is the most important sector in an economy.

As the importance of money grows in societies, banking becomes inevitable as money has to move. And when money has to move, there have to be regulations.

In 2016, we cannot say that we do not want regulations. We are 5,000 years late for that!

The question is, do we have sensible banking regulations?

Do we?

By and large, I would say, yes. The RBI's role is a bit like parenting. The banking regulator has to regulate the bank.

It is true that we have too many laws. Like (eminent jurist and the late Supreme Court justice) V R Krishna Iyer said, an Indian is violating 137 laws at any point!

There are no clear cut laws that say if you do this, this and this, the banks will be happy and the economy will flourish. You have to do corrections all along.

But, generally, there is a need to minimise the number of regulations so that the regulations that are there can be supervised effectively.

Bankers say it is due to the global economic slowdown that many infra projects got stuck and became NPAs.

It was not recession that put all the infra projects on hold; it was because they could not acquire land. The local, civic government could not help the projects with the necessary permission to complete the process.

Though there are many reasons, I feel this is the first thing they should look at.

Before you sanction a loan to an infra project for a five lane highway, a bank should look at whether the acquisition of land is possible. Without looking into the aspect, if you provide a loan to the project, who is to blame?

You can't blame China or the USA or global recession for projects that are getting stalled.

The government gives sanction to build an airport to a company that has no expertise in the field and then bankers give loans to such projects.

Who is to blame -- the banks that give loans to such inexperienced people or the political system that forces banks to give loans?

All of them have to share the blame.

I would say the biggest problem we face is the moral hazard in the banking system.

Sixty per cent of our banking is under government control. There is a fundamental problem with this.

The day-to-day control is in the hands of political bosses and bureaucrats who are not answerable. The political system uses the banks as a helicopter to throw money to the sector they want to (patronise) in order to win the next election. This has to stop.

It was reported that wilful defaulters owe banks up to Rs 4 lakh crores...

I would blame the moral hazard arising out of political ownership and control on the banks as the main reasons for this.

Another reason is that most of these banks are into everything, from lending Rs 15 to Rs 15,000 crores. And this happened because of political interference.

Is merger an answer to this problem?

Merger is not a solution at all. Nobody should be too big to fail.

The idea to merge all the subsidiaries of State Bank into one is a stupid idea from all angles.

What is needed is questioning the independence of the top management of government-owned banks.

You mean accountability?

Accountability in banking is usually used in the sense of who actually did something wrong? Can you fix it on somebody's head?

The leader of a bank cannot say he didn't know what was going on. He has to be accountable, but everyone is in survival mode. Now, there are committees and committees and nobody is accountable.

You said merger is not a solution. There are talks of downsizing...

Yes, they should keep banks smaller. In fact, the government has already started creating small banks with specific intentions.

For example, the types of skills required for rural lending is different from lending done in an urban area.

What the banks have to do now is to keep the bad loans aside so that new businesses don't get pulled down.

The RBI's decision to ask the banks to find out how bad they (the bad loans) are and then come out with a solution is quite wise.

In India, people think businesses are forever. No, they are not.

Like animals and humans, businesses also die due to various natural causes.

If you take the (top) 100 businesses of the US in the last 100 years, many of them do not exist at all. We must accept that businesses become irrelevant after a while and can fail. It's like people dying.

Do you see a revival of the banking sector?

It has to when there are a lot of good things going for the economy.

When you have an economy that grows at 7 to 8 per cent with 1.2 billion people, adding more and more to the spending population over the age of 18 the size of which is more than many countries, obviously there has to be a revival.

But it depends a lot on political will.

The political reality is that when you need radical surgery, they are using a bandage.

S Muralidharan's photograph: Sreeram Selvaraj