Thursday, May 24, 2007

erosion in Bank's margin

After causing much damage to banking system RBI data now reveals that the impact of high cost deposits coupled with slowdown in lending may result in shrinking of margin of the banks. Long ago I had pointed out that bankers are raising deposit rates abnormally without taking care of lending rates. When interest rate on deposits rises, depositors will not delay in switching over to new rate structure. Most of big depositors prefer breaking of old deposits and avail high rate of interest under new structure. But the same things do not appear to happen in lending rate. More often than not, it takes 15 days to 30 days in message reaching to branches. Then it takes months together for branches to actually put the increased rate into action. There may be several such branches where still old interest rates are continuing on advances.
Such negligence although do not occur in CBS branches ,non CBS branches covering more than 50 percent of business undoubtedly affects the margin available to banks. Moreover in many cases of retail lending, rate chargeable on advances is fixed and hence cannot be changed. To add fuel to fire, major portion of the advances in most of the branches (I would say more than 50 percent) are non performing assets in practice. Though not all bad advances are declared as non performer by banks it causes damage to bank's health slowly but steadily.RBI will be awakened from deep slumber when it is too late.
Altogether impact of such unwise policies is that banks have to see erosion in their margin and without fail they have to suffer weakness in bottom line.
Experts say that growth of lending is also low in the first two months and this time such slowdown is more pronounced because of rising interest rates on advances. My opinion says that it is an advantageous for banks that poor credit will reduce the chances of advances becoming non performing assets. Already quantum of NPA in banks if declared honestly crossed the limit of survival. Banks are being projected healthy to please the ministers but actually they all are on ventilators.
In such position RBI should ponder over causes of irregularities and weaknesses the ailing banks suffer and increase deep monitoring instead of believing on data submitted by banks. The ground reality is that RBI has inadequate manpower to monitor 65000 banks branches. Similarly all branches have been suffering from shortages of man power as compared to their requirement in tune with their business. That is why adhocism is prevailing all where. Somehow or other bankers are pulling on days and leaving the work of reformations and curbing growth of indiscipline and negligence (added by dirty politics of our rulers) to their successors. Who will bell the cat? When birds of the same feather are sitting at the helm of affairs in most of Public Sector Banks..