Loan waivers, rate cuts may put banks in deeper distress; little protection for common man’s savings  

Veteran banker and financial wizard Deepak Parekh is absolutely right to lately express his concern about the system of loan waivers and write-offs “every now and again” while there is little “to protect the honest, common man’s savings.”

The HDFC chairman’s comments came in the wake of the crisis at the Punjab and Maharashtra Cooperative Bank (PMC), affecting over four lakh depositors who are in deep distress and fighting to withdraw their savings. The latter’s money is stuck with the urban cooperative bank after RBI put a withdrawal limit at ₹25,000 per account last month. Parekh said it is "brutally unfair" that “we have regular loan waivers and corporate loan write-offs but no financial system to protect the common man's savings.” Incidentally, political parties, fighting forthcoming assembly elections in Maharashtra, Haryana and Jharkhand, are promising fresh loan waivers to farmers and lower caste borrowers. In Haryana, BJP’s election manifesto promises a collateral-free loan of up to rupees three lakh to people belonging to the scheduled caste community, if voted to power again. It also pledges to give interest-free crop loan of up to ₹ 3 lakh to farmers.

"To my mind, there is no greater cardinal sin in finance than the misuse of the common man's hard-earned savings. It seems brutally unfair that we have allowed a system of loan waivers and write-offs every now and again, but yet we do not have a robust enough financial system to protect the honest common man's savings," Parekh said without mentioning any particular incident while launching a centre for financial studies at a B-school.

He said trust and confidence are the backbone of any financial system and one should never underestimate the power of ethics and values. "It is a pity that this is so often eroded," he said. Calling for encouraging savings if credit were to grow, Parekh said the savings rate at 30% of GDP has been showing a declining trend over the past decade. "Household savings is important for any economy and that is why there is likely to be a threshold beyond which lowering interest rates becomes difficult….. Our savers prefer assured returns which is why fixed deposits continue to remain the preferred choice of savings,” he added.

However, loan waivers, write-offs and political doles are not the only reason for the weakening of the financial system. The frequent and undesirable rate cuts by the country’s central bank and forcing commercial banks to lower lending and borrowing rates without any concern about their resultant effect on bank finances are also throwing the financial system out of gear. During the last 10 years, most banks, led by the National Housing Bank, raised large term deposits from the public at annual interest rates varying from nine per cent to 11 per cent. Many of these fixed deposit accounts are still to be matured. Banks are spending thousands of crores to service those high-cost term deposits while they are now suddenly forced to cut down lending rates to eight to nine per cent per annum. This has put many banks in a tight spot. The sudden cut in term deposit rates — to six to 6.5% — has already chocked the deposit growth. Medium-level income holders, who form the bulk of fix depositors, are shifting to riskier non-bank savings threatening a devastating impact on the banking and financial system.

The logic behind the series of sudden rate cuts by India’s central bank is as political as the loan waivers and write-offs. It ignores the fact that the latest round of rate cuts haven’t benefited the economy, although they may have helped a section of businessmen to pocket some extra money. It has failed to generate investments in manufacturing and production and create gainful employment. The working class is reeling under rising prices of most of the essential goods and services. At the same time, the income growth has slowed down and the quality of jobs has become poorer, especially in the services sector. Diminishing buying power with the public is the main cause of the current recession. Unfortunately, the government is yet to come out with a comprehensive economic policy to fight the recession by creating jobs, improving the buying power of the public and encouraging bank savings.

Banks are in bad shape. The country’s bad debt malaise has mostly centred on corporate debt and poor recovery of farm loans. Now, there are signs of stress even in household debt with the fall of the real income of the public and a very high unemployment rate — considered to be the highest in 45 years — with lenders grappling with highly soured debt levels. The economic slowdown and drying-up of credit from the ‘shadow banking’ system do not augur well. The latter represents a group of financial intermediaries facilitating the creation of credit across the financial system but whose members are not subject to any regulatory framework. The whimsical rate cuts by the central bank have not helped the economy. Yet, the practice continues raising tension for both depositors and lenders.

Earlier this month, the central bank had cut the key lending rate by 25 basis points, marking the fifth consecutive rate cut by RBI this year, aggregating to 135 bps. Is the central bank’s decision on such rate cuts was governed by any study or research work on their positive impact on the economy? Or, was it just influenced by unwritten directives of political bigwigs at the Raisina Hills? Unfortunately, at stake are the financially overburdened banks and common man’s savings. The country’s financial system has never been under such a pressure since July 19, 1969, when 14 largest commercial banks, accounting for 85 per cent of India’s bank deposits, were nationalised to protect them and depositors.