Ex-RBI Governor Reddy slams both UPA and NDA govts for mess in banking sector
Dailyhunt
June 11, 2018
Former Reserve Bank of India (RBI) governor YV Reddy slammed both the previous United Progressive Alliance administration as well as the present National Democratic Alliance regime for the mess in the banking sector. Reddy has blamed the earlier regime for post-crisis measures which he blames for the present surge in bad loans. At the same time, he hit out at the current government for large frauds and for losing public trusts on safety of bank deposits.
The Reserve Bank of India and the central government must together come up to with non-disruptive changes with vision and clarity to restore depositors' confidence in the banking system, former RBI governor YV Reddy has said.
Pointing out that the confidence in the working of public sector banks is at a historical low, Reddy said: "Both RBI and the government together need to ensure that they bring about non -disruptive changes while maintaining trust in the banking system. This is the need of the hour."
The former central bank governor addressed the topic of "Keeping Banks Safe" at the Shivaji University in Kolhapur.
The speech comes amid a slew of scandals affecting the banking system, starting with the massive one at Punjab National Bank (PNB) that was unearthed in February.
The rise in non-performing assets (NPAs) and provisions for stressed assets has led to 19 of the 21 public sector banks in the country reporting a collective loss of Rs 60,000 crore.
Though RBI's main responsibility is ensuring the stability of the financial system, and depositors' protection, it is also responsible for maintaining the public's trust in the banking system.
Referring to the PNB fraud, worth over Rs 14,000 crore, Reddy said: "The fraud is of such a magnitude that it affects the credibility of RBI in ensuring the trust of people in banking. To this extent, it has to review its own regulatory and supervisory practices."
Reddy, who headed the RBI from September 2003 to 2008, said today's problems are traceable to the global financial crisis ten years ago.
"The problem looks big because it is accumulated and not revealed for several years after the global financial crisis," he said, adding that the NPAs in 1996-97 were 17.8 percent of gross loans and 9.2 percent of net loans.
"These ratios are much higher than what is prevailing today at 11.7 percent and 6.9 percent in 2016-17. They were brought down to 9.4 percent and 4.5 percent in 2002-03, still higher than in 2015-16."
The most affected party in all this mess is the depositor. Rich and powerful people defaulting on their loans, and top management of banks getting embroiled in criminal investigations only end up adding to the pressure on the depositor's shoulder.
When a bank lends, the money it lends is that which is collected from its depositors. So when a large loan is defaulted on, the interests of depositors are adversely affected.
A number of strategies, including tightening of rules to match global standards, and re-capitalization of public sector banks helped assuage tensions during the crisis.
Reddy, who is well known for being an outspoken central banker, and who has also worked with the government, pointed out that RBI's attempts to introduce good governance practice in public sector banks, like in private sector banks, failed to convince the government.
Reddy's speech puts on record what many in the banking sector have been informally stating all along. Reddy, who was credited with steering India clear of the global crisis by placing restrictions on capital flows, was denied a three-year extension by the government. Soon after bureaucrat D Subbarao was appointed a governor in September 2008. The finance ministry too saw a change with P Chidambaram moving to the Home Ministry and Pranab Mukherjee taking over finance after the 26/11 terror attacks in Mumbai.
".the regulation relating to management and governance was entirely with the government. Our attempts to try and persuade the Government to use similar criteria for selection of Board directors did not succeed," Reddy said.
However, on Friday, interim finance minister Piyush Goyal said that the government is considering setting up an asset reconstruction company for faster resolution of bad loans.
Reddy suggested that each state government should be encouraged to publish a white paper to promote urban cooperative banks as institutions that can expand and grow in order to offset the ailing banks' performance.
He said there must be an official pronouncement that "banks are special and deposits in banks are very special".
The months that followed saw a massive monetary and fiscal stimulus which resulted in widening of the fiscal deficit and India being placed among the fragile five in 2013.
Reddy, who headed the RBI from September 2003 to 2008, said today's problems are traceable to the global financial crisis ten years ago.
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