Banking crisis

Crisis in Indian banking seems to be all-pervasive. The largest bank, SBI, has reported loss during the third quarter.

During the quarter ended Dec 31st, the bank has incurred loss after tax to the extent of Rs.2,416 crore. Loss before tax is Rs.7,121 crore. This means SBI has secured tax refund or credit for Rs.4,705 crore during this quarter. But for this, the position would have attracted more adverse attention.

In the nine months ended Dec 31st, loss before tax is Rs.8,751 crore. In other words, SBI has made losses in previous quarters also. SBI Chairman says we have reached the end of NPA cycle. One hopes that his judgment is correct.

There is another disturbing development. GOI has advised banks to repay the Additional Tier 1 capital even if it is not due for repayment. This move is apparently because some banks have accumulated losses mandating non-payment of interest on perpetual bonds. This will lead to sovereign embarrassment unless prevented. The sum and substance of this is that banks have funds, but not profits. This is potentially a Ponzi situation.

Changing times

There was a time when people had utmost faith in banks. It was not unusual for people to seek advice from their bankers how to invest their hard earned money. Any money kept with banks was deemed to be 100% safe.

Post 2007, things have changed drastically. It has become difficult to distinguish between bankers and politicians in terms of their trust-worthiness. Frauds committed by and on banks have become one too many.

I am tempted to write this because today when I saw a headline in NYTimes "DealBook: Barclays Charged with Fraud", I was least interested in reading the details. I was only wondering 'What is new in a bank committing a fraud?'

Would banks ever regain their credibility?

Corruption in Banks (contd.)

Writing in The Hindu, C.R.L.Narasimhan, a respected financial journalist makes the following observation:

"The usual way senior executives of government banks get into trouble is through the actions of their subordinates in which case it becomes a question of vicarious responsibility. It is likely that where the number one person actually instigated the action that leads to criminal behaviour on the part of one or more of his subordinates he will be clever enough to camouflage his own role.

That leads to the puzzling question as to why Mr. Jain was brazen enough to demand a bribe over the telephone (and that too the one which he normally uses). A person with even half the intelligence a CMD of a bank has (or presumed to have) would have a thousand other ways to ask and receive bribes if he wants to be corrupt.

It is also logical to think that the vice-chairman of a large corporate ‘negotiating’ a bribe with a senior executive of a nationalised bank would be more discreet."

The writer has subtly indicated that corrupt deals are normally transacted in a more recondite and esoteric manner so that the guilty will have easy escape routes. Those conversant with banking transactions tend to believe that corruption is very rampant.

Therefore, Narasimhan's conclusion that " However, their top executives certainly do not deserve to be tarred with the same brush just because of the alleged corrupt ways of one of them" strains our credulity.

It is more realistic to say that  honest bankers are not yet totally extinct.

Corruption in banks

S.K.Jain, Chairman and Managing Director of Syndicate Bank has been arrested on charges of corruption by CBI today (2nd August). The surprise is not that CBI has sensed bribery in Syndicate Bank. The shocking surprise is CBI's inability / unwillingness to identify corruption in so many other banks.

It is generally believed that the positions of Executive Directors and CMDs in public sector banks carry a price tag. Only those who pay a 'decent sum' to powers-that-be are promoted to such privileged positions. It is rationalised that such payments are recovered by charging speed-money from borrowers.

This is not to say that all top executives are mercenaries. A preponderant majority perhaps is. Venal politicians have an unhealthy say in bank appointments.