Friends
Indian Economy in last 68 years
has seen substantial growth post independence. The Economy got boost in 1991 by
way of liberalization. This growth was further fuelled by various political and
economical steps taken by Government India under different political parties.
Public Sector Banks have played
very crucial role in this growth . The trust and patience displayed by banking
authorities in Indian Entrepreneurs has been remarkable. Government has
continuously supported PSBs by way of infusion of capital from time to
time. Without this support, Indian banking
would not have been in such a healthy position.
Recently GOI announced infusion of Rs. 70 K Crs. in next 4 years. In past GOI has infused huge money into Banking system to keep them live and flourishing. There is nothing wrong to support the Banks owned by GOI but it should also look into certain issues which may be real causes of concern and may be strategic fault lines. In my view GOI should seriously look into these issues:
1. Subsidiary Companies: Most of the PSBs
are having one or more wholly owned subsidiaries in the field of advisory
services, ARCs, housing finance, Insurance, Asset Management, Factoring,
Broking etc. Some of the Banks are having key share in rating agencies too.
Most of the Rating agencies and Asset Reconstruction Companies are owned by the
Banks only. These subsidiaries are surviving on mostly fees from the
assignments created by parent company. In my view this is serious issue of
conflict of interest.
Let me explain
the issue: ‘A’ Bank who is a major Bank of the country has advisory firm
engaged in capital market, Restructuring, Debt Syndication, CDR,
TEV Study etc. This advisory firm will
take the assignment for loan syndication. Generally assignments are given out
of pressure. Being a subsidiary company parent bank will be soft in lending to
the client sourced by it. In my view
this activity falls into conflict of interest and probability of wrong decision
in lending becomes very high. Similarly, when an account gets stressed and need
restructuring, parent bank will give this assignment to this advisory firm.
Again this firm will charge heftily to liaise with parent bank on behalf of the
client. Again this is conflict of
interest and right decision may severely get affected as there is conflict of
interest. In the greed of earning fees, the chance of mistake becomes very
high. Other side, if some one does not give the assignment to this subsidiary,
parent bank may not appreciate and take wrong decision . In both the cases
parent bank and client are sufferer. Same
principle applies for Insurance and Mutual Fund activities. Further there is frequent transfers from
parent to subsidiary and vice versa.
2. Investment in ARCs and Rating Agencies:
Most of the PSBs are shareholders/promoters of Asset Reconstruction companies
and Rating agencies. As it is well known that ARCs play major role in case of
stressed accounts, the conflict of interest is quite apparent. If the stressed
accounts are being assigned to an ARC, irrespective to whatever level of
transparency, the role of a company promoted by a Bank is highly objectionable.
Same bank lending and post NPA, being assigned to own company can not be
justified and the chances of injustice to either Bank or the Client can not be
ruled out.
Suggestions: To make the Banks sustainable and stronger for long time, GOI should look into following suggestions:
1. PSBs
should not be allowed to enter into various different activities mainly those
of conflicting interest i.e. Capital Advisory Services, Syndication Services,
Restructuring Advisory, Insurance , ARCs and Rating Agencies. Those already
into these activities should be instructed to scrap these business in near
future;
2. Fund
utilisation by Banks should be monitored by a separate committee of experts,
other than RBI, regularly;
3. Transfer
from parent bank to subsidiary and vice versa should be immediately stopped as
this makes the institution vulnerable to losses;
4. Till
the PSBs are out of these subsidiaries, Same Bank should not do any business
with subsidiaries to bring in better decisions and transparency.
5. Subsidiary
Companies should be immediately headed by GOI nominees and designated team.
6. Any
business generated by Subsidiaries by way of using the office of parent bank or
pressure should be treated as misuse of office.
CP
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