Can we bank upon the Banks

Among one of the industries I have keenly followed and analysed in last few years is Banking. The Apex Court will be hearing the Interest waiver case this week which in my view if properly argued can become a landmark case in Indian Banking History. How ?

Businesses and Business Models are born from Consumption needs and Consumer behaviour. Banking is the only business which has born from Policy. While there is definitely a need for an Institution for people to keep their surplus money ‘Safely’ and also an Institution from which they can borrow money and also an Institution which can facilitate transfer of money to others but these three not necessarily should be One and in fact, if the Consumer or Customer has its say, they shall never be One. But they are due the Policy and Law and are called ‘Banks’. They are also largest wealth creators for their shareholders in modern times.

Talking of Indian scenario, owing to regulatory changes in last few years, it is almost required by law for citizens to keep their surplus money or savings deposited with a ‘Bank’. Bank then lend this money to others, some of which never come back, sometimes due to fraud committed by ‘Bank’ itself. However, the law which requires the Citizens to keep their monies with a ‘Bank’ does not guarantee the return of the money to them. There is an Insurance for deposits upto 5 lacs which is firstly inadequate and is a liability insurance bought by the bank , there is no guarantee or certainty that the money deposited in compliance of the law is ‘Safe’. Yes, Right to Property is not a fundamental right, buts it’s a human right according to recent Apex Court judgement which should rank higher. So should the Bank Deposits i.e., CASA not carry Sovereign Guarantee ?. I would like to mention here that after ICICI Bank and Yes Bank fiascos, this is not just far fetched apprehension but a real risk. In fact, Bank Deposits are no more the risk-free or least risk asset-class. One of the major contributor to risk for any asset class is illiquidty and we had complete illiquidity for Yes Bank depositers for 18 days. The Asset Managers will appreciate that ’Complete Illiquidty’ for any asset even for short duration is dangerous. Even real estate the most illiquid asset class can be cashed out in 18 days. In last few months, the Depositors have started following the quarterly earning and research reports of the Banks they have deposited their money in, even if they do not own any stocks in those Banks, to assess the financial position of these Banks. People have moved their deposits to HDFCs and Kotaks of the world, which are supposed to be Blue Chips ( from Equity Market perspective) who have gladly accepted them at dearth cheap interest rates. So how come Bank Deposits are less riskier than Equity, forget about calling them as Cash or Cash Equivalent. As an Accountant, if a company has large deposits in Banks, I would recommend making provisions on them equivalent to the provisions those Banks have made on account of NPAs. This is called 'Mirroring of Risk'. Cash is no more the King.

Anyways, coming back to the Interest waiver case. while the matter is still sub-judice with the Apex Court, The industry experts have called this demand as absurd and unreasonable. This would be like seeking a Direct Benefit Transfer in respect of Covid disaster from Banks which are not Government but private parties. Mr. Uday Kotak, the biggest authority in the industry has said, if interest waiver has to be given, no interest on deposit should be demanded as well. My arguments are,

a)    We have a disaster / force majerus situation. Interest is a type of Economic Rent, the other two are Rent and Labour. Economic rents are "excess returns" above the "normal levels" that are generated in competitive markets.They should not be allowed to exist at least beyond normal level during disaster type situation when competitive market does not exist.

b)   Coming to Mr. Uday Kotak’s argument of Deposit interest. First of all the Depositor and the Borrower are not the same person so it is even more absurd to assume that the Depositor shall bear the burden of interest waiver. Secondly, the ‘Bank’ chooses how much interest it wants to pay to the depositer, how much charges to charge, to lend money or not and if yes at what rate. While the citizens are required by law to keep their monies with Banks, Banks are not obliged to lend money to citizens, as we know that most large ‘Blue Chip’ Banks are refraining from lending even after RBI/GOI instructions. Owing to strict entry barrier, favorable policy and a Cartel, Banks have become the den of profiteering. Needless to say, some large Banks supported Yes Bank restructuring only to help the Cartel and their own image. Tomorrow, if 5 more go down, no one will come forward.

c)    Taking advantage of Covid and rate cut, most Banks have reduced their Deposit Interest rates to meager and the depositors do not have any choice. Therefore let the Borrowers also not pay any interest or pay only meager interest during Covid period.

d)   Stock Market analyst have called Banking or Financials as the most risky sector during Covid. I would say it is the other way round. All other businesses have suffered due to Covid. In fact auto, aviation, retail, multiplexes may have zero revenues this quarter. Banks are the only businesses whose revenues/earnings will continue un-interrupted 24 hours even during lock-down. Isn't’ it unfair ? , let them also have their share of Covid losses, Let there be no interest.Analyst will say, that they will have their share of Covid in form of increased NPA. Come on. NPA is a cost of doing business in Banking. It does not compare with Revenue loss. Employees have not been paid or have been sacked. Shops and factories have not been allowed to operate. Why should Banks be the only one to be allowed to have their full earnings. Since it’s a business run through regulation and policy this cannot happen without law. RBI is opposing it, hopefully Apex Court will consider.

Coming back to Sovereign Guarantee, going by my logic, if tomorrow the matter goes to Apex Court and ruled in favour, can the Government do so ? Impossible. They are anyways not able to solve the million pieces Indian Banking Zigsaw puzzle. Earlier it was only PSU but now it is also the Privates. Banks have created too much of a Chaos. So what is the solution ? The general problem solving approach say that if the problem becomes too big and complicated, break it.

a)    ‘Banks’ as the name suggest should only be allowed to handle CASA and facilitate transfer of funds. They should be allowed to invest only in G-sec or similar risk-free securities. In other words, they should have 100% SLR. They should also have high Capital Adequacy Ratio. They may have lower operating margins but will have good net profit margin, since there will be no NPAs. Going by the mirroring of risk approach, then only bank deposits may be called as ‘Cash or Cash Equivalents’ and this will be as good as Sovereign guarantee. The ‘Payment Bank’ concept is very close to this. I am more than sure that the Bankers will be happy with this too. Even for the best banks, the NPAs or provisions on account of NPA eat away more than 30% of their operating margins which is more than the spread they earning on lending.

b)   The lending institutions should be separate. They may be called as NBFCs or anything else. They may raise money through Capital, CPs, Bonds or anything else except CASA.

c)    Only few Institutions, the so called ‘Too Big to Fail’ with may be allowed to do both.

As far as the Interest waiver is concerned, Yes it should be allowed. Although I also own a few Banking stocks and they will crumble like a cookie if it happens but what is right is right.