Easy life for bankers

It was not long ago that the life of bankers was considered very boring and tough. Not only were they always required to sit for long hours in their poorly-furnished offices to woo depositors to expand their operations, they were also needed to pay utmost attention to their asset portfolios which overwhelmingly represented loans to the private sector borrowers that were risky in nature. The situation has changed dramatically during the last few years as the banks have found it more profitable and convenient to increasingly invest their funds in government’s high yielding and risk-free securities which are readily available in the market because of a widening fiscal deficit and government of the day’s growing needs to finance this deficit from the banking system. Government borrows both through the issuance of T-bills which are of short-term maturity and relatively low yield, and through PIBs which are issued for long-term with a higher coupon rate. Of late, however, banks have stuffed their coffers with government’s long-term papers in anticipation of a reduction in interest rates due to a likely fall in inflation rate in the coming months. Their outstanding stock of PIBs has surged by 5.8 percent from Rs 3.457 trillion as of September, 2014 to Rs 3.659 trillion in November, 2014 while their holdings of MTBs stood at slightly over Rs 2 trillion at the end of November, 2014. Banks’ exposure in the government’s Ijara Sukuk (GIS) also now stands at Rs 291.4 billion, ie, 91.3 percent of total GIS of Rs 319.2 billion in circulation.

Such a high level of investment by banks in government securities is indeed a source of great concern as it adversely affects the economy of the country in a number of ways. While the profits of banking sector continue to grow, the bankers have not to be at all fretful about the quality of their assets with most of their funds invested in sovereign securities. Consequently, the flow of credit to the private sector is reduced, leading to stagnation in economic growth rate. It is, however, needles to say that a low economic growth rate badly hurts employment prospects. Of course, exports and tax revenue potential of the economy also suffer in the process. The trend of holding more PIBs that has been evident in the recent past also locks up liquidity for longer tenors, crowding out the private sector for a longer period and creating serious implications for proper matching of the balance sheets as overwhelming part of banks’ deposits is short-term in nature. As the government has been the only major borrower for the last few years, it has made the life of bankers very easy but practically chocked the country’s banking industry and starved the private sector of its credit needs.

The State Bank has rightly been concerned about the unfolding situation and has constantly advised the banks in its various documents to revert to its traditional business and serve as a financial intermediary between savers and investors in the country. Instead, the banks continue to direct the nation’s resources to the public sector in order to boost their profits. However, moral persuasion alone cannot change the behaviour of banks when big money is involved and there is no deterrence. In our view, there are certain instruments at the disposal of a central bank which could be successfully employed to change the attitude of banks. Though prescribing a reasonable limit on the banks’ holding of government proper would be most effective, proper adjustment in overall interest rate structure keeping in view the risk factor and maturity profile, could also motivate bankers to alter their mindset. However, it is of utmost importance for the government to undertake the necessary policy measures to minimise its fiscal deficit and try to finance it from non-banking sources to the maximum extent possible. This is particularly crucial because interest payments have already emerged as a major drain on scarce fiscal resources. The government paid Rs 1.148 trillion as interest payments in FY14, which was 31.6 percent of government revenues, 21.9 percent of total expenditures; and it constituted 4.5 percent of the country’s GDP. Of course, the continuation of such a situation is not desirable or tenable and needs to be reversed as soon as possible not only for the prospects of the economy but for the change in the present tendency of bankers to be passive and less innovative than the demands of their profession.