Friday, August 20, 2010

The Hindu Business Line : Banks tread cautiously on floating rate deposits

The Hindu Business Line : Banks tread cautiously on floating rate deposits

Risk is inherent and in-built in any business including banking business. Banks in India were for long years regulated and regimented. Commercial Banks were almost treated as Development Banks after the two nationalisations in 1969 and 1980. But, what was the outcome? For all that development-oriented, rural and directed lending they resorted to in the seventies and eighties, in particular the PSBs ended up with huge losses and Non Performing Assets in the nineties when rules of the game changed.

Most of them were declared either non-profitable or non-productive, if not overtly but silently with the introduction of prudential norms. CRR, SLR, CAR and other parameters were seriously revised thanks to Narasimham Committee Report. Balance Sheets were never so transparent as they are in the post reforms era. Interest Rates were deregulated with minimum prescriptions and Asset Liability Management (also Risk Management) was introduced in a gradual manner when branch licencing was done with and computerisation set in a big way towards the end of the century.

Nearly two decades after the financial sector reforms, a typical level playing field has emerged again in the modern set up. PSBs, old and new Private Banks as also Foreign Banks are in stiff competition with their tools and techniques sharpened, manpower revamped and fully trained, technology support fully set in to handle their individual banks extend best customer service and offer best of products and services at attractive rates of interest. No doubt, India exhibited its robustness withstanding three or four major financial scams during the reforms period domestically or globally. They could absorb shocks of recessions and downturns but were not closed down as in USA.

This is a new challenge banks are taking by offering floating rate fixed deposit schemes. That is the real meaning of deregulation. While floating rate housing loans are in vogue for over a decade, why not fixed deposits too? If three banks have come forward to experiment this mechanism, RBI should close to ensure that no unhealthy practices are resorted to. And, SBI being the leader of the pack can certainly jump into such innovations beause of its size of balance sheet and assets. If others like Bank of India and IDBI Bank would like to follow the leader, let them. Let the respective managements prove their management skills and handle the funds profitably under the new scheme.

No comments: