General Banking News

7/28/2019 General Banking News

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Shadow banking in China

http://www.thehindubusinessline.com/todays-paper/tp-opinion/article2586801.ece

Basically, this refers to non-depository banks and other financial entities such as investment banks,

mutual funds, hedge funds, money market funds and insurers, who typically do not fall underbanking regulation.

RBI's most interesting move interest rate deregulation and its impacts

http://www.thehindubusinessline.com/todays-paper/tp-opinion/article2595781.ece

Nod for Videocon, Liberty Mutual general insurance joint venture

http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article2595826.ece

FIIs allowed to invest in debt instruments of non-banking finance firms

http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article2595828.ece

New banks should be allowed to maintain competition, says Rangarajan

http://www.thehindubusinessline.com/todays-paper/tp-others/tp-editorial-feature/article2601896.ece

Opportunity in private banking space growing'

http://www.thehindubusinessline.com/todays-paper/tp-others/tp-editorial-

feature/article2601893.ece

Focus on customers first, and not products

As acquiring a new customer costs six times more than retaining a customer, banks also have

the need to improve customer loyalty by segmenting them

http://www.thehindubusinessline.com/todays-paper/tp-others/tp-editorial-

feature/article2601903.ece
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2/14

Deregulation of SB rates gives more options for customers'

Deregulation of interest rates on savings bank account will only prompt customers to move from

one bank to another, rather than bringing in new customers into the banking system, said Mr K.R.

Kamath, Chairman and Managing Director, Punjab National Bank. People who do not have money

in savings account of any bank might not even know what interest rates it offers. So it (the

deregulation) will only benefit existing customers and prompt them to move from one bank to

another for higher rates, Mr Kamath said at the Bancon here on Sunday.

Gokarn to banks: Use KYC to Grow with Your CustomersKnowing customers will help banks to

grow, said Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, while delivering a special

address at the Bancon 2011, held here on Saturday.

If you really know your customer, you will be able to grow with your customers, he said, adding

that knowledge capital will enable banks to move from KYC to GYC (grow with your customer).

According to him, knowledge is the key to understanding the market. KYC norms will thus help banks

understand the demographics, income, etc which banks could use favourably in serving customers

better and thus grow with their customers.

Dr Gokarn pointed out that it is the middle ground where there are many opportunities, and even as

the banking system is dealing with its internal challenges, it is important for banks to come out with

products and services targeting this opportunity.

Just as there is an opportunity in rural financial inclusion, urban financial inclusion also throws openlot of opportunities for banks, said Dr Gokarn. Banks should analyse the basic motivating factors for

savings and borrowings, which will help them meet the needs of customers better.

Informal sector focus

For all emergencies, the primary source of credit for the financially excluded in the rural and urban

areas is the informal sector.

Banks need to explore this opportunity and meet these needs, which mean lower cost of

borrowings for these people, he said. Encashing the demographic dividend properly is not possible

without knowing the customers better. Understanding the motivators for savings and borrowings is

key to making financial inclusion a profitable venture.

SBI chief for doing away with cash reserve ratio

The Chairman of State Bank of India, Mr Pratip Chaudhuri, wants the cash reserve ratio (CRR) to be

abolished. Today, banks are required to keep 6 per cent of their deposits in cash with the Reserve

Bank of India, on which the RBI pays nothing.

Speaking to Business Line on the sidelines of Bancon 2011, Mr Chaudhuri said that CRR is an NPA

(non-performing asset) for banks.


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Asked what according to him was the appropriate level of CRR, he said that he would like it to be

brought to zero.

I don't mind SLR, he said, referring to the 24 per cent statutory liquidity reserve to be maintained

by banks, in liquid government bonds. SLR serves a purpose (of providing debt funds to the

government), he observed. He also pointed out that the banks get reasonably good returns.

Responding to another question, Mr Chaudhuri said that SBI had insured all of its export credit with

the Export Credit Guarantee Corporation, as a result of which the bank's capital requirement would

come down by 25 basis points.

SBI is under pressure to keep pace with capital requirements. One of the means it has devised to

achieve this is to insure export credit with ECGC, on account of which the capital call would come

down.

The bank believes that while the fee that it would pay ECGC would balance out the losses due to bad

debts if the loans were not insured, the benefits would be mainly in terms of lower capital calls.

Also, ECGC fees are fully tax-deductible. On the other hand, there is a cap (of 7.5 per cent of gross

income) for loan loss provisions to count as tax deductible expenditure.

Is SBI's Tier-I capital really low?

The downgrading of State Bank of India by Moody's, an international credit rating agency, is not

because its Tier I capital is lower than the minimum stipulated by the RBI, but largely due to the

Government of India (GoI) not fulfilling its own commitment.

Recognising this, the government has recently decided to infuse Rs 8,500 crore in the form of capital,

as reported recently in this paper. To state a fact, SBI's Tier I capital, at 7.6 per cent, is higher than

the regulatory requirements, either in India or anywhere else on the globe. The important issues are

discussed in this article.

Regulations regarding the capital of commercial banks emanated from what are known as the Basel

rules. These were laid down approximately two decades ago by the Bank for International

Settlements (BIS), based in Basel. BIS is a club of the top central banks. Till then, there were no rules

regarding the minimum level of capital of banks in relation to their assets (and consequently,

borrowings through deposits or otherwise).

When a new category, Tier II capital, was created, it consisted primarily of long-term loans that were

contractually subordinated to deposits. The level was placed at 8 per cent as capital funds (CF),

comprising Tier I (shareholders' funds) and Tier II.

CAPITAL FUNDS

The Reserve Bank of India adopted these rules in 1992. Later, the RBI tightened the level to 9 per

cent of CF for banks operating in India, against the international norm of 8 per cent. The RBI further


4/14

laid down that banks should set apart from profits, 70 per cent of all Non-Performing Assets (NPAs),

irrespective of the level of security held against them.

Thus, if a loan is secured by valuable property worth more than 90 per cent (potential loss 10 per

cent), even then, in the bank's books, it will be valued only at 30 per cent. Both these unique rules

make the banks in India financially stronger than those in other countries.

BIS modified the norms in 2006 (called Basel II), and the RBI has adopted them, with some changes,

but retaining the higher level of 9 per cent for CF. Despite the prudential level of 8 per cent for CF,

many large international banks in the West faced bankruptcy after 2008, because of a rule in the

Basel norms. Chastened by the recent financial meltdown, all major central banks are in the process

of evolving higher capital requirements and even some minimum liquidity to meet emergent

circumstances. Only now, it is contemplated that there should be a minimum level of Tier I capital.

The proposal is to have at least 4.5 per cent as Tier I capital, and an additional capital conservation

buffer of 2.5 per cent, with a total of 7 per cent. It is yet to be implemented. SBI's Tier I capital isabove this level also. Compared to SBI's level, the average of banks in Eurozone is 4.7 per cent, in UK

4.63 per cent, Japan 4.70 per cent and China 5.63 per cent; only in US, the average of major banks is

7.87 per cent, as per a study of top 1000 global banks.

MINIMUM CAPITAL

Even before BIS thought of minimum Tier I capital, the RBI had stipulated that banks in India should

have Tier I capital equivalent to two-thirds of total capital funds, or 6 per cent. SBI's level is well

above this limit. In spite of all these facts, Moody's latched on to the budget speech of the Union

Finance Minister in 2010, when he said, inter alia, that: For the year 2010-11, I propose to provide a

sum of Rs 16,500 crore to ensure that the public sector banks are able to attain a minimum 8 per

cent Tier I capital by March 2011.

For Finance Ministry babus, such commitments are not sacrosanct, and they weren't monitoring the

situation vis--vis SBI. It is a different matter that, for them, even guarantees given by the

Government are not binding and are rarely met on time and in full.

To shore up capital in time, SBI has been pleading with the Government, in vain, to contribute its

share. Taking cognisance of this, Moody's reportedly commented that SBI's efforts to secure this

capital for the better part of the year demonstrates the bank's limited ability to manage its capital.

SBI was, till recently, majority-owned by the RBI, and the Government took over the ownership a

few years ago. Had the RBI continued to own, SBI might have raised the required capital well in time.

Only now, Government mandarins have woken up and have promised to give additional capital of Rs

8,500 crore to SBI. With this, SBI should comfortably meet the Government's goal of 8 per cent Tier I

capital, for public sector banks.

To conclude, SBI continues to be a well-capitalised bank based on regulatory requirement, but needs

to augment capital for expansion because the portfolio of non-performing assets of the banking

system might grow due to recessionary conditions faced by the industry and business. And,

government officials should take prompt action with regard to nationalised banks' capital needs, asthey are the bedrock of our financial system.


5/14

SBI needs to augment capital for expansion as bank NPAs may grow as a result of the recessionary

conditions.

Planning Commission nod needed for capital infusion, says SBI chief

The Planning Commission has to give its nod to the Central Government's Rs 3,000-4,000-crorecapital infusion plan in State Bank of India, said the bank's chairman, Mr Pratip Chaudhuri.

The Government has allocated us about Rs 3,000-4,000 crore. This has to go to the Planning

Commission, because this is an investment, and not expenditure, decision. The Government will give

capital to all the banks at the same time, Mr Chaudhuri told newspersons after a meeting between

the Finance Minister and the heads of public sector banks here on Tuesday.

The bank is hopeful of receiving capital by end-December. Capital infusion of Rs 3,000-4,000 crore

coupled with reasonable profits will boost the bank's Tier I capital adequacy ratio to 9 per cent. In

case we do not get funds by December, we should get them by March 2012, he said.

The Government is mulling options such as preferential issue of shares, rights issue and qualified

institutional placement for infusing funds into the bank. In case the Government decides to go for a

rights issue or a QIP, then its stake will remain unaltered at 59.40 per cent, whereas if it is a

preferential issue, the Government's shareholding could go up to 65 per cent, Mr Chaudhuri pointed

out.

Talking about asset quality, Mr Chaudhuri said that there has been a rise in non-performing assets in

sectors such as power, aviation and textiles.

Net Interest Margins

State Bank expects to surpass its net interest margin target of 3.5 per cent during the current year.

In the beginning of the year our projection was 3.5 per cent, and we have already achieved NIM of

3.62 per cent so far during this year. The current indication is that the margins will surpass that level

by the end of this year, he said.

The bank has no immediate plans to raise interest rates on saving deposits. We do not intend to

raise interest rates now as there is no flight of deposits. On the contrary, we are seeing accretion in

deposits, he said.

Moody's downgrades banks' outlook

Global credit rating agency Moody's Investors Service has revised its outlook for India's banking

system to negative from stable.

It also warned that bank ratings may come under downward pressure.

This change in outlook is due to concerns that an increasingly challenging operating environment will

adversely affect asset quality, capitalisation, and profitability of Indian banks.

India's economic momentum is slowing because of high inflation, monetary tightening, and rapidlyrising interest rates, said Mr Vineet Gupta, Vice-President and Senior Analyst, Moody's.


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At the same time, Mr Gupta said, concerns have emerged over the sustainability of the recovery in

the US and Europe, and the rise in the borrowing programme of the Indian Government, which could

drain funds away from the private credit market.

According to Mr Pratip Chaudhuri, Chairman, State Bank of India, the agency's earlier experience in

overseas markets may have prompted it to believe the worst.

Emphasising that the Indian banking system was stable, Mr Chaudhuri averred that unlike their

counterparts in the West, Indian banks did not have any hidden assets, did not deal in exotic

products and were conservatively leveraged.

Mr Hemant Contractor, Managing Director, SBI, said the change in outlook by Moody's will not come

in the way of his bank raising funds at competitive interest rates from overseas markets.

Given the tightening environment, Moody's is anticipating that banks' asset quality will deteriorate

over the next 12-18 months, thereby causing an increase in provisioning needs in 2012 and 2013.

The rating agency expects loan growth to be a strain on the banks' capital over the next 12-18

months. As monetary conditions tighten and economic activities slow, it sees bank loan growth

falling to 16-18 per cent in 2012 and 2013, from 21 per cent in 2011.

Asset quality to deteriorate

When it comes to profitability, Moody's expects it to come under pressure due to lower interest

margins as deposit rates re-price and get a further push from the latest liberalisation on savings

deposit rates.

For those banks with weaker capital ratios and higher asset quality pressures, their standalone

ratings are likely to come under pressure as underscored by Moody's downgrade of SBI's banking

financial strength rating on October 4.

Positive side

But, on the positive side, Moody's recognised Indian banks' stable customer deposit base and high

level of government securities holdings, which provide them with a resilient funding and liquidity

profile that buffer them against destabilising shocks.

Moody's also expects the Government to remain committed towards providing support to bothpublic and private' banks. Such potential support translates to an average one-notch uplift to the

banks' debt and deposit ratings to Baa2', compared with their standalone base line credit

assessment of Baa3'

Where are India's savings?

There are many paradoxes attached to Indian savings. At over 30 per cent, India has one of the

highest savings/GDP ratios in the world. Yet, firms have been raising cheaper capital abroad, in the

low-saving economies of the West. Small firms also find it difficult to finance their needs, while

exclusion from the formal financial system is widespread.


7/14

What is equally paradoxical is that our policymakers point to the high domestic savings to also

calculate a high potential growth rate. An incremental capital-output ratio of 4, with capital

availability of 40 per cent of GDP (based on a peak savings achievement of 36 per cent plus a current

account deficit of 4 per cent), gives a 10 per cent rate of growth.

At the same time, despite these high savings, every effort is made to attract foreign capital. If it is

domestic resources that is making growth possible, why is more foreign capital so essential? A figure

of Rs 40 lakh crore is floated as required for infrastructure investment over the next five years. But

since the safe level of the current account deficit is about 3 per cent of GDP, not more than one-

fourth of this can come from abroad. Foreign borrowing could be large in absolute numbers, but is

dwarfed by the share of domestic resources required.

What this means is that the Government should be spending most of its energy on improving the

financial intermediation of domestic savings.

SAVINGS INTERMEDIATION

More household savings should pass through the formal financial sector. Financial inclusion can

increase the share of financial savings. Large mobile penetration offers the opportunity to develop

complementary institutions and finally achieve inclusion. But these opportunities are poorly utilised

as yet. In the absence of financial inclusion, the government's large rural spend has actually reversed

financial intermediation. The currency-deposit ratio, which had been steadily falling, increased over

2008-10, as more income went to people excluded from the banking system.

After 20 years of financial reforms, the percentage of household financial savings in stocks and

debentures, including through mutual funds, have shrunk from a pre-reform 20 per cent to as low as

5 per cent. Physical savings constitute half of domestic savings and the large household stocks of

gold are not even part of measured physical savings.

Intra-day trade and foreign portfolio flows dominate Indian equity markets. Allowing pension and

insurance funds to invest in stocks could be one way of increasing household savings that are

invested in markets. This type of savings also provides essential long-term finance for infrastructure.

INSTITUTIONS AND SYSTEMS

Technology cannot deliver alone. There have to be other institutions and systems to suit and adapt

to Indian conditions. For example, deeper thought should be given to why the mutual fund model isnot bringing in household savings. What is the proper role of brokers and of commission fees?

Can competitive fees for genuine services be combined with tighter systems? One could probably

increase the time for cheque clearance in relation to IPOs, thereby reducing households' need to

authorise brokers, which can be misused.

Information on low-cost financial alternatives such as index funds could be made available on

websites. These websites on financial products can be ranked or rated by the Government or a

rating agency.


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The mobile equivalent of savings instruments, which works because it meets real needs, is yet to be

developed. Households need secure inflation-indexed instruments that deliver decent returns.

Despite rising interest rates, inflation gives households negative real interest rates on their savings.

The private sector under-provides financial innovations, since copying reduces returns to the risks on

costly product innovation and development. Households associate government securities (G-secs)

with security. Government-led product innovation, more clearly linked to G-secs, may work. It is also

the most stable way for the government to borrow. In Japan, government debt is domestically held

unlike in Greece, where it is with foreign banks.

UNDERDEVELOPED MARKETS

The supply of G-secs is very large in India, but banks hold the bulk of this as a statutory requirement

(SLR). Since it is not marked-to-market (MTM), interest rate risks are not hedged, preventing an

active debt market from developing.

It illustrates how a valid practice gets locked in, even when it has become dysfunctional. A system

designed for one regime continues in another.

In 1985, the Reserve Bank of India (RBI) provided for valuation of held-to-maturity securities at cost

prices in order to facilitate movement to-market determined interest rates.

This would mitigate the erosion in value of SLR G-secs from the expected rise in rates. But the

system continues even in 2011, when two-way movement in interest rates is established. There is

strong resistance from some banks to a fall in the MTM share of SLR securities.

The absence of an active G-secs market also makes it difficult for the RBI to conduct Open MarketOperations and fine-tune liquidity. As domestic savings do not enter and interest gaps widen in

narrow markets, firms borrow abroad. India's short-term debt, as a proportion of its total external

debt, has reached 40 per cent in terms of residual maturity, at a time when international markets

are stressed.

Despite India's high savings to GDP ratio, every effort is made to attract foreign capital. There is

obviously a problem of financial intermediation of domestic savings.

Asset quality continues to slip - SBI

Even as the profit growth of State Bank of India (SBI) beat street estimates, asset quality worries

continued to exert pressure on the bank's operating performance. In spite of showing a 12.3 per

cent year-on-year growth in September quarter's net profit, higher slippages in non-performing

assets (NPAs) led to the SBI stock losing 6.76 per cent in Wednesday's trade.

NPA woes continue

SBI's gross NPA grew 22 per cent between June 2011 and September 2011 as against 19 per cent by

other public sector banks (PSBs). This even as SBI already has higher levels of stressed assets.

Slippages have been witnessed predominantly in the agriculture, corporate (export oriented, iron

and steel and hospitality segments) and SME portfolios.


9/14

Adding to concerns were slippages on assets already restructured earlier which contributed to 29

per cent of the net slippages between June and September.

Consequently, SBI's gross NPA ratio rose from 3.28 per cent as of March 2011 to 4.19 per cent during

the September 2011 quarter.

Markets also seem concerned about expected moderation in economic growth exerting further

pressure on the asset quality of banks, including SBI.

Core operations improve

The asset quality slippages overshadowed what was otherwise an encouraging performance as the

bank increased its focus on profitability rather than volumes. While this led to loss of market share in

loans, the bank's net interest income growth during the September quarter was at an impressive

28.6 per cent year-on-year compared to the 11 per cent registered by other PSBs and 18 per cent by

private banks.

SBI's net interest margin (NIM) improved from 3.43 per cent in the September 2010 quarter to 3.8

per cent in the latest reported quarter.

The improvement in NIM is far better than that of other PSBs, thanks to re-pricing of high cost

deposits raised in 2008 and retirement of bulk deposits.

The significant proportion (47.6 per cent) of low-cost deposits also aided margins. Additionally, much

of the hike in the bank's lending rates have been effected during the first half of this fiscal.

Consequently, margins have also improved over the last two quarters.

With the latest base rate hike coming in the second half of the September quarter, the benefits

should be fully reflected in the December quarter.

One more positive aspect of September quarter results was, despite the rise in NPAs, the bank

managed to limit the rise of restructured assets (4.36 per cent of the total advances) which is among

the lowest in the public sector bank space.

Misstep on small savingsderegulation of savings bank account is bad

Thrift has not been a rewarding proposition for Indian households in recent years, as interest rates

on debt instruments have failed to keep up with runaway inflation. The post office-administered

small savings schemes have been the worst placed in this regard, with their fixed interest rates not

revised for years besides the cumbersome service procedures. No wonder, retail investors have

been opting out of them to make a beeline for bank deposits or gold. Against this backdrop, one

doubts whether the government's proposed measures to make these schemes more flexible and

market-linked' will lure them back. It is now being sought to rationalise small savings products to

conform to standard tenures ranging from one to 15 years. Their interest rates are to be reset

annually and pegged to yields on comparable government securities, with mark-ups of 0.25 to one


10/14

percentage points. Long-term products will be made more liquid by offering early withdrawal

options with penalty.

If the formula being proposed were to be implemented, the rates on post office time deposits for

2011-12 would work out to 6.8-8 per cent for one to 5-year deposits. While an improvement over

the existing rates, they are still way below the 8.50-9.50 per cent that banks are offering on their

term deposits. Investors may additionally have to budget for lower rates next year, as we are

probably now at the peak of the interest rate cycle. It is even worse in the long-term social security'

schemes the Public Provident Fund (PPF), Senior Citizen's Savings Scheme and Monthly Income

Scheme. The recommended rates of 8-9 per cent here are even lower than current rates and well

below the 10 per cent-plus inflation levels. If shielding one's income from inflation is the primary

concern for any long-term investor or senior citizen, these schemes will clearly not meet that

objective. If unattractive interest rates do not turn off retail investors, the prospect of returns

fluctuating from year to year surely will, as small savers build a corpus over many years.

As the Government embarks on reforming small savings schemes, it should take note that most

instruments that protect the small saver government pension payments, savings and bank

deposits have already been thrown open to market forces and yet none of them have succeeded

in consistently delivering inflation-beating returns. To genuinely protect small savers, what is needed

really are bonds offering inflation-linked returns. If developed markets such as the US, which redirect

retirement savings into equities, can provide inflation-protected bonds to savers, they surely

deserve consideration in India. And there is no better vehicle for that than the ubiquitous post

office.

Home loans: Interest subsidy scheme extended to end-March 2012

The 1 per cent interest subvention scheme on housing loans up to Rs 10 lakh has been extended up

to March 31, 2012, said a notification issued by the Reserve Bank of India on Wednesday.

Loans sanctioned and disbursed between October 1, 2009 and March 31, 2011 are outside the ambit

of the new liberalised scheme and they will be treated as per the old instructions (that is, loans up to

Rs 10 lakh with project cost up to Rs 20 lakh), the RBI said.

Banks may continue to claim reimbursement, at present, as per the original scheme.

For claims in respect of the new scheme, revised instructions would follow, the RBI said.

As per the revised scheme, the existing interest subvention of 1 per cent on housing loans was

extended to housing loan up to Rs15 lakh, where the cost of the house does not exceed Rs 25 lakh.

The ways of rating agenciesopinion on Moodys downgrading SBI

Rating agencies are known to move in sync, almost to the point of exhibiting herd behaviour. So, it is

a little unusual to see the global top two Moody's and Standard & Poor's (S&P) taking

diametrically opposite positions on the country's banking system, that too within a space of two

days. On Thursday, Moody's downgraded its outlook for India's banks from stable' to negative',

citing slowing economic momentum, high inflation and rising interest rates that could adverselyaffect (their) asset quality, capitalisation and profitability. The very next day saw S&P revise


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12/14

As a result, gross NPAs for state-owned banks rose from 2.45 per cent in June to 2.9 per cent by the

September quarter. Private banks have managed much better with gross NPAs falling.

Automatic recognition

September 30, 2011 was the deadline for banks to shift to system-based identification of NPAs.Public sector banks made this shift recently. Computer-based NPA recognition removes the

subjectivity that the banker may exercise in classifying a loan as non-performing. Smaller loan

accounts, particularly agricultural loans, were the last to migrate to this system, and seem to have

suffered the biggest slippage.

Canara Bank, for instance, reported Rs 1,280 crore of additional NPAs, 33 per cent of the total

because of such migration. Similarly, Union Bank of India witnessed a 20 per cent addition to NPAs

from such accounts.

Another reason for the rise in NPAs is the phenomenon of restructured loans going bad.

Restructured assets refer to loans on which banks have allowed customers to postpone their interest

payments until business prospects improve. Such restructured loans accounted for 4.4 per cent of

the loans outstanding for the top nine state-owned banks. These banks accounted for over half of all

loans advanced by the industry.

The restructured loans that turned bad accounted for 17 per cent of all advances for these banks.

The government-owned banks' net NPA ratio, after setting aside provisions, went up by nearly a

third or Rs 12,000 crore.

Due to these and other challenges, public sector banks saw a modest 5.4 per cent growth in profits

in the September quarter. Private sector banks managed a 27 per cent growth.

Finance Ministry asks Moody's to upgrade rating

Why private airlines deserve a bailout

A leader of industry has recently said that in a market economy private players should not get any

bailout in case they are in trouble. The airline industry is in trouble, indeed. Air India is continuously

making huge losses, Kingfisher is almost at the verge of collapse, Jet has made huge losses, and Spice

Jet, too.

There is something wrong if an entire critical industry is in such deep trouble. This requires a policy

response for industry, not mere rhetoric about capitalism and too from people, who in the not-so-

distant past, asked for protection for Indian industry, and rightly too.

FOREIGN AIRLINES PRIVILEGED

The root of the current crisis lies in bad policy of the government. Our airlines are not allowed to fly

overseas unless they have five years of operations.


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Overseas airlines are freely allowed, within bilaterals, to fly to India. This shuts out lucrative routes

for our airlines and allows overseas airlines to charge outrageous prices to Indian consumers.

Bangalore is a classic example where overseas airlines are creaming the market. Our airlines

compete in the domestic sector, which is extremely price-competitive without revenues from

overseas sectors where they could earn more in their formative years. They are at a disadvantage.

Our fuel cost is around 60 per cent of operational cost, an absurdly high percentage because of

monopolistic conditions in the market place.

The oil companies mercilessly jack up oil prices, charge much higher than international prices,

collude together in pricing and suck the resources out of the airlines. The Competition Commission

of India should suo motu conduct an enquiry into such predatory practices.

This is compounded by very high taxes on airline fuel, levied by both the Centre and States. Each

time prices are raised, both the Centre and the State earn more taxes, out of the misery of the

industry. A case of exploitative suppliers and an insensitive government.

THE AIR INDIA FACTOR

But the biggest factor is the existence of a player who does not believe in rational pricing Air

India. This airline is pricing below cost, to get market share and making huge losses. It is asking for a

massive bailout from the government, using taxpayers' money.

It is driving the private sector out of business, secure in the knowledge that it is a public sector

undertaking and the government will bail it out using taxpayers' money.

And worst of all, our government, our political leaders and industry leaders, believe this is alright

and good policy but helping the industry as a whole through policy is an unnecessary bailout.

This is absurd and distorts market pricing. No industry can compete and survive where one player

makes huge losses, believes in predatory pricing and is bailed out continuously by the government.

This is the key issue behind this crisis.

If our industry leaders believe in the market economy they should ask for Air India to be allowed to

shut down, not criticise private airlines' request for a bailout from bad policy.

FUEL PRICING

Our private airlines deserve a bailout. They are not failing because of mismanagement.

Unfortunately, the debate is getting sidetracked because of the extravagant lifestyle of the owner of

one airline. What needs to be done? First, we need competitive conditions in airline fuel pricing. The

airline industry cannot subsidise losses made by the oil companies on diesel and kerosene pricing.

The high margins on sales need to reduce and the monopoly broken in the public interest. The

pricing has to be based on international prices without huge margins.

The taxes levied by the Centre and the States need to be reduced to a reasonable level, and fixed ona base prices and not increased each time international prices go up.


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Lastly, Air India cannot be subsidised by taxpayers and the private airlines asked to compete against

the government with its vast resources. This is no competition at all, but hara kiri. If private airlines

are to be allowed to fail, Air India should first be shut down.

Let us remember that private airlines make up 80 per cent of India's capacity. Should 80 per cent

suffer for the fallacy of 20 per cent? And if they shut down because of losses, what happens to the

consumer, what happens to our economy if a very critical part of our infrastructure shut down due

to bad policy?

Helping the industry is not a bailout, but remedying bad policy they need urgent help.

Customer service slips in public sector banks

Net interest margins must come down

The RBI's Report on Trend and Progress of Banking in India 2010-11 notes that net interest margins

(NIMs), a key measure of efficiency for banks, have to be reduced for more efficient financial

intermediation. For this to happen, banks have to offer attractive interest rates to depositors and

lower lending rates for borrowers.

NIMs are the margins enjoyed by banks for doing their business and defined as interest earnings less

interest expenses as a percentage of average total assets.

NIMs for the Indian banking system have been between 2.5 per cent and 3.1 per cent.

After seeing a declining trend for five years, NIMs once again moved up in 2010-11. NIMs in India

are still high when compared to other emerging economies.

If NIMs are reduced, it will help raise the level of domestic savings and channel them into investment

and sustain high and inclusive growth, the report said. While profitability of banks is important,

efficient financial intermediation is important from the point of view of economic growth.

Increase other income'

The report calls on banks to increase other income (this has declined over a decade when seen as

a percentage of total assets) and reduce operating expenses (wages, transaction costs) to maintain

profitability.

Technological advancements have already helped reduce operating expenses.

SBI, ICICI Bank lead peers in global branch network
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