 |
Chakrabarty Says Customers Must Approach Banking Ombudsman Over Rate Anomalies |
NEW DELHI: RBI Deputy Governor K C Chakrabarty is known to speak his mind. In a freewheeling chat with TOI recently, he spoke on a host of issues ranging from transparency in interest rates to charges levied by banks and corporate governance issues. Excerpts:
Moody's has expressed concerns over the health of Indian banks. Do you agree with it?
We may or may not agree with them. Overall, the economy has slowed down and you cannot say that banks will not be affected adversely. We feel that banks will be able to overcome (the stress) and banks also say so. But banks will have to work hard, they must take corrective measures and they must be cautious so that they are able to withstand the pressure. The more you diversify, spread your risks, go for inclusion, you will be better off.
What should banks do?
One of the first things that they need to do is, improve the quality of management; they must improve the quality of asset management, they must control expenses, avoid unnecessary risk taking and they must see to it that they do not have unduly high exposure to sectors those are under stress. They should improve corporate governance. In terms of sectors, there is concern on power, aviation... Power and aviation are concerns. But these are all necessary vital sectors. We need more flights, more airports because the country needs them. We should collectively find out how we should deal with them. It does not mean that banks should not finance them. Banks being the provider of finance need to influence a company's decision in improving its performance. Power companies need to build efficiency - both generation and distribution costs need to come down and even transmission loss should be reduced. Banks can say that they will not provide fresh funds till power companies build in efficiencies. Wherever required, tariffs should go up. But we can't let the power sector close down.
There are comparisons between now and 2008 and there are demands for a special dispensation for loan restructuring...
This is a very controversial thing. The issue is whether we are out of 2008 crisis or if it is the same crisis? The second thing is, in 2008, the crisis started from banking sector and spread to the real sector. This time, it is a sovereign crisis that is spilling over to banks. We have to contain this spillover. If it spills over to the real sector we all will suffer. Unfortunately, central banks and governments are not in a position to provide the same kind of relief that was possible in 2008, hence need for more collective efforts.
In the past you had discussed the issue of pricing of loans and transmission of interest rate by banks...
What we are saying is, increase interest rates if the cost of funds go up. If one is saying that cost of funds has increased by one percentage point and one has increased base rates by two percentage points but average yield on advances has increased by only one percentage point. That means benefit in cost has been not passed on in an equitable manner. One may say that cost of operation has gone up, that is, inefficiency has gone up, we need to avoid that. Pricing has to be transparent and non-discriminatory. If petrol price goes up, everyone pays a higher price. This is what we want.
Do banks have the ability to do that? They say that they don't have data.
Banks cannot say this as the very meaning of having licence to do banking business is the ability to assess and price the risk. Anyhow, we are appointing a committee to examine the issue in totality.
There are also concerns about usurious charges and they have a huge interest margin. What are your comments?
I find some banks have prime lending rate of 21% and base rate is 12%. That is a huge gap. What kind of risk we are taking when we are lending to someone at 21%? If the risk is too high, don't lend to them. It does not make sense for the good borrowers to pay for that and in the process they also suffer. The second is the economy, which will suffer.
But didn't banks jack up PLRs to get customers to move to base rate, which was expected to usher in transparency?
If that was the case, everyone should have moved to base rate by now. We have no evidence on whether banks are doing it in a scientific manner. The committee will look at all these aspects and if there is a need, we will tighten the guidelines. What we are saying is that in the matter of pricing, banks are not that transparent, especially for small customers, and definitely they are not non-discriminatory.
Old customers have to pay higher rates than a new customer who walks into a branch now. Is that fair?
First, we have to conclusively prove that this is happening. If it is the case and if a customer complains, Banking Ombudsman will uphold the customer complaint and ask banks to rectify.
After a meeting with ombudsman, you had asked banks to come up with a fixed rate product. While there are products I will have to pay 15% for a fixed rate home loan, which does not make sense. What are you doing about this?
I have seen one bank offering a home loan at 11% fixed rate. We don't want to micro manage banks on pricing but in the interest of customers and in the interest of banks, there must be a fixed rate product because banks are better manager of risk than individuals. If the banks want to hedge their risk, they can go for interest rate swap, for which market exists.
Are you happy that banks are again offering loans where the rate is fixed for two years?
We have absolutely no problem with them. But if the objective is to deprive the existing customer the benefit of lower rates then we have objection. That is why we must give the customer a choice to exit free of cost.
Some banks levy very high penalty. For instance, if you go below the Rs 10,000 minimum balance to Rs 9,990, then they charge Rs 600-700. Is this fair?
All banks are not doing this. I am unable to understand the justification for Rs 10,000. Further, how can one charge him Rs 500 penalty if the balance goes to Rs 9,900? Banks must examine the charges and explain the reasonableness of these charges. But then a customer has to come to the Banking Ombudsman.
TOI
Moody's has expressed concerns over the health of Indian banks. Do you agree with it?
We may or may not agree with them. Overall, the economy has slowed down and you cannot say that banks will not be affected adversely. We feel that banks will be able to overcome (the stress) and banks also say so. But banks will have to work hard, they must take corrective measures and they must be cautious so that they are able to withstand the pressure. The more you diversify, spread your risks, go for inclusion, you will be better off.
What should banks do?
One of the first things that they need to do is, improve the quality of management; they must improve the quality of asset management, they must control expenses, avoid unnecessary risk taking and they must see to it that they do not have unduly high exposure to sectors those are under stress. They should improve corporate governance. In terms of sectors, there is concern on power, aviation... Power and aviation are concerns. But these are all necessary vital sectors. We need more flights, more airports because the country needs them. We should collectively find out how we should deal with them. It does not mean that banks should not finance them. Banks being the provider of finance need to influence a company's decision in improving its performance. Power companies need to build efficiency - both generation and distribution costs need to come down and even transmission loss should be reduced. Banks can say that they will not provide fresh funds till power companies build in efficiencies. Wherever required, tariffs should go up. But we can't let the power sector close down.
There are comparisons between now and 2008 and there are demands for a special dispensation for loan restructuring...
This is a very controversial thing. The issue is whether we are out of 2008 crisis or if it is the same crisis? The second thing is, in 2008, the crisis started from banking sector and spread to the real sector. This time, it is a sovereign crisis that is spilling over to banks. We have to contain this spillover. If it spills over to the real sector we all will suffer. Unfortunately, central banks and governments are not in a position to provide the same kind of relief that was possible in 2008, hence need for more collective efforts.
In the past you had discussed the issue of pricing of loans and transmission of interest rate by banks...
What we are saying is, increase interest rates if the cost of funds go up. If one is saying that cost of funds has increased by one percentage point and one has increased base rates by two percentage points but average yield on advances has increased by only one percentage point. That means benefit in cost has been not passed on in an equitable manner. One may say that cost of operation has gone up, that is, inefficiency has gone up, we need to avoid that. Pricing has to be transparent and non-discriminatory. If petrol price goes up, everyone pays a higher price. This is what we want.
Do banks have the ability to do that? They say that they don't have data.
Banks cannot say this as the very meaning of having licence to do banking business is the ability to assess and price the risk. Anyhow, we are appointing a committee to examine the issue in totality.
There are also concerns about usurious charges and they have a huge interest margin. What are your comments?
I find some banks have prime lending rate of 21% and base rate is 12%. That is a huge gap. What kind of risk we are taking when we are lending to someone at 21%? If the risk is too high, don't lend to them. It does not make sense for the good borrowers to pay for that and in the process they also suffer. The second is the economy, which will suffer.
But didn't banks jack up PLRs to get customers to move to base rate, which was expected to usher in transparency?
If that was the case, everyone should have moved to base rate by now. We have no evidence on whether banks are doing it in a scientific manner. The committee will look at all these aspects and if there is a need, we will tighten the guidelines. What we are saying is that in the matter of pricing, banks are not that transparent, especially for small customers, and definitely they are not non-discriminatory.
Old customers have to pay higher rates than a new customer who walks into a branch now. Is that fair?
First, we have to conclusively prove that this is happening. If it is the case and if a customer complains, Banking Ombudsman will uphold the customer complaint and ask banks to rectify.
After a meeting with ombudsman, you had asked banks to come up with a fixed rate product. While there are products I will have to pay 15% for a fixed rate home loan, which does not make sense. What are you doing about this?
I have seen one bank offering a home loan at 11% fixed rate. We don't want to micro manage banks on pricing but in the interest of customers and in the interest of banks, there must be a fixed rate product because banks are better manager of risk than individuals. If the banks want to hedge their risk, they can go for interest rate swap, for which market exists.
Are you happy that banks are again offering loans where the rate is fixed for two years?
We have absolutely no problem with them. But if the objective is to deprive the existing customer the benefit of lower rates then we have objection. That is why we must give the customer a choice to exit free of cost.
Some banks levy very high penalty. For instance, if you go below the Rs 10,000 minimum balance to Rs 9,990, then they charge Rs 600-700. Is this fair?
All banks are not doing this. I am unable to understand the justification for Rs 10,000. Further, how can one charge him Rs 500 penalty if the balance goes to Rs 9,900? Banks must examine the charges and explain the reasonableness of these charges. But then a customer has to come to the Banking Ombudsman.
TOI
