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India Booked | The Indian Banking Story with Madan Sabnavis
121 Plays3 years ago
Do you often wonder— ‘Is my money safe in banks?’ India is grappling with its worst banking crisis ever, and we are still trying to figure out what landed us here. This podcast episode with economist Madan Sabnavis analyses the role of the government and RBI in allowing the problem to reach the dimension it has assumed today.
When will the never-ending NPA issue be resolved? Does it make sense to merge two PSBs when the culture and governance structures are alike? Should the RBI reserves be used in times of crisis? Should the tenure of a CEO be long or short? The book ponders and debates on some of these questions.
Hits and Misses presents the two sides of the Indian banking story by giving an account of the reforms as well as quandaries in times of extraordinary economic and political challenges. The podcast just like the book, answers many relevant questions by highlighting the highs and lows of the banking sector, which became subjects of debate in media and financial circles today.
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Transcript
Introduction and Guest Background
00:00:00
Speaker
Hello, everyone. This is Aayushi Mona, your host on India, booked a podcast where we lean into the idea of India through its literature. And today I have with me Madan Sabnavis. Madan has written a fascinating book on the hits and misses of the Indian banking industry, which has been published by SAGE.
00:00:22
Speaker
Madan has been a practicing corporate economist for 33 years. He's worked with ICICI, Larsen and Toubro and is presently with care ratings as chief economist.
00:00:32
Speaker
He's also written a bunch of other books on finance, economics, one of which I've read before, which is Economics of India, How to Fool All People for All Times. And I highly recommend that as well. Welcome to the show, Madan. And thank you so much for doing this with us. It's a pleasure being here, Ayesha. So Madan, I think I'll start at the beginning and ask you, why did you think that a book like this
00:00:59
Speaker
was necessary when in bits and pieces of course from time to time you know we all read these opinion pieces and thought pieces on the state of banking in India what really made you want to condense it into a book?
00:01:15
Speaker
So actually, I have also been commenting on various banking issues, time and on. And very often we see that there are new policies which are coming in. We see different reactions coming from industry. We see different reactions coming from the government. So I thought it would be a good idea to actually put all these thoughts together and bring out a book.
00:01:37
Speaker
So just talking of a book, talking of different issues is one thing. And I thought maybe we can make it a bit more comprehensive and look at what's been happening in the banking sector for the last 25 years or so, and also talk about certain facts.
Writing on Policy and Economics
00:01:52
Speaker
So therefore what we see in this book are certain facts which have been interpreted in the form of trends, what come out from the banking trends. And then we're also talking of some of the issues which almost every reader would be familiar with and try and engage the reader.
00:02:07
Speaker
You know, one of the things that I found very fascinating, you know, in terms of the blurbs, right, is Sunil Jain, who's the managing editor at Financial Express, has said that you combine the skills of an economist with the speed of a journalist. And that is what makes this book so important. Yeah, actually, you know, Sunil, I must admit that Sunil and I, we have been classmates in school as well as in college. So it goes back a long time.
00:02:36
Speaker
And ever since he took over as editor of Financial Express, I think we got to know each other even better. Because see, I've been writing in the newspapers articles on different issues, topical issues in particular. And I think what really gelled with Sunil was the fact that if there was a certain policy which was announced at say 5pm, I was able to give him exactly what a newspaper would like to have, a commentary in maybe around 800 to 1000 words by 7pm.
00:03:06
Speaker
So I think that's what he really meant out here because he also found that I was fairly reliable and maybe what I wrote did make sense. And even though he did not agree most of the time with what I wrote, my view, but he was willing to accept that, yes, these are pertinent views, which Dorito also needs to have.
00:03:25
Speaker
actually a very very interesting anecdote and I think he was going through your Twitter bio and reading your Twitter bio says that you've written over 2000 articles you know the banking and financial space and that was I mean for most of us right who struggled to get a few pages together that kind of consistency and volume how do you do it
00:03:50
Speaker
Well, it's actually a case that my profession of being an economist, we need to be in touch with whatever is happening. And we also need to develop views on every development that takes place in the economic space. So keeping this in mind, it became a kind of an habit. In the initial days, in the late 1980s, that's when I really started writing.
00:04:10
Speaker
It was more a case of putting in a lot of effort to bring out those thousand words. And I remember some of my editors had told me very clearly that to be successful in writing in newspapers. In fact, I would credit this with Swaminathan Iyer, who was probably the first editor who took a chance in taking an article from me. So you have to convey everything in 800 to 1000 words.
00:04:34
Speaker
We normally tend to be a bit verbless when we talk about issues. We like to get into the background. We like to give our views and then try and give conclusions and give projections. But how do you put all this in a format of 800,000 words? It used to be a bit of a challenge at that particular point of time. But then as you keep doing it, and I had very good editors who became my friends later on who were giving me regular columns.
00:04:56
Speaker
So then it just became a part of me. And even today, I can say that a lot of in modesty, if I would say that use the right word, that I can actually bring out an article of 1000 words, or even 2000 words, maybe an hour or two after any development is taking place. So it's become a part of me and take on my habit now.
Banking Reforms and the Narasimham Committee
00:05:16
Speaker
And that's how I've reached this number of over 2000 publications. Wow.
00:05:21
Speaker
Let's get into today's conversation Madan, which is around your book. I think for me finishing reading it right. I really struggled and what should be my first question to you because everything from NPA's to reserves.
00:05:39
Speaker
um to you know just from say the branch banking system right all of them are literally books in their own right as well so i'll actually begin at the beginning really and ask you to share with a lay person who's listening to this podcast on what are the circumstances around the nurse simon committee uh which is where the book really begins yeah actually when i said in the beginning that
00:06:07
Speaker
I've tried to look at trends in banking in the last 25 years. The genesis is actually in the Narasimham Committee. The Narasimham Committee was something set up by the Reserve Bank of India in the early 1990s. So, 1991-92 is when the first report came out and subsequently there was a second version which came out towards the end of the decade. Now, this is probably the most important banking document in India. And I would say it's remarkable because of the fact that in those days we did not have any internet.
00:06:34
Speaker
But seeing the committee under Mr. Narsimam, who is also the governor of the RBI for a brief period, he actually has encapsulated almost everything that we are talking of even today. So almost every reform in the banking sector, which is being discussed, which is being implemented today, actually has its genesis in the Narsimam committee report.
00:06:53
Speaker
So they made a template about what should ideally be done to bring it on lines with the global best practices. And accordingly, the Reserve Bank of India picked it up periodically and brought in whatever changes were required. And today, what we are seeing is very much, I would say, the imprint of the Natsumam Committee is there in almost every policy which is being implemented. And I think that gives a lot of credit to the Natsumam Committee.
00:07:19
Speaker
True, I think it really did sort of provide the strong foundation right, which has in a calibrated manner also ensured back then that there were no major shocks for the system, which is also very important in actually bringing out reforms at that level.
Private vs Institution-driven Banks
00:07:36
Speaker
My next question really is on the whole advent of private banks, right? And what it meant. Now in your book, right, you've bought out this difference between institution driven banks, like ICICI or UPI became access, versus say bank owned by a corporate house like India, which is in the same, or bank
00:08:03
Speaker
for him or emanated from the institutions, right? Or in the FCs. What really do you think and while you've dealt about it in the book, for the purpose of the listener journey, what was the testimony of strength which made some players stay in other players' books? Sir, I would tend to think that what is really required when you start a bank is a long-term commitment.
00:08:28
Speaker
So when you are set up by an institution like you've mentioned, we had ICC bank, they had access bank, and we had IDBA bank and HDFC bank, you're actually set up by institutions which evidently had a very long term vision in mind when they started operating the banks. Whereas when you're talking in terms of individual parties, when I say individual parties could be an NDFC or any other private player, the same kind of commitment was probably not there.
00:08:54
Speaker
So for example, if you're talking of certain banks, like say 20th century finance was in BFC, successful in BFC. We also had Times Bank, which was set up by the Benetton Coleman Group. But these were the institutions which were actually set up, did not really manage to gather the kind of steam which was required, did not really have the patience to wait for a longer period of time. And they were always searching for a buyer.
00:09:21
Speaker
So that's how we found that most of these banks got merged into other banks. They were purchased by the other banks and happened to be the institutional ones. And I think Indusan stands out because this was set up by an industrial group, the Hindujas, and they have shown their commitment, which is actually bearing fruit even today, where we see that it's one of the more successful banks.
00:09:45
Speaker
Absolutely, it does. No, in fact, I think this book has come out, it got published.
00:09:51
Speaker
I rather went in for publication before the RBI very recently brought out a paper about giving more license to banks. And there's been quite a bit of debate controversy over whether corporate players should be allowed or not. So I think all this will actually resonate well because it has been addressed in the book about what's really happened when we've had a whole series of banks which have come in. We've also seen something like Yes Bank, which was driven by a promoter, which hasn't quite made it. Now, of course, it's gone into a different kind of a version of a bank being
00:10:21
Speaker
owned by other banks with SBI taking the lead. So I think this will give a very good backdrop to anyone who's trying to evaluate as to should we be having more banks coming in, should corporates be coming
Bank Competition and Interest Rates
00:10:33
Speaker
in. So I go back to saying that what really requires a long-term commitment because banking is not a journey which can be taken in three, four, five years. It's something which actually bears fruit maybe after 15, 20 years.
00:10:44
Speaker
I think one of the most interesting aspects of the book, I think for me as a reader as well, was when you touch upon the fact that banks were sort of visualized as monopolistic and in competition, but this really ended up forming like an oligopoly.
00:11:01
Speaker
Absolutely, because today if we look at the way in which most of the policies, especially when it concerns individuals, interest rates are set, it does appear to be a catalyzation which takes place because there's really very little for one to distinguish between Bank A and Bank B. And we see that most of the policies in terms of deposits or in terms of lending always seem to be moving in the very same direction. So while the whole ethos behind getting in more banks was to bring in more competition,
00:11:31
Speaker
It's definitely brought in a lot of new products. Maybe technology is something which has benefited all customers, both on the boring as well as the lending sides. But at the end of the day, if you look back and say, you said that are we actually getting competitive interest rates as a deposit? Well, the answer is probably not. Almost you want, you don't want to go to bank A because again, your lower interest rates go to B. It's probably the same kind of interest which you get.
00:11:56
Speaker
So I think that's something which one should really think of when you're talking of getting in more banks but it'll actually bring about differentiation or will it just be more with the name and maybe there are certain kind of additional services like what the private sector banks do provide to the customers.
Branch Banking Challenges in Rural India
00:12:13
Speaker
That's certainly a good part. And you know this whole growth in terms of just the numbers of institutions, right, was his reach. So again in the book you touch upon
00:12:26
Speaker
how it never made business sense to actually penetrate to rural India because that's not where the money was and foreign banks peered away from it. And patterns of branch banking, et cetera, also morphed along where there were business opportunities and it makes complete commercial sense where banks were open to their branches, where the money is even after all these stipulations were imposed.
00:12:56
Speaker
What do you think is the role of technology and now with mobile penetration and data consumption, India being what it is, how do you see this rural versus urban, really converging? Does it converge in terms of services, in terms of
00:13:15
Speaker
Products, how do you see this change? You should get two parts to it. See, one is we're talking in terms of technology and second, we're talking in terms of branch banking. Now, I think successive regimes at the government level as well as in the Reserve Bank have been focusing a lot on inclusive banking, which means that we want to have everybody having an access to a bank account.
00:13:39
Speaker
which means that you need to have a branch. So I think this pressure has been more on public sector banks, which have been expanding and setting up branches in almost every corner of the country. Now, the fact is also that people in the rural areas or even the semi-urban areas, depending upon their income levels, don't really have much money to save. So merely having a branch in a village
00:14:00
Speaker
for the sake of having a branch does not make commercial sense for a bank.
Public vs Private Sector Employment Strategies
00:14:05
Speaker
So ideally they would not like to have a branch, but you're forced to have the branch because they're a public sector bank.
00:14:10
Speaker
So I think that's how the entire branching, the branch policies of banks has evolved. And that's why we have so many branches in the country. And the whole question is that do we actually require all these branches? The answer is probably no. But this brings in the issue, the second issue, which you raised of technology. I think with the spread of technology, and I think people are becoming more and more saviour right now, because we have a case of people getting into mobile banking. Almost everybody has a mobile handset, even a poor person has it.
00:14:40
Speaker
So I think there is a kind of a transformation which is taking place where people even with a limited amount of money which you have, you're able to do your banking transactions using technology and you do not really go to the physical branch.
00:14:52
Speaker
Well, it may be a bit too premature to say that the branches may not exist in the rural areas at some point of time. But I think gradually as the habit picks up, we may see that it may be less expedient for banks to have branches everywhere. When technology is able to take over, you will be able to cut down on costs and probably also provide superior services. How does this impact manpower?
00:15:23
Speaker
with centralization and digitalization. And this has been something that's often been spoken of in terms of the banking sector, employing people or employing people across the world in a better way. I think talks around this really even with when computers were first introduced into the Indian banking system. But what are the kinds of facts that we might see,
00:15:51
Speaker
and employees. So what we have seen in the banking system, the banks are definitely one of the largest employers in the services sector. I think it comes probably after the IT sector. But we've also seen that over the years, public sector banks have been more parsimonious in terms of adding to stuff. And what they've really done is that the certain level of staff at the lower levels, if you look at the P1s, you look at the clocks, I think they're the ones whom they have not released. And what they have added to have been more people in the office, in the office
00:16:20
Speaker
So I think, therefore, we've seen that if you look at the growth in the number of staff, the staff count for public sector banks, it's definitely been more moderate. It's actually been coming down the growth rate. But if I look at the private sector banks, I think they have tended to be hiring more people.
00:16:36
Speaker
So this is quite a kind of an ironical situation which we have because we normally associate anything to the government public sector to be useful. But today we have a situation where the public sector banks have actually been using technology more aggressively and therefore there's less requirement for having a support staff which we are seeing in terms of the numbers.
00:16:55
Speaker
However, if you look at the private sector banks, I think they have changed the strategy a little bit. They're trying to go more aggressively into the non-metropolitan, non-urban areas. And therefore, they are hiring a larger amount of staff. So that's why we're seeing that their headcount has actually been increasing over the years as they're penetrating new markets and trying to get their share of the customer's wallet. Actually, one of the most interesting things about the book for me was that public sector employees are
00:17:25
Speaker
actually receive a higher compensation than a private sector bank employee which I don't know for some reason I assumed and maybe other people assume like me that it would be the other way around because there is a perception of the PSB employee being poorly compensated compared to the private sector employee but that's not the case.
00:17:49
Speaker
No absolutely, this came as a revelation to me actually when I looked at the data because it's a very crude way of finding out what is the average compensation. You look at what is the total salary bill of the banks and you divide it by the total amount of headcount. So therefore you get to know what is the average salary. So it tells you broadly speaking, this is what the average salary in a particular segment is. Now the interesting part is there's also another chapter later on where I'm talking in terms of the compensation for the CEOs. Now there if you see there's been a very wide variation between what
00:18:18
Speaker
the CEO of a public sector bank earns and what the CEO of a private sector bank earns. So the truth actually is that if you're looking at private sector banks, they don't pay everybody the same amount. But as you move higher up in hierarchy, you tend to be earning disproportionately higher salaries.
00:18:34
Speaker
So if you look at the standard metric which is normally used to talk about how to do the other salaries, you look at what's a salary of the top person to the median salary, you'll see that particular ratio seems to be very much higher for the private sector banks compared to the public sector banks. Public sector bank, I think the dispersion across the median would be very much limited. It would be very much under control.
00:18:57
Speaker
One of the things that I think what I'd like to sort of tell people who will be picking up the book and reading the book is that they will get such revelations I think throughout the book. It's very interesting that because you have these
00:19:12
Speaker
either broad assumptions right or you read newspaper articles from time to time or you skim through business pages for most average readers right people who say do not work really in the finance or the individually you know at the in the brass stacks of the industry but
00:19:29
Speaker
all of these perceptions on private bank performance versus PSB performance was one of the most interesting aspects from the book for me because for instance I think you say that the pace of growth is actually not unimpressive because PSBs are doing a CAGR of almost 15% in a comparison that you draw between 95 and 2019 which again and then you also compares
00:19:57
Speaker
to compare efficiencies and to me that was interesting because a lot of perception is around PSBs not being able to deliver and of course this co-exists with like a yes bank as well so I'm not saying that that it's like a black and white in the first place but even in a zone of grey PSBs are the public imagination of them to be
00:20:26
Speaker
When juxtaposed, again, private banks. In fact, everyone's in similar murky waters. That's true because I think what you spoke of is the right thing. It's about perception. So the perception which a common man gets is from what you read in the newspapers, what you see on television channels. And that's how you pick up things like saying that, look, public sector banks. So you'll be here of, say, for example, the unions of public sector banks going on strike.
00:20:51
Speaker
But the private sector banks are not part of the union, so therefore, you don't hear about strike. So therefore, you feel that the public sector bank employees are not being paid that well because somebody is protesting somewhere, whereas we don't see this happening in terms of the private sector banks. So therefore, we tend to miss on that. Similarly, when you're looking in terms of performance, we tend to believe that, OK, this public sector bank A or public sector bank B, which is in deep trouble, the government is trying to bail it out. So therefore, we feel that, look,
00:21:19
Speaker
use the same brush and say that, look, all public sector banks have a problem out there. But it's actually not a case. And this, again, I would say was a revelation as I kept going through the data, doing these comparisons, seeing what's been happening over the last 20, 25 years. Then you suddenly realize that the public sector banks have actually covered a lot of ground. They are comparable to those. Some of them are comparable to those of the private sector banks. Just like as you mentioned, we've also had cases like Yes Bank. So not all private sector banks are equally as efficient as the other ones.
NPA Crisis and RBI's Role
00:21:48
Speaker
But on an average, yes, they may be marginally above those of some of the best public sector banks, but definitely the gap between the two sets of banks has been narrowed down in the last two decades also. And I think this whole comparison, of course,
00:22:03
Speaker
You have touched extensively, I think chapter 10 is when you talk about the NPX Conundrum and the asset quality recognition order which was passed in 2016. What is this fear psychosis that spread with bankers? And they became averse to decision making during this time between 2016 to 2019, really.
00:22:29
Speaker
when RBI came down heavily on banks for mistaking their NPA levels. I actually leave it to you to sort of contextualize it. I've read about it and I don't want to and it's something that's well known. But I think the beauty of the book really, Madan, for me at least was that it simultaneously works almost like a Wikipedia broad summary
00:22:54
Speaker
And at the same time, a detailed analysis, but it's also very impartial. So I think kudos to you for actually pulling this off. And I'm sorry if I digress, and I just felt that this is the right moment to say this. But what really led to
00:23:13
Speaker
that piece in 2016 to 19 and they're coming down. So heavily, was it really about leadership at the helm or was it just something that would have anyway been done at some point of time? First, Ayesha, I'd like to thank you for the kind words which you've uttered. Now, saying that, I would say that, see, this entire process of NPS was a creation of something which happened in the earlier part of the decade.
00:23:42
Speaker
We had the Lehman crisis. After that, there was a tendency for banks to keep lending a lot of money to industry. So when I say lending money, it happened because interest rates were lowered by the Reserve Bank of India. The government on its side was also going in for a fiscal stimulus. So there was a lot of money available to make sure that the economy continued to grow.
00:24:02
Speaker
So at that particular point of time, there were definitely a certain amount of governance lapses. So that's something also which I've highlighted in a couple of places in the book about governance lapses. Now, the governance lapses tended to be more in the public sector banks because there was a lot of political interference, where there were instructions which came from the top to say that you should lead to the steel sector, you should lead to the power sector. So as these loans turned out to be dodgy, that is when the problems really took place.
00:24:29
Speaker
Now in between, we had a concept where we called something CDR, corporate debt restructuring. So it was felt that, let me give an example to make it easier for the listeners, that I've set up a steel plant and I took money in 2010, 2011.
00:24:48
Speaker
But somewhere along the way, we had all those scams which came in. Now, we had a scam in the coal area. So therefore, there was a problem in terms of acquiring coal. There was a mining scam which was there down south. So therefore, iron ore getting iron ore was a problem. So therefore, as a steel company, the problem was that I could not continue my project because I was not getting my basic raw materials. So therefore, I became an NPA.
00:25:14
Speaker
Now, in the wisdom, the Reserve Bank of India along with the bankers and the government, everybody agreed that the fault was not with me because I was not repaying my loan.
00:25:23
Speaker
I had a genuine problem because of certain institutionalized scams which happened, which they called the irregularities in various natural resources. My project got affected. So therefore, let us not call it an MBA, we call it a restructured asset. So accordingly, we had a corporate debt restructuring sale, which said that look, instead of repaying the money now, you repay it after another five years. Instead of paying an interest rate of 15%, you pay 12%. So accordingly, the loans were restructured. So this is not shown in the papers, we showed low NPA's.
00:25:53
Speaker
At some point of time, the Reserve Bank of India got up. I think Dr. Raghuram Rajan was the governor. He said that we need to have a fair assessment of the quality of assets. And therefore, there was this AQR concept with asset quality. And the moment you went in for this reassessment of your NPAs, we suddenly realized that the numbers started to wake up.
00:26:12
Speaker
And as the numbers started going up, I think the heads of public sector banks were under the scanner. Then there were lots of inquiries which came about saying, why did you lend to this particular steel company? Why did you lend to this particular power company? So accordingly, there was this fear psychosis which came in, which actually led to bankers becoming very, very conservative.
00:26:30
Speaker
Now, since public sector banks are under public scrutiny, you have the CAG, the CIC, all the investigative, CBI, all these investigative agencies can come after me. However, if I'm in a private sector bank, we don't have the same fear. So therefore, most of the problems in terms of the NPAs, in terms of these infrastructure sectors which were involved in the NPAs were all things which came into the open because of the fact that they were public sector banks. And that's what created this problem of lending. Bankers were refusing to take their sessions.
00:27:00
Speaker
And in this process, the private sector banks were able to speed up and gather a larger part of the market share. And also, how do you see, I mean, now that we've had the whole pandemic, right? And do you see how
00:27:18
Speaker
the NPA issue going to say dominate headlines or do you think that because of this whole the moratorium that were provided to borrowers I mean it's futuristic and I should really not be asking you for anything predictive that's not in the book but how do you probably see the impact of this pandemic in terms of of this slide?
00:27:44
Speaker
No, in fact, I think that the pandemic has led the Reserve Bank of India and the government to become more flexible in terms of NPA recognition. And as you have mentioned, there was a moratorium also which has been given. And the RBI data showed that as of April, normally around 50% of the borrowers, 50% of the total value of debt was actually came under the moratorium. People adopted for it.
00:28:10
Speaker
So, now the question is that at some point of time when we go back to normalization, so even today, for example, if I'm not servicing my loan, I'm not going to be called an NPA because RBI said that up to March 2021, I will NPA norms have all been relaxed. But at some point of time when the normalization takes place, my sense is that there will be a tendency for the NPA numbers to once again be known.
00:28:32
Speaker
So I think this is a legitimate threat which is there. I think the RBI is also aware of it. The bankers are also aware of it because if you look at most of the bankers presentations, they have already started making provisions for the NPAs which are not there today.
00:28:47
Speaker
So I think that's a good step. So hopefully we may not see the ghastly numbers of 15, 20% for banks. But definitely from the 8% levels which were recorded as of September, we could be expecting this number to go up to something like 12 or 13%. I think that's such a valuable opinion. And it's also one of those how time unfolds and what we see happen.
00:29:10
Speaker
One of the questions that I had, and this is personal curiosity and not really for the book so much, is that do you see yourself as an economist, a banker, a writer, considering you wear so many hats, what
00:29:27
Speaker
what really calls out to you the most or what do you find most interesting or challenging or is it all the same once you've been at so many things for so long? No, actually the thing is that I look at myself as being an economist or I try hard to be an economist and I take a view of an economist on all these issues.
00:29:49
Speaker
So my experience in working in ICC bank, which is of course a long time back, actually gave me a kind of a real view about what happens in the banking sector. What happens in the bank? How are decisions taken? What is an interest rate? Otherwise, I've always had a view about what interest rates are from the point of view of being an economist. So that's what I see by looking at as an economist, you're actually able to take a macro view, a broader view of things. And more importantly, the way economists normally tend to look at any issue is that
00:30:18
Speaker
I mean, in a way, lots of people keep saying that economists don't take a view because they always say on one hand and on the other hand. But the thing is actually very clear on paper. There are always certain pros and cons. So what we do with the way I analyze things is to look at the pros and cons of everything and then probably pass some kind of a judgment.
00:30:37
Speaker
So as far as the reader is concerned in the book, I think for any particular issue, I've actually given views of saying that why it is so, why it should not be so. And instead of just sitting back and saying, OK, I'm not giving a final view, I do, of course, pitch for saying that I would rather go in for one of the two views based on the balance. Like, for example, when we are talking of the tenure of the RBI governor. So there's been a lot of debate about whether it should be three years or five years. Or if a governor is not given an extension beyond three years, there's a lot of noise made about it.
00:31:05
Speaker
So you actually say, why should it be three? Why should it not be three? And then you finally say that, look, we need to have a fixed tenure and there will be no more extensions.
00:31:14
Speaker
even if we're talking of the 10 years of CEOs of private sector banks, I've done the same thing saying what are the negatives which happen when you have the same person who's ruling for say 10, 15, 20 years and getting in fresh blood, what difference does it make? And finally say that, okay, we have two sets of views and this is what I'm pitching for. So as an economist, I think we're able to take a more balanced view, even though at times when we feel that we're not actually sticking our necks out by saying on one hand and on the other hand.
Government Influence and RBI Reserves Debate
00:31:42
Speaker
No, thank you for that answer. The next question that I have for you, Madan, is that while there is obviously this balance of views, how about external influences, right? And banking is so politically interlinked, right? Of course, it impacts the lives of people.
00:32:05
Speaker
It makes a difference everywhere, right? From loan waivers to farmers to all of it. I mean, of course, unlike, say, capital markets or a RSB and RBI, it's obviously woven into the basis of the economy, right? Unlike, say, capital markets regulation, which again came and regimented only, say, in the 90s, right? Being there forever.
00:32:35
Speaker
the role of political influence or changes in political contestants or leadership from time to time. And how has that benefited or not benefited? What I mean the hits and misses in terms of how banking interfaces with governance and political influence today is what I was asking.
00:32:58
Speaker
See, if you're talking in terms of government, I think the government has always tried to use the banking sector as a means to carry out a political agenda. Now, this holds for all kinds of governments, whether it's the UPA government or whether it's the India government. So you have a certain scheme which works well at the political level, and then you make sure that it has to be carried out by the banking system.
00:33:23
Speaker
Now, how do you do it? You have little control over the private sector banks, therefore you do it over the public sector banks. And how do you get the public sector banks to do it? That is where we say that even I'm the owner of a public sector bank, so therefore I can do whatever I want to with a public sector bank. So right from the point of view of the appointments which are there, both for the directors as well as in terms of the management, everything seems to be appointed by the government. So that's how you actually take full control over one particular segment of the banking sector.
00:33:50
Speaker
I'm not saying it's a right thing or a wrong thing because as an owner of a bank, you have a right to decide about who should be governing the bank. But in terms of making sure that certain agenda is being carried out, which may not be profitable, which may not be viable, that is where I have a problem with it.
00:34:08
Speaker
Okay, so if you're forcing them to lend to a certain sector, I think that is not something we should be done by the government. For example, some time back, I think a couple of years back, we had one of the politicians actually saying that if a public sector bank branch manager does not lend money to a certain segment, then the person will not be getting his increment for the year.
00:34:30
Speaker
Now, that is not the way in which we do banking, but that's where you're forcing people to take decisions which may not be, let's say, economically relevant. And finally, at the end of the day, if something goes wrong, then you'll run into a problem of saying an inquiry coming in and what we spoke about investigative agencies. So this is something which we should try and keep away from.
00:34:49
Speaker
And to the credit of this government, I think they have said it that often on that they have stopped this business of phone banking where somebody calls you up and tells you give a loan to this person or don't give a loan to someone. But we've still seen that in terms of carrying out any policy of the government, we still use banks as the medium, which ideally should not be done. That brings me to the next question, which is,
00:35:14
Speaker
And I think you allude to this towards the later part of your book Madan, which is whether RBI should hold reserves, transfer them to the government, you know, and what happens with the anomaly of that part of the balance sheet of the RBI that gets created due to the central bank holding on to government securities.
00:35:37
Speaker
Right. And we've had a lot of conversation a few months back, right, around this whole transfer issue. So what's your take really on this? While I read it in the book, I generally think it's something that could be fascinating for me. Yeah. So the thing is that the Reserve Bank of India, for all practical purposes, is actually owned by the government of India. So therefore, any kind of a surplus which comes
00:36:03
Speaker
from the Reserve Bank of India's operations in a particular year will have to be transferred to the government, which is a fair enough thing. Now, a couple of years back, it so happened that the government felt that they could take a part of the reserves of the RBI because the RBI actually, as a central bank, has the power to create money.
00:36:23
Speaker
They create money not just in terms of currency, but they could also be issuing, they could be buying up government paper from the banks. So, accordingly, you print currency for it, and that's how you create a huge balance sheet. Now, is it a right thing to actually say that if my balance sheet size is 100, that we work out a way to say that the RBI did not keep 100 as a balance sheet. It can do with, say, 90.
00:36:47
Speaker
And then I say that this 10 which is there, it can be transferred to the government. Now, I think the messaging which was sent was probably where the problem was. Because it was a time when the government's fiscal numbers were under pressure, it did look like that it would be a major fiscal slippage. So therefore, the timing of such an act gave the feeling that the government wanted the reserves of the RBI in order to shore up its budgetary balances.
00:37:10
Speaker
So I think that's where the controversy came. If it was probably done maybe after another two or three years when everything was normal, it wouldn't have created the same noise. But one should remember that once you do it, it's only a one-time exercise because now there's no possibility of transferring any more reserves because everything that is earned by the Reserve Bank of India in the form of a service will be transferred to the government by statute anyway. So I think this one-time use of it
00:37:36
Speaker
was probably, it was fairly unusual. And as I told you, it gives the wrong kind of signals to the market saying that the government is desperate to get money. So you're trying to get into the Reserve Bank of India's balance sheet.
00:37:48
Speaker
But I think it cannot be done too often. So probably it was something which a prerogative, which the government used once, they had set up an expert committee so nobody can really have any dispute over that. But Dr. Bemerjalan who had chaired the committee and he had come to this conclusion that a
Conclusion and Book Recommendations
00:38:03
Speaker
certain amount based on certain prudent ratios were able to, led to this transfer which took place to the government.
00:38:12
Speaker
Yeah, we are done with it now. But ideally, I would have said that we should not be doing such things because there is a Bank of India's balance sheet is not a real balance sheet, because it just has the power to create money whenever it wants to. I think before we have this conversation, one last question for you. What are a few books
00:38:32
Speaker
that you would recommend, apart from your own, to perhaps understand India better or our economic structure. Who are some of your favorite writers? In fact, I think we've seen some fairly remarkable books and I would not be... since you've caught me slightly off guard, I can probably give you the name of the authors rather than books because I would not be remembering them.
00:38:57
Speaker
But I think we've seen some very good views which have been given by Dr. Virela Charyat, his book which came out recently.
00:39:05
Speaker
I also like the one from a journalist coming, Tamil Bandopadhyay. I think he's written something on banking. He's specialized in banking. And as a journalist, he can take more liberties than I can. Like in a sense, he can take names of people which I cannot take because I'm still in the business of, in the financial sector. So I cannot take these liberties. But definitely Tamil has been more open and vocal in terms of his critique. So I think Tamil Bandopadhyay is
00:39:30
Speaker
books on banking, the one which came out recently. I think that's something which one should be looking at. And we've seen certain other good books coming from people like Dr. Rakesh Mohan was the ex deputy governor of RPI. I think he has fairly insightful books on this particular subject. So I think there are lots of books on banking which are there. And again, I would just like to say that what I try to do out here is to try and simplify things.
00:40:00
Speaker
and keep the chapters short so that you don't doze off when you're reading it. And can't be everything that is required in maybe instead of 1000 words, I kept maybe 2000-3000 words. Actually, I think Tamil's book is Pandemonium, right? The great Indian book which I've read, so I think I can say it for the listeners. And I think Dr. Virala Charya has written a quest for restoring financial stability in India, if I'm not mistaken.
00:40:32
Speaker
But thank you so much Madan. I can tell you that I last worked in a bank many many years ago and I studied economics even before that but I did not doze off. I could read the book of very comfortable sittings.
00:40:48
Speaker
and i learned a lot in the process and i hope to everyone who's listening to this podcast that they do realize that they can learn a lot please go buy the book from amazon flipkart check it out online it's available everywhere the book is also a great book to gift to someone you know who's studying uh finance or
00:41:09
Speaker
aspiring to pay a charter account and an economist or just someone generally curious about banking and the Indian economy. Once again, thank you so much Madan for doing this podcast and being on the show. Thanks for having me here.