THE GIST of Editorial for UPSC Exams : 09 December 2019 (Banks must stick to their core functions (The Hindu))

Banks must stick to their core functions (The Hindu)

Mains Paper 3 : Economy
Prelims level : Non-core areas
Mains level : India’s economic growth and development

Context:

  • The recent statement by Finance Minister Nirmala Sitharaman at a private bank’s foundation day event is a marked departure from the usual rhetoric of politicians.
  • The Finance Minister said: “Banks should not engage in unnecessary scaling up of business, and, rather lenders must understand their core strength of business and run operations with consistency, stability and with a sense of ownership.”
  • She added, “The orthodoxy in banks is better, since it is layered with conventional wisdom.”
  • The above statement is a refreshing one because we have allowed the banks to deviate far away from the principles of sound banking.
  • Whatever problems the banks are undergoing now are on account of such deviation.

Different entities:

  • There is a marked difference between the business of banking and other businesses. Banks operate with others’ money and with a very small capital base.
  • Banks’ failure will affect not only the shareholders but also their clients. Moreover, their operations will have contagion effect.
  • The ability of banks to return depositors’ money is of paramount importance.
  • Year after year, the government is pumping taxpayers’ money to shore up the capital base of public sector banks to maintain their capital adequacy.
  • Until three or four decades back, Indian banks’ function was mainly to mobilise community savings for the purpose of lending for productive purposes.
  • Banks were not considered as a ‘super market’ of financial products. Banks have been able to mobilise deposits only because of the trust developed in them over the years.
  • To have the trust of the people, the banks must adopt sound banking principles like liquidity, safety, profitability, secrecy and customer service.

Into non-core areas:

  • When commercial banks ventured into long-term finance after the closure of development finance institutions.
  • It led to asset-liability mismatches and affected the liquidity of banks.
  • Banks’ lending without adequate tangible security has led to a rise in non-performing assets (NPAs) and affected the safety of funds with banks and the profitability of the lenders as well.
  • The diversification of banks into non-banking activities such as insurance and mutual funds has forced them to deploy the productive workforce in these activities, affecting thereby the core function of banking.

Paradigm shift required:

  • Security-based lending should be restored to and loans should be sanctioned only with adequate tangible security. Only credit to the weaker sections should be exempt from this criteria.
  • Banks’ role should be to focus only on accepting deposits for the purpose of lending. Non-banking activities such as insurance, mutual funds and share broking should be left to dedicated entities other than banks.
  • Dedicated development financial institutions should be started again and commercial banks should lend only for the short to medium term.
  • Loan waivers should be stopped and using banks’ funds for politically-driven schemes should be eliminated.
  • Targets should be fixed more for the quality of operations and not for quantity. When quality is maintained quantity will automatically flow in.

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Prelims Questions:

Q.1) With reference to a new study by the Indian Institute of Science (IISc) Bangalore on antivenom, consider the following statements:
1. India is regarded as the snakebite capital of the world.
2. In India, a polyvalent antivenom is produced against only the spectacled cobra and Russell’s viper.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A
Mains Questions:

Q.1) How diversification into long-term financing, insurance, mutual funds and share broking have affected their performance? Comment.