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Did the Bank Bail-out Work?

When the ‘white-collar robbers’ (banking industry) are robbed, should the government go to bail them out? Or should it be a ‘non-bail’ offence? I am using the harsh expression against the policy makers in the banking industry with full responsibility. Both the top administration and the employee organizations are to be blamed. What if our defense officers and men go on a strike? Can you think of this situation? They are defending the borders and you expect them to be on vigil at the borders 24×7. At all times and at all costs! What about the employees who engage in war against the economy of the country by going on lightning and indefinite strikes? What is the colossal damage done to the economy of a country, when the commercial world comes to standstill and transactions involving several millions of dollars are affected badly in the Clearing Houses and Stock Exchanges? Recession was but one important cause. But there were other causes simmering in the pot for the sorry situation the Banks created for themselves!

At the time of bail-out was announced, the position of the banks was dire. The question is who made it dire? Was the bank administration and the controlling authorities of the Central  Bank, which is flooded with  stalwarts of economics and banking were so incompetent to hoist the white flag of surrender so soon?

The first casualties of recession

The trouble about bail-out began with the end-use of the U. S. Treasury amount of $350 billion tranche of the Troubled Asset Relief Program (TARP).The purpose of this amount was to inject capital into a variety of range of potentially viable banks, but presently ailing. Under the arrangement, the government will have the ownership share. But what is the use of ownership? How will the Government enforce that ownership, if the Banks yet again fail to deliver the intended results? What is important is– have they acquired the competency now to utilize the money properly for increasing loans to business and consumer borrowers. Where was that competency earlier?

The banking industry should have gone through the process of failure.  No problems if some banks down their shutters. The survivors must have followed the banking regulations and loaning discipline as per the banking norms. It is also reasonable to expect that the top managerial personnel of such banks are free from corruption. The bail-out exercise is just a cosmetic remedy. The Government cannot arrest recession by offering doles to the Banks.

This is however is not to doubt the intentions of the Government. But it is a reaction in panic, and no tangible benefit will come out of this exercise alone. Mortgage defaults can be tackled by recasting the repayment schedule by granting a repayment holiday for a fixed period. The remedies will have to be found out by the think-tanks of the banking industry. For other troubled segments of the economy, a need-based approach to additional loans may be considered. The objective is to look out for long-term remedies; cesarean operation in the form of bail-out is not the final solution.

TARP capital injection has reduced the size of the problem temporarily, the beneficiary Banks breathe with this ‘oxygen cylinder’ but such dole-outs can never bring about the permanent and genuine solutions. The Banks need grow their intrinsic strength. How they do it is their business.  Cut down the extra fat salaries and perquisites of the senior executives? Withdraw the facility of private jet to the CEO? Sell partial assets? By a voluntary/forced cut in the salaries of the employees and by declaring moratorium on wage increases till the issue settles down? By pruning the personnel? By shutting down the loss-incurring Branches? There are many solutions.

I mentioned about the ‘white collar robbers’ in the first paragraph of the essay. Banking institutions are customer-friendly only in their advertisements. They rob the customers by charging heavy service charges for every function. Their profits need to be confined to the interest rate they pay on the deposits and the lending rate they charge from their loan customers. This difference is their profits.  Even in that area, Banks discriminate against the deposit customers as compared to the loan customers. For example, if the interest rates are raised, the customers have to pay the increased rate of interest even on the existing loans that were sanctioned at a lower rate of interest at the time of disbursement of the loan. But as for the deposit customers (Fixed deposits) the increased rate is not applicable. The deposits will continue to get the old rates of interest till the date of their maturity.

Bank bail-out has NOT worked. The Government did it for propaganda purposes, not knowing what else to do.


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2 Responses

  1. its nice message, people friend are only in adverisement in practical it has far more distance we people should serious about the banking works, i have some personal experience in this matter, in the year 2000 i had joined one CA firm and subsequently i did some audit in the Banks(Assam Gramin Vikash Bank), what happened most of the loan accounts were NPA, loanee were surrendered militant, no repayment but the banking people what they done they charged interest for increasing their revenue and also to increase their DA.

    Next another experience, I had appeared as a Advocate in DRT(Debt Recovery Tribunal) basically handiling disputes regarding Banks with the Customers, here the same thing happened, I dont know how could one firm have taken 2 cash credit (cc) loan on the basis of one patta land, without the involvement of Bank official it could not be possible because every Bank have quarterly concurrent audit, there lots of cases (money suit, DRT cases) which only due to the negligence done by the Bank Higher Executives. They always harrasing the genuine people, they issue loan to those who has no repayment capacity but produced strong documents and also paying some bribe which depends on the loan. So this is the present situation of Bank.

    • Mith, very correct observations. The customers are at the receiving end, with no one to care for. More strictness is needed by the controlling authorities and Reserve Bank. Unless the Bank staff is hand in glove with the loan clients, they won’t go bad. Corruption is rampart in the banking circles, including the Rural Banks.

      The foreign banks have perfected another style of robbing the customers, through “Service Charges.” Reserve Bank is watching this trend helplessly. Goons are appointed by these banks to recover the amount. The banks that use such high handed methods, should be thrown out of the country, lock, stock and barrel and the concerned Manager of the Branch should be arrested with a non-bailable warrant!