The Hindu : Opinion / Editorials : CRISIS OF CONFIDENCE

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Tuesday, Jul 27, 2004

Opinion

Opinion - Editorials

CRISIS OF CONFIDENCE

THE OFFER BY the Oriental Bank of Commerce to take over the Global Trust Bank is good news for the one million depositors of the troubled private bank but a nagging question is if the Reserve Bank of India could not have handled the crisis better. That the Hyderabad-headquartered GTB was in deep trouble has been public knowledge for three years; that the regulator had frowned on the bank's revival proposals was also well known. It should have been possible therefore to oversee a quieter shutdown of GTB as an independent entity, followed by an RBI-directed merger with a stronger bank. Mergers between healthy and failing banks have been the preferred rescue strategy of the central bank and it is a natural inference that the sudden announcement by the public sector Oriental Bank of Commerce must have been the result of prodding by the RBI and the Government of India. If the merger option was to be exercised within a couple of days of the decision temporarily to halt transactions by GTB, then it was surely possible to avoid causing tremors in the financial markets and great anxiety to depositors by arranging the union without imposing a moratorium.

GTB was among the new banks to set up business after the RBI opened the sector once again to private enterprise in 1992. The erosion of GTB's net worth within a decade of its commencing operations is a poor advertisement for the liberalised policy on bank licensing. Questions were raised at the very beginning when a group of individuals rather than an existing financial institution was given a licence to set up the bank. There were concerns as well that the main promoters were raising loans against their holdings by promising an appreciation in the GTB share price. More seriously, in the late 1990s, the bank embarked on a reckless course of speculation in the stock market. The chickens came home to roost in 2002, when huge losses forced the RBI to crack its whip. Yet the central bank was willing to give GTB time to clean up its balance sheet even as it kept a close watch on operations. In retrospect, this was not a wise decision, for the regulator was eventually left with no choice but to suspend the functioning of a bank that had accumulated more than Rs.900 crores of non-performing assets. It is inevitable that public confidence in the new private banks, which stand out for their aggressive lending practices and branch expansion drives, will be adversely affected by the GTB episode.

A crisis of confidence in banks is a precursor to a wider and deeper economic problem. It is therefore a matter of urgency that the central bank first tightens its scrutiny of applications for banking licences. A closer scrutiny of banking operations is also essential for preemptive action so that the RBI does not end up arranging a series of marriages between weak and strong banks. However, a pre-condition is that the regulator is allowed to carry out its supervisory functions without directions from New Delhi. Access to the corridors of power and acts of favouritism by the Central Government are widely believed to have enabled the delinquents in the banking sector to get away with abuse of RBI regulations. The many millions who repose their faith in the organised banking system and oil the wheels of business deserve better.

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