The Chartered Accountant

INDUSTRY-SPECIFIC
As a result of this financial mess, liquidity in India is drying up and the cost
of borrowing, particularly for small scale industry is today higher than 20 per
cent! If the banks own cost of funding is 13 per cent then they cannot lend
it even to blue chip companies for less than 15 per cent! All these actions are
already impacting the growth in India.
all loans are not equally risky; some given to blue
chip borrowers being safer than others. The
quality of borrowers is to be determined by either
credit rating agencies or by the bank itself.
Further the value of investment could be deducted
from loan amount for appraising risk of
loss. Besides, banks are required to keep some
capital for market risk, viz., dilution in value of
investments due to future increase in interest
rates and for operational risks, which could arise
due to fraud, mismanagement, etc.
While the above logic is sound, in my opinion, the
concept of Tier II capital dilutes the meaning of
capital. Technically a bank can get into a serious
situation if the equity is eroded. Then of course,
Tier II capital will still be there to protect depositors,
but once a bank becomes insolvent, its assets
will fetch a far lower sum on forced sale, thereby
endangering the depositors’ money also.
Bankers as well as independent broking firms
should not be allowed to buy and sell commodities
unless it is for a client who is into the similar
kind of business and if found by regulatory
authorities that the bank has indulged in speculative
activity, punitive actions should be taken.
Even while entering into Forward, Futures and
Options for the clients, there should be checks
and balances through regulatory authorities that
they cannot do it beyond let us say maximum
one year of consumption. The unprecedented
rise in commodities prices in the recent past is
largely due to speculation and the reason for the
recent steep fall is mainly due to winding up of
these large positions.
While efficiency should be rewarded and perhaps
the reasons for lack of speedier growth in public
sector companies and various nationalised banks
in India is the absence of reward linked to efficiency,
we also cannot operate on two extremes.
I don’t think the person who designed Nano car
would have received the bonus that some of the