Closer Look At Pvt Bank Managements Needed

Updated: Jul 29 2004, 06:46am hrs
The GTB crisis shows that private sector banks need to imbibe the traditional wisdom that discretion is better than valour, especially when it comes to lending and investing. The RBIs three-month moratorium aims at safeguarding depositors interest. So far, so good. But there is a lesson in the crisis. Financial sector reforms that harp on opening up the banking system to private sector need to proceed slowly. Else, in the absence of a proper regulatory framework, crises may well convert into a contagion. Dont forget, the proposed GTB-OBC merger follows the earlier one of Nedungadi Bank with Punjab National Bank.

In GTBs case, caution in lending was thrown to the winds. This is clearly a crisis of moral hazard. RBI Governor YV Reddy, in his 2001 S Radhakrishnan Memorial Lecture, had warned: In regard to private sector banks, including co-operatives, vulnerability of some of them is no longer an impossible contingency.... In case it is assessed by the regulator that a bank is insolvent...the logical requirement would be liquidation unless a serious contagion resulting in systemic risk is anticipated.

The GTB managements attempts at dismissing the crisis as leading to liquidity crunch seems ludicrous. In this clear case of moral hazard, the RBI has sought to bail out the depositors. But will such bailouts not breed contempt for caution on the part of bank managements

The most important lesson, however, is that the private sector in the era of reforms need not be taken as a torchbearer of efficiency and professionalism. Also, there is need to keep a watch on the closeness between bank managements and corporates if such a crisis is to be avoided. If the faith of Indian public in the banking system is to be sustained, the erring promoters and management must be taken to task.