This editorial does not intend a bashing against any particular stakeholder. Instead, this is a call for reason and measured action to reshape or rescue (depending upon how you sense the crisis) the financial sector. The fact that top CEOs in banking have publicly argued the case for painful mergers between banks speaks volumes for the trouble the sector is in. The merger attempts by and between the major banks offer a further sense of the impending crisis. The sector suffers from multiple problems-- rapid expansion in the number of banks, reckless lending (especially during the boom in real estate), and unsustainable competition to raise the deposit rates to attract more depositors.
The central bank did intervene, but the intervention seems to have come rather late, especially with regard to imposing a lending cap in the realty sector. Top bankers concede that realty has trapped billions of rupees and the banks are unlikely to recover all of that money as real estate has gone bust. The reining liquidity shortage has further compounded the woe of banks, and the policy response until recently seemed to be to further raise deposit rates. This wasn´t going to solve the problem because there is always a limit to how far you can raise the lending rates and still be able to lend in an economy with such low productivity. And it didn´t work. Now the banks have come together and decided to keep the deposit rates low.
Such a cartel-style decision to cut the deposit rates without a corresponding slash in lending rates is only going to infuriate the public and the regulatory body. It´s time the central bank stepped in, not in any ad hoc, short-sighted intervention, but for a comprehensive dialogue with all the stakeholders, to come up with the right policy response. The issue is a lot more than just deposit rates or lending rates-- at stake is the stability of the banking sector.
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