In banks we trust.

The Reserve Bank has announced that it will license new banks in the private sector under strict criteria. But why? India does not lack banks. There are 22 nationalised banks, State bank of India and its 5 associated banks and at least 29 foreign banks operating here. Surely the more banks there are the more difficult they will be to monitor. In 2003 Nedungadi bank had to be taken over by Punjab National Bank and in 2004 the Global Trust Bank had to be rescued by the Oriental Bank of Commerce. The global economic crisis since 2008 started with the collapse of Lehman Brothers which collapsed under the weight of bad loans. Bruno Iksil, nicknamed the London Whale, at the London office of JP Morgan cost the bank $6.2 billion in losses. Royal Bank of Scotland had to be rescued by the British government with 80 billion pounds of taxpayer money. Despite making huge losses and enormous public loathing managers continued, in complete absence of any shame, to give themselves large bonuses. While the government is encouraging companies to open new banks the RBI is trying to control the danger of rising bad loans at existing banks, especially public sector ones. The RBI has laid down stricter guidelines for restructuring of bad loans at banks. Already Rs 2.29 trillion of loans have been restructured. The RBI has ordered banks to increase reserves against restructured loans from 2.75% to 5%. For loans which have already been recast banks will have to increase reserves to 3.5% by March 2014, 4.25% by March 2015 and to 5% by March 2016. In March the RBI reduced the Cash Reserve Ratio by 25 basis points to 4% to improve liquidity and bring down interest rates but is now having to increase reserves for bad loans. Of course bad loans are only 4% of total loans of banks but still it means that banks will have to find extra money to hold in reserve. The RBI has mandated that owners of companies will have to give personal guarantee to have their debt restructured which shows the level of concern. " It has been decided that promoters' personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as a substitute of personal guarantee," the RBI said. Livemint 31 May. The RBI also said that restructured loans cannot be classified as standard accounts unless repayments are regular. " This means restructured loans, unless it meets the criteria, will be classified as substandard, increasing the provision on such loans to 15% from 5% currently," A Krishna, MD of SBI. It is probably a good thing that we do not understand what is going on or we would die of worry.