Good and bad news on banks.

It is very rare to hear of sweet story in relation to public officials in India, but we have one now. Laila Indira Alva, a class V school student wrote to Mr Raghuram Rajan, the Governor of the Reserve Bank, in September last year, enclosing a $20 note. " I have heard about the crisis our economy is facing...I have also heard about the fall of the rupee with respect to the dollar," she wrote. " I have saved $20 on my last trip abroad with my parents. I thought that I could use it but the country needs it more than I do." Ahhh, so sweet and innocent. Mr Rajan returned the $20 dollar note with a letter," I am deeply touched by your kind gesture. I am aware that this is a challenging time for the country and I have no doubt that the economy will emerge stronger. I am returning the 20 ( note ) that you sent with the assurance that we have adequate foreign exchange reserves in RBI to manage the situation." This incident is remarkable for 2 reasons. First, the money was not stolen in the post and second, a very high ranking official actually answered a letter from a child seriously, politely and reassuringly. It gives us confidence that the Reserve Bank is at last in good hands. But sadly Mr Rajan is in a very small minority. Hence, the bad news. Seems that public sector banks need Rs 4 trillion for recapitalisation. With a budget of Rs 16.65 trillion this represents almost 25% our total annual budget. The reason is the soaring levels of bad loans in public sector banks which have risen to Rs 2.8 trillion in 5 years. This maybe an underestimate because banks hide bad loans by issuing new ones with which the borrower pays off the old loans and this is shown as fresh loans on the books. This process is called ' evergreening '. Banks officers being government employees cannot refuse pressure from politicians to extend loans to family and friends who feel that they have no obligation to return it. The International Monetary Fund has warned of very high debt levels of companies. As the US continues its tapering of Quantitative Easing interest rates are expected to rise in the west, putting pressure on India to raise rates. That will make it even tougher for these companies to repay their debts. However, the RBI has instructed public sector banks to get tough with wilful defaulters. " Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures," said Mr Rajan. If banks sell off bad loans the promoters may lose control of the companies. Naturally, this does not go well with vested interests. Perhaps we should have children in our government.