Pratip Chaudhuri ko gussa kyoon aata hai?

CategoriesBlog

State Bank of India(SBI) chairman Pratip Chaudhuri’s outburst in Kolkata on Wednesday against the Reserve Bank of India’s (RBI’s) latest liquidity tightening measures is unprecedented. I can’t recall a commercial banker taking on the banking regulator in such a way, openly saying RBI is non-transparent in its policy measures.
The corner room in SBI’s headquarters on Madame Cama Road in Mumbai has a history of minor skirmishes with the RBI boss, whose office is just about a kilometre away on Mint Road.
Chaudhuri’s predecessor O.P. Bhatt had fought hard with RBI on so-called teaser loans. Bhatt structured a home loan product that was offered to the consumer at a low price with an understanding that the interest rate would be raised in the next few years. RBI was concerned this could lead to a rise in bad assets as many consumers would get hooked because of the low initial cost and not be in a position to pay when the rates go up. Bhatt positioned teaser loans as a unique product to give a fillip to economic growth when India, along with the rest of the globe, was reeling under a credit crunch in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc.
Bhatt also gave a corporate guarantee to the bond offerings of the Tata group, which the banking regulator did not approve of.
On taking over in April 2011, Chaudhuri—who started his career as a probationary officer in the bank in 1974—went out of his way to make peace with RBI by junking the teaser loan scheme. But he started finding fault with the regulator on policy issues. For instance, he has all along been pressing for a cut in the cash reserve ratio (CRR), or the portion of deposits that banks need to keep with RBI, as a precondition to the bank lowering rates. His obsession with the CRR cut prompted RBI governor D. Subbarao to a crack a joke at a public forum saying he had set up a two-member committee to look into the issue and the members, Chaudhuri and RBI deputy governor K.C. Chakrabarty, would be locked up in a room to discuss the issue and would be released to announce the measures only after Subbarao retired!
Incidentally, both Subbarao and Chaudhuri are set to leave their respective offices in September.
Chaudhuri’s latest outburst against RBI also stems from his concerns about liquidity. He has said RBI should have hiked the interest rates to raise money market rates instead of tightening liquidity. By tightening liquidity, RBI has been non-transparent in its approach. Globally, central banks only raise interest rates if they want to jack up money market rates. He said this as SBI chairman and not on behalf of the banker’s lobby—the Indian Banks’ Association—of which he is the honorary secretary.
RBI has many tools it can use to raise rates and the kind of transparency that Chaudhuri expects may not necessarily be a virtue for any central bank.
I wonder why Chaudhuri gets so upset with RBI measures and why he is so openly critical of them. Should a commercial banker be so open about criticizing RBI? What will happen if all other bankers take a leaf out of Chauduri’s book and start screaming from the rooftops?
Chaudhuri has been trying hard to put SBI’s house in order but it has been a tough task with bad assets growing in a slowing economy. As it needs to set aside money to take care of bad assets, profitability is being hurt, and this is why the stock market is punishing SBI. In April 2011, when he took over the assignment, the SBI stock was at around Rs.2,900 after testing its lifetime high of Rs.3,322 in October 2010. Now it is trading at around Rs.1,800. The latest trigger for the drop in price has been the RBI measures that are making money more expensive and driving up bond yields as prices drop. When bond yields rise, banks need to book so-called mark-to-market, or MTM, losses. MTM is the accounting practice of valuing financial assets at current cost and not the price at which they were acquired.
It will be interesting to watch SBI’s June quarter earnings, the last of the results Chaudhuri will oversee. Will he be able to arrest the accumulation of bad assets and restructured loans and maintain net interest margin? Meanwhile, on one front, he has been a resounding success. He has dealt with the trade unions in the nation’s largest bank with an iron hand and forced them to put the bank’s interest ahead of everything else.

About the author

Leave a Reply

Your email address will not be published. Required fields are marked *