"A TROUBLED banking sector is not good for any economy" is a commonly mentioned statement. At the same time, it has its opposition mainly from the bankers who are of the sentiment that it ought to be rephrased to, "A troubled economy" is not good for the banking sector.
It is interesting how the shift in positions of words could reflect a totally different meaning. Yet this reveals the sort of blame game that is playing out in the economy.
On one hand, the bankers have pointed out macroeconomic challenges as the major reason for their struggle. However, on the other, regulators have come out lashing at bankers of unethical practices that have disturbed the soundness of the sector
The Monetary Policy Statement presented two weeks ago by the acting Governor brought out the regulator's sentiment.
Of course, there were other measures that took cognisant of the fact that we are operating in harsh times and banks ought to get some relief, for example the relaxation of the capitalisation deadline.
However, the highlight of the policy was mainly pointing out the undesirable elements in the banking system, which was pinned as the reason why the sector is struggling.
For starters, some banking institutions are undercapitalised. In the advent of bad loans, which seem to be the prevalent case among many banks, they will not be able to survive after absorbing such write offs.
Furthermore, due to the lack of capital, some bankers engage in desperate and unethical acts of abusing depositors' funds.
Banks are not allowed to use depositors' funds to cover their operational costs.
Rather, they should only generate income out of them, which should then be used to fund their operations.
Unfortunately, most banks are indeed guilty of such. A number of banks have gone down history books guilty of abusing depositors' funds. As also mentioned in the monetary policy statement, struggling banks have a significant proportion of insider loans in their books.
These loans are mainly unsecured and non-performing.
Clearly this is an abuse of depositors' funds. If the bank is to lend to subsidiary companies of its holding company, or directors of the business, who in turn do not pay off, it is unethical to say the least.
It is abuse of power, and betrayal of trust to the depositors who would have entrusted their funds to them. Banks, such as Interfin, which is currently under curatorship, were reported to have insider loans that were not just non-performing but also above the regulatory threshold combined.
All this brings the ethics of the sector under spotlight and erodes the confidence in banking that was hard to regain after hyperinflation.
Rightfully so, the Governor has come up with policies that are expected to clip the wings of banks and avoid bankers from feathering their nests at the expense of depositors.
All insider loans will not be renewed and the parties are supposed to provide a payment plan on how they are going to pay off those exposures.
In the long run, this means that should the policy not change in the short term, insider loans will slowly fade away.
Of course this begs the question of whether or not the 'insiders' are able to turn their non-performing position into performing ones.
Maybe a little coercion is what was required and the Monetary Policy statement did just that.
Of course, we will have to see with time whether or not insider loans are actually coming down, and interestingly monitor the ratio of non-performing loans to total market loans.
Furthermore, banks are being required to capitalise to the minimum thresholds. Emphasis was just not just on the level of capital but also on its composition.
Illiquid capital in the form of fixed assets, for example, is dominating the capital structure of some banks.
This creates a problem of liquidity as the capital is not able to instantly absorb any shocks due to its illiquid nature.
Hence, the Monetary Policy had to curb the level of fixed assets that can form the capital structure of a bank to not more than 25 percent.
With such detail, it is easy to have a rather shallow conclusion that the crisis in the banking sector is entirely that of bad management.
Surely bankers have their fair share of blame to carry as there is no excuse for abusing depositors' funds. However, we cannot run away from the fact the economy is also bleeding. The lifeline of the banking sector is dependent on the general health of the economy.
The argument therefore is that a crisis in the banking sector is merely a signal of a bigger crisis brewing in the economy.
Currently, companies are struggling to make ends meet. This is mainly due to lack of liquidity. As a result they fail to generate enough cash-flows to cater for their obligations, including bank loans.
This increases the level of non-performing loans and locks up funds in a non-performing asset.
This has the effect of creating a gridlock in bank payments should these bad loans continue piling, which is highly likely in an underperforming economy.
The lack of a lender of last resort exacerbates the problem, as banks have no place of refuge.
The ongoing struggle with some banks would not have reached such heights should the necessary bailouts had been available to curtail the problem at infancy.
Should blame be entirely shifted onto bankers alone? The sector does not exist in isolation.
It is operating in a very difficult environment where some companies are closing down and others cutting their levels of business.
Due to their intermediary role, banks end up facing the brunt as they are burnt from both ends.
Although we do have some unethical practices in the sector, it is important to not ignore that challenges the banking sector is facing could also be a signal of a sinking economy calling for lifesaving.
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