Even the best of intentions can turn sour if a decision is not timed correctly.
The RBI's decision to free interest rates on the savings bank accounts appears to be one such move.
It may be a logical and over due reform of dismantling the regulatory regime of interest rates.
In its battle against inflation, the RBI has been finding it hard to raise rates in one go, for fear of hurting the market sentiment.
But allowing the cost of funds to go north might unwittingly add to the woes of banks and borrowers, equally.
Strategy?
Or was it a strategy? Unwilling to be seen as the villain of piece, the RBI has increased the official repo rate just by 25 basis points, surprising the markets which had braced for a 50 points jump.
But it might be achieving the goal through the actions banks would take now.
Thanks to the high interest rates, banks' cup of woes is full with increased NPAs, raising costs of funds, additional depreciation on investments due to their eroding values and higher outgoes on wages and retirement benefits.
Can they, at this juncture, face the SB interest rates war?
The loans will certainly become costlier than expected.
The base rates of banks are invariably linked to the cost of deposits and with the newly acquired freedom to price the saving deposits; they are bound to go beyond the level envisaged by the modest increase in the repo rate.
Can the economy sustain further raises in rates?
Call rates
It would, of course, be naïve to expect that banks would go down the path of suicide to bring the SB rates on par with the call rates or the short term deposit rates.
But the surge likely to be caused by the initial enthusiasm might last long enough to upset the ALM apple carts of many banks.
As we enter the last quarter of this fiscal, the upswing would only escalate even if the inflation were to take a symbolic U turn by the year end, as eagerly anticipated by the RBI and the Government.
Habits die hard and lessons learnt in the past are easily forgotten.
Building balance sheets for the year end is an obsession and the temptation to outwit and outsmart the competitors will prevail.
One might argue that the freedom to decide rates for term deposits is already available and adding the SB should not cause any upheavals.
Compared to term deposits, both in terms of size and tenure, the leeway available for the SB deposits is much more, leaving enough space and scope and not many will hesitate to play with the rates.
And some banks are adept in using short term liabilities to acquire medium term assets.
NINJA borrowers
After competing for the SB deposits, banks can hardly afford to keep the funds idle and would look to deploy the funds profitably.
In a possible replay of the past, though in a small way, the lenders would scout for the now famous (or infamous) NINJA borrowers.
This will lead to dilution of quality and un-ethical practices, spoiling the semblance of market discipline, so assiduously built up by the RBI, through prodding, goading, cajoling and where required, cautioning and penalising the banks.
In these difficult times, the borrowers would not have any qualms about following the trend and grabbing opportunities, in the process, abandoning loyalties or financial discipline.
They would also resort to short term borrowings for long term commitments or for replacing the regular limits, to save costs.
The current bankers, kept in the dark, will be left to hold the baby when it becomes sick.
Corporates
Corporates, looking to gain from forex market movements burnt their fingers several times in the past.
Once again what started as an innocent attempt to hedge the risks soon degenerated into a speculative activity, leaving both the customers and some banks licking their wounds.
The urge to make money from other than their primary business ignoring the risks associated with such moves, was responsible for the developments.
It will happen yet again, this time in the credit area, if corrective steps are not taken in good time.
Ill conceived strategies
A few examples of ill conceived strategies of some banks are seen in the market.
These banks opt for short term funds, even at a relatively higher cost, to avoid getting locked into long periods at high rates.
These funds are offered as ST loans at lower rates with out the knowledge or consent of the existing bankers, who have a floating charge on the movable assets.
These un-authorised borrowings are, obviously, against the security of the assets already charged to the existing banks.
The loans are for shorter periods, to be repaid before close of the year. Where ever possible, moveable assets or inventories are taken under lock and key, as security.
The borrowers are convinced that it is safe as it would neither attract the auditors' notice nor the liabilities would appear in the balance sheet.
Crop loans
The same logic is extended to big farmers who avail crop loans and who are offered warehouse loans, with the lure of higher returns for their produce later.
Farmers getting higher price, if it happens is a positive and farmers need to be supported with produce loans to avoid distress sales.
Such loaning without the knowledge of their regular bankers results in double financing, misuse of funds and ultimate defaults!
Freedom to price SB accounts is right, but the timing doesn't appear to be!
(The author is former Managing Director of State Bank of Mysore and can be contacted at: >murthy@mandavilli.com )