Austerity, not bailout, solution to EU crisis: Rajesh Tambe

By Rajesh Tambe of Suresh Rathi Securities

The banking sector in India will take a hit due to the recent decision by Reserve Bank of India to deregulate the savings bank interest rates. For all these long years, the saving banks interest rates were regulated as result banks made huge profits as the cost of acquiring the funds was low.

But the new saving bank interest rates offered are 6% and 7% by the public sector and the private banks, which means cost of acquiring the funds  will go high. The whole game in the banking sector is the differential in the cost of acquiring the funds and the realisation. Within these parameters, the bank has to keep its cost under control, expanding its activity by opening up of new branches on national and international level and make good profits.

But as the interest rates in fixed deposit were continuously going up, it was necessary for the RBI to deregulate the savings bank interest rates, which were low at 3% causing great differential between the two interest rates.

Secondly, because of high inflation and high interest rates, there are no new project financed. As a result,  we will not see real growth in the banking sector.

The recent results of the state-owned Punjab National Bank has shown that the differential of 3.58%. The bank has made phenomenal profit but with higher efficiency in the private sector banking, it will do much better compared to the PSUs banks

The Euro Trouble

The Euro zone problem, particularly Greece, will turnout to be a big problem as the referendum process has been cancelled by government as the opposition  party has agreed for the same.

A)      India's trade with Greece has came down to half -- 480 million dollars

B)      And also the trade with other European nation have taken a hit

C)      The political turmoil in the middle east is a big threat

D)      US is also not showing any science of recovery

E)      Slow down in China.

All the above mentioned problems will bring in slow down in India's growth due to the cumulative effect.

ECGC (Export credit Guarantee Corporation has sounded a cautious approach to all the Indian exporters. Today, we are looking at the problems of Greece tomorrow it could be Portugal, Italy and Spain.

European banks have greater exposure in the Greek banks which is matter of concern, Greece without joining the union could have survived on its own but by joining the union and the money flowing in the from the rich countries  Germany and France as bail out package creates distortions in the economy.

The solution to the Greece problem is not bail out package but austerity measures.

1.       Reduce the expenditure / wages.

2.       No frees bees to the people

3.       High taxation to its rich  people   to generate more revenue

But this is not easy as Greece has always lived beyond its means.