Problems of excess capacity

| Updated: October 25, 2017 01:56:12

Problems of excess capacity

The country's financial sector has institutions of different types in excess of what it needs. This is true for banks, insurance companies and non-banking financial institutions (NBFIs). The sector is also reportedly accommodating credit rating agencies more than the requirement. 
There is no denying that short-supply of anything, be it goods or services, tends to give rise to greed among operators concerned for earning more profit at the cost of their clients. Over-abundance does also exact a cost. 
The presence of too many banks, insurance companies and any other financial entities triggers unhealthy competition to grab business. That, in turn, prompts these institutions to indulge in far more serious irregularities, financial or otherwise, for the sake of their survival. 
A lot of anomalies in the financial sector originate from excess capacity. Political considerations played a part in creating excess capacity both in the banking and insurance sectors. It is hard to contest the fact that the number of banks and insurance companies is now more than the market can accommodate. That is why the banks and insurance companies are in a rat race to grab a piece of business by any means, fair and foul 
The large volume of toxic assets of banks and the erosion in the capital base of a good number of new entrants in the insurance sector are notable manifestations of the existence of over-capacity in both banking and insurance sectors. The policymakers had no reasons to be oblivious of the fallout. Yet they overlooked the consequences, deliberately. 
The problem has not remained confined to just financial institutions. The number of rating agencies, considered quasi-regulatory bodies, according to a report published in The Financial Express, is more than the requirement. This has, obviously, led to unhealthy competition. To keep their customers happy, a good number of agencies, allegedly, are giving higher ratings that they do not deserve. 
Such 'unfair' ratings would have been harmless had the rated companies used their rating certificates for mere display in their respective offices. But the ratings have far greater implications since those are taken into cognizance, among others, by banks, bourses, capital market regulatory bodies. Banks prefer to deal with clients with higher ratings, particularly in the matters of lending. 
Even banks are mandatorily required to get themselves rated by the credit rating agencies and the results published in newspapers. 
The content of the FE report on ratings given to Small and Medium Enterprises (SMEs) by the rating agencies is sure to give rise to frustration among people who prefer to see businesses are done fairly. If a section of SMEs can secure higher ratings for getting easy access to banks' financing, medium and large enterprises must also be getting similar benefits from the rating agencies since they enjoy an edge over SMEs in all matters. Given the high decadence in morality, honesty and integrity in society, it is not impossible for companies to secure higher ratings using money or influence. 
If allegations against audit firms about helping companies in the act of doctoring their financials can surface, there is no reason to be surprised by allegations of wrongdoing by a section of rating agencies. The government had to pass Financial Reporting Act and form Financial Reporting Council (FRC) to deal with errant audit firms.
But one can hardly ignore the huge cost that inflated credit ratings and doctored balanced sheets exact from the economy in general and investors in particular. On top of everything, the people's confidence on overall financial sector and institutions gets eroded by rating and auditing of questionable quality. 
Undeniably, the private sector has emerged as the 'engine of growth' in recent times. The people lost their confidence in the public sector long ago because of large-scale irregularities, corruption, mismanagement and inefficiency. The private sector has taken over, gradually. The common people do appreciate the private entrepreneurs' role, but they hardly hold many of the latter in high esteem. Why? The businesses do need to explore the reason/s. 
 It is a pity that entrepreneurs with honesty and integrity are very often bracketed with wrongdoers. Some people doing business unhindered, getting bank loans and, at times, securing coveted positions of trade bodies just because of their political connections. Unfortunately, these people are put on a par with the good entrepreneurs. The latter should bear a part of the blame for they cannot disassociate themselves from the former. 
One major problem with the country's most regulatory bodies is that they are very much vulnerable to dictates coming from high places or other allurements. Regulating the regulators has, thus, become a serious problem. One major reason for facing this problem is the government's failure to select competent and independent people to run the regulatory bodies. All governments, across the political divide, want to put their 'own' men in key positions. Competence, honesty, integrity etc. matter little in the selection process. So, it seems, there will be no respite from the unsavoury developments. 
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