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Updated: March 22, 2013 23:43 IST

Cyprus banking crisis is about trust: Subbarao

Special Correspondent
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D. Subbarao. File Photo: K. Murali Kumar
The Hindu
D. Subbarao. File Photo: K. Murali Kumar

At the heart of the banking crisis engulfing Cyprus is failure of the banks to “honour their obligations to depositors,” said Reserve Bank of India Governor D. Subbarao on Friday.

Delivering a lecture on ‘Indian banking: beyond the crisis,’ at the Bangalore Chapter of the Bankers’ Club here, Dr. Subbarao said the ‘fundamental issue’ in the crisis was the issue of banks safeguarding the interests of depositors, especially small depositors. “When a bank fails to honour its obligation, it loses trust,” he remarked.

Although Cyprus is a country with a population of just one million, the crisis there had ramifications for the global economy, Dr. Subbarao pointed out. While some felt that the bankers “honour code of deposit insurance,” others argued that the government had no obligation to save the banks in Cyprus, he pointed out.

Referring to the developments in the banking industry since the 2008-09 financial crisis, the RBI Governor said, “Banks had lost the trust of the people.”

On the recent sting operation against three private banks by Internet portal Cobrapost, alleging money laundering, Dr. Subbarao said the central bank had been conducting ‘transaction-level audits’ in the alleged instances.

Dr. Subbarao ruled out a specialised bank for lending to the infrastructure sector.

Conceding that the adherence to Basle III norms would result in costlier credit for banks, Dr. Subbarao advised banks to increase their efficiency to cope with this problem.

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The Cyprus banking crisis is not about trusting the bankers - it is about poor
government. The Cyprus government over borrowed in the boom years, banks
funded the borrowing by holding government debt, that debt has been
downgraded to junk status, and the banks have lost money. Is it wrong to buy your
own Government's debt? Now the banks are being asked, by the same government,
to charge the customers to repay some of that debt.

This is not about greedy bankers, it is about an incompetent government looking
for scapegoats.

from:  Raxa Mehta
Posted on: Mar 23, 2013 at 05:32 IST
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