Opinion Of FM Mr. Jaitley On Banks

Jaitley is repeating Sinha, Chidu: To ring in autonomy govt must cut bank stake below 51%-First Post
The biggest take away from the two-day bankers’ meet in Pune, Gyan Sangam, was the promise made by Prime Minister Narendra Modi and Finance Minister Arun Jaitley to state-run bankers regarding the autonomy in their operations.

Speaking at the conference Modi said the government would stay away from ‘political interference’ in state-run banks. Bankers will not get even a call from his office, Modi said. Jaitely too promised to let these banks “to deal with commercial issues with a commercial mindset” as “they know the best where the shoe pinches".

But both Modi and Jaitley were silent on the biggest reform needed to salvage these entities — privatising government banks by lowering government stake to less than 51 percent. At present, the government owns majority stake in the 27 public sector banks in the country and more than 75 percent in a handful of them.

Until the government readies its mindset to trim its stake below 51 percent, it is highly unlikely that the state-run banks, which have been the perfect tools time and again for governments to roll out their populist measures, will get the real autonomy. In fact, at the Gyan Sangam, state-run bankers had formally put forward a suggestion to the government to trim its holding in these banks. Also, this is something which the P J Nayak committee on banking reforms had recommended in the past.

Lowering its majority stake doesn’t necessarily mean to throw these banks into the hands of private corporations. The government can still retain a significant say in public sector banks even with a holding less than 51 percent by distributing the fresh issue of shares to retail shareholders.
Before committing fresh promises on autonomy of government banks, Jaitley should perhaps look at the fate of similar promises made by his predecessors and how these promises met a silent death.

Back in the budget speech of 2000-01, the then finance minister, Yashwant Sinha made a commitment on autonomy for state-run banks by accepting the recommendations of the Narasimham committee on the banking sector reforms. The committee had recommended that the government should reduce holding in nationalised banks to 33 percent, without changing the public sector character of banks.

“It is proposed to bring about necessary changes in the legislative provisions to accord necessary flexibility and autonomy to the Boards of the banks,” Sinha said.

The promise of autonomy was repeated by his successor. When the UPA came to power, finance minister P Chidambaram too made a tall promise of letting state-run banks do their own business.

“We are willing to give banks more autonomy. But with autonomy, hand-in-hand, will go more accountability. More autonomy would mean more accountability, more responsibility and willingness to take on greater responsibility in a growing economy," Chidambaram said speaking at a function in New Delhi in June, 2005.

The key difference here was that Chidambaram categorically ruled out privatisation of state-run banks. But what was common, and noteworthy, in both cases was that the promises remained promises and the public banks remained as extended arms of the ruling governments to implement the political agenda.

Autonomy remained elusive for state-run banks.
The trend of intervening in daily operations of state-run banks became more evident during the UPA-II, when major business decisions of state-run lenders originated in the North Block and not at the management meetings of public banks. Chairmen and top executives at these banks turned nothing less than puppets fretting over the phone calls made by politicians and bureaucrats from Delhi.

Micromanagement in state-run banks was visible in multiple areas ranging from forced loan-recasts to certain sectors, pricing of and sanctioning of credit, appointment process of executives and implementing massive farm loan waivers.

State-run banks were compulsorily asked to lend to the agriculture sector even when farm output as a percentage of GDP has been falling drastically over years. The lending target was kept increasing through budgetary allocations every year to please the vote bank, even though many banks witnessed severe stress on their books from this segment.

The pain emerging from the farm sector multiplied after the Chidambaram-sponsored Rs 70,000 crore debt waiver in 2008. Even when agri-bad loans shot up to double digits to many state-run banks, they were forced to increase the exposure to the segment.

When the frequency of missives from the government terrorised state-run bankers and political influence worked as motivating factor than lending prudence behind many large ticket corporate loans, stressed assets (non-performing assets plus restructured loans) of public sector banks drastically increased. Now it is about 13 percent of the total loans given until September.
Absolute autonomy for state-run banks without government ceding the control will not happen because:

For one, public sector banks are always at the mercy of the central government to meet their capital needs and look up to the annual capital infusion to stay afloat. The capital requirements have gone up substantially in the recent years on two accounts. One, the dramatic rise in the stressed asset levels, for which banks need to set aside more money under current norms. About Rs 2.7 lakh crore loan have turned non-performing till September and another Rs 5-6 lakh crore loans have been restructured. Two, the migration to the Basel-III norms requires state-run banks to have an additional Rs 2.5 lakh crore, which includes the additional capital buffer they needed to withstand tough times.

Given that except a few large banks, others do not have the ability to bargain funding in the market, these banks will continue at the mercy of the government and will remain as its loyal, obedient divisions and not independent institutions.

Second, even if the government shows the political will to give autonomy to state-run banks, it will be difficult for Modi or Jaitley to make sure all influential members even in their own party, follows the principle, needless to speak about other-party politicians.

The political-corporate nexus to exploit the state-run banks takes birth across various levels using expert middle-men to make available money to a particular company. This unholy nexus mostly targets state-run banks since they are more vulnerable to such excesses than private banks.

It is a matter of debate that how many of the public banks would have agreed to implement some of the biggest populist measures the country has seen such as the 2008 farm loan waivers sponsored by Chidambaram, which permanently destroyed credit culture of borrowers inflicting significant damage on banks or the recent Jan Dhan Yojana launched by Modi, where public banks were literally put on gun point to meet the magical targets of crores of new bank accounts, flouting standard KYC norms, within days and weeks.

At least in their promises, both the prime minister and the finance minister have touched upon the most needed step to rescue state-run banks, which control 70 percent of the banking system.
But, unfortunately, beyond the promises, the Gyan Sangam has been largely silent on the biggest reform these entities need—taking them out of government control. Modi can become the real agent of change to rescue state-run banks by stating his stance clear on the privatisation of nationalised banks.

Trimming the government stake below 51 percent in state-run banks will make these entities better-run, professional institutions besides enabling them raise the required amount of funds time to time based on efficiency and competence and not depending upon which bank meets the government targets first, as is the case now.

Until then, autonomy of public banks is just an illusion.



My Opinion are as follows:-

Gyan Sangam which remained for two days in Delhi on 2nd and 3rd of this month ended and the outcome which emerged is that banks need more freedom and Government of India will not interfere in functioning of banks . Mr. Finance Minister and Mr. Prime Minister both have assured Chiefs of banks which participated in the said conglomerate, that they will not interfere in banks' working and they want the bank to become socially useful and commercially viable. On the other hand Chiefs of banks might have also promised as usual to fulfil the agenda of the Government. Gyan Sangam ended with note of flattery from both side and promise from each side to look into other's grievance as use to happen in the past too.

I don't know it is a win-win or loss-loss game for both. But I am unable to understand what strategy they have planned to achieve the goal of social objective and that of profit aspiration of bank ,other than focusing on their own ideas and ending without reconciliation in the larger interest of people of India for which banks were nationalised. It is not clear what motive banks like to fulfil, They want to serve common men or to earn profit and exploit common men like their counterparts in private sector.

I simply ask following questions to top officials of banks who are asking for free Hand to combat menace of bad debts and to earn more profit .

Recruitment:

Management of public sector bank was free to recruit employees in all cadres as per whims and fancies of top officials of the bank. Bank staff are recruited through IBPS which is manned by retired bankers only . Top Officials of each bank even recruited thousands of officers from campuses to please sons and daughters of their friends and relatives and to please college managements which were associated with top officials of the bank.

Now What more freedom They need to make banks safer and growing?

They were completely free to recruit talented staff as per their need for last a decade and more and undoubtedly they recruited as per their sweet will only. Still they failed to protect banks from losses arising out of rising bad debts and frauds. Only last year Supreme Court stopped them when some one filed PIL in court and the court found campus recruitment against the spirit of the Constitution.

What more additional power and absolute freedom Chiefs of bank management mean now?

Promotions: Bank management use to promote officers from one scale to other absolutely as per their sweet will. They never cared the reports written or marks given to any officer in Annual Performance Appraisal Report (APAR). Members of Interview Panel used to give higher marks ( 25 out of 25 ) to officers who were close to them or who were recommended by some Very Important Person. Even in selection of ED or CMD we have seen how officers like S K JAIN was given higher marks in Interview though his rating AAPR was poor. Every bank officer knows very well that an officer may be inefficient, corrupt, negligent, bribe earner, unskilled for post and cadre , but if he has close relation with any senior officer or his immediate boss , he may be promoted. of each bank has absolute power to transfer any officer from one corner to other without any restrain from GOI or RBI. This is why culture of flattery is more prevalent than culture of performance in banks. Management

After enjoying such devious power of promotion and added by monstrous power of transfers, What more power top officials of public sector banks need to cure sick banks?

When top management of an officer is unable to read , assess and ascertain the real quality of an officer in 10 to 30 years of his or her service , what quality they may assess and ascertain in two or three minutes of Interview is another pertinent question which every fan of Modi Government or protagonist of merit oriented promotion policy or supporter and seekers of freedom for top officials of banks have to ponder over.

People should know, bank staff should know and Government of India who even after burning entire body of bank only due to misuse of power by top officials should make it clear what additional freedom they suggest to make banks socially useful and commercially viable.?

Why GOI, RBI and Chiefs of PS banks demand absolute and greater freedom for bank management and what is the broad idea of such freedom should be brought in public domain.

Sanction of loans: Management of banks have enough powers to sanction loans strictly as per their sweet will. Branch head of each branch can sanction loan to small loan seekers and higher offices can sanction loan to bigger business men and big corporate houses without any restraints from GOI.

Is there any interference in sanction of loan from the government?

Branch Head and Regional Head should enlighten government and people of India what type of interference they face at branches in loaning process.

There is system of Credit Approval Committee in all administrative offices of all banks , but even today, majority of loans are sanctioned as per sweet will of the Branch Head or Regional Head or Zonal Head or Chief of Bank Head called as CMD or ED. High value loans are sanctioned by Board of Directors represented by GOI, RBI and Chiefs of Bank. And ninety per cent of stressed assets are those assets which have been sanctioned by top officials only and that too after due diligence made by various committees and many professionals like valuers, Chartered accountants, advocates etc

Is there any top official in any bank who may say boldly that he or she had or has enough courage to deny sanction of any loan proposal against the will of the boss or against the will of de-facto head of such committees?

Can any officer sitting at any branch or any office have courage to move against his or her boss even though everyone officer is free to voice his unwillingness to sanction any loan due to inherent weakness in the proposal?

It is true that politicians also build pressure on them to sanction loans as per their choice and to their close relatives, friends, corporates etc..

Government ask for financing to any particular sector or to any particular scheme formulated by them and this will continue in future too.

Has any officer of the bank courage to oppose it?

Or is it desirable for government to allow PS banks to neglect national priorities for the sake of earning profits only?

or I can ask in different way , whether government , the owner of the bank do not have power to frame policy of credit delivery as per national priority and urgency?

Investment: Management of each bank is free to park surplus fund of the bank in any mutual fund or SLR linked fund even if banks have to incur interest loss . Banks are supposed to achieve target fixed for lending in priority sector , for lending in agriculture and for weaker section of society or minority communities. When they fail to do so even by manipulating datas of other sector lending towards preferred lending, they think it wise to park fund equivalent to gap of actual with target in government prescribed low interest yielding fund even though it causes loss to bank. These banks prefer parking idle fund in mutual fund even though it causes loss to bank indirectly.

What more freedom they visualise and what more freedom they demand now?

Interest Rate and concessions:

Banks are free to decide their base rate or Prime Lending rate keeping in view cost of deposit and expenses and they have been enjoying this freedom for last two decades. They are free to give concession in interest rate, processing charges and what not to any borrower as per their whims and fancies, not as per the merit or demerit of the case .

Even after giving all concessions , they are unable to safeguard banks fund and they are unable to increase profit of the bank whereas private banks are using their freedom for the growth of banks credit and bank's profit. On the contrary top officials of public sector banks use power of interest concessions to please the borrower who can please senior bosses by gifts in cash or in kind.

It will not be an exaggeration and incorrect to say that majority of borrowers who are given various concessions at the cost of bank's interest are now considered as Non Performers and loans given to such borrowers has gone bad or are in category of stressed assets

I dare ask top officials of bank what more freedom they seek from GOI and I ask RBI and Finance Minister too ,what more freedom they are likely to give bankers in fixing of interest rate structure to make banks economically viable and socially useful as prescribed and desired by Mr. Jayant Sinha, learned Deputy Finance Minister.

Write Off and compromise settlement: Management of each bank have full freedom to frame their recovery policy and decide their terms of compromise settlement with loan defaulters and conditions for writing off a bad loan. They are free to restructure any good or bad loan to hide stressed assets and to avoid legal actin against any borrower they like .They have written off bad loans and sacrificed banks good money amount to Rs.1.65 lac crore during last five years. Huge drainage of money in writing off of loan or sacrificing of principle and interest amount from loan defaulters .

Now Chiefs of banks should make it clear what more freedom they aspire to stop pilferage and drainage of banks good money ?

What more power they need to increase in loss to banks by writing off loan and by sacrificing bank's interest in compromise settlement?

Do they have any plan and idea to stop such losses which deprive stakeholders of dividends ?

Do they have any idea to stop such losses so that they may earn higher profit and they may stop begging capital infusion in future?

Branch Expansion: During last ten years every bank has undertaken rapid branch expansion. Banks are now free to open branch in any corner of the country as per their suitability . Interference of RBI has been reduced to minimum. Bank can open as many branch as they like to enhance profit prospect . They can install an number of ATM to improve customer service.

What more freedom management of bank seek from GOI in this aspect?
Danendra Jain 05.01.2015