4D Approach To Make Bank Healthy

Survey pitches for 'exit' of non-performing government banks-Business Standard 28.02.2015 Economic Survey Report 14-15

Economic Survey 2014-15 has laid down a road map for reforms in public sector banks (PSBs), which includes, among other things, the “exit” of non-performers. Backing the government’s recent move to capitalise banks based on their efficiency, the survey argued for doing away with a one-size-fits-all approach for PSBs. As of now, all state-run banks are treated on a par, regardless of their size, in all areas, ranging from the appointment process, compensation policies and distribution of capital to employee performance.

“Differentiation will allow a full menu of options such as selective recapitalisation, diluted government ownership, and exit,” the Survey said. While it didn’t elaborate on the exit option, the PJ Nayak committee, appointed by the central bank to look into governance issues in PSBs, had recommended the government give up its control in these banks and reduce its stake in these to less than 51 per cent

THE 4 Ds OF BANKING REFORMS
• Deregulate: SLR needs to be brought down; priority sector lending norms should be revisited
• Differentiate: Wide variation among the performance of  PSBs; public ownership, exit and recapitalisation should be on a selective basis
• Diversify: Need to have new banks, new type of banks
• Disinter: Better bankruptcy procedures essential; need for independent renegotiation commission, with political authority and reputational integrity to resolve big and difficult cases
 
 So far, the government’s stated position is to reduce stake up to 52 per cent. In some banks, the government’s shareholding is as high as 80 per cent.

 The survey has suggested reforms in four areas, christened 4 Ds — deregulate, differentiate, diversify and disinter. To address the asset side repression in the banking system, deregulation in terms of lowering the minimum requirement for statutory liquidity ratio (SLR) was suggested. SLR is the proportion of net demand and time liabilities a bank needs to invest in government papers.

 The observation is in line with what the Reserve Bank of India (RBI) has suggested, as this will release funds for banks; these funds could be deployed in productive sectors. However, for such a move, the government has to stick to fiscal discipline, as SLR has become a means of financing a bulk of the fiscal deficit. The survey said while the minimum SLR a bank should hold was stipulated at 21.5 per cent, in reality, they held more than 25 per cent.

 Another area of deregulation was revisiting priority sector norms, which had to be redefined to make the sector more targeted, smaller and need-driven, the survey said.
 Highlighting the need for a diversified banking sector, the survey said the country needed more and different banks. The banking regulator has already taken steps in this direction, agreeing to offer niche bank licences.

 The fourth D (disinter) refers to a robust recovery mechanism and a bankruptcy law. RBI has emphasised the need for a bankruptcy code in the country to tackle the problem of wilful defaulters. Delay in loan recovery is one of the reasons behind the pile-up of stressed assets in the banking system. Currently, such assets account for about 10 per cent of the total loans given by banks, impacting their profitability. As the survey notes, “distressed assets hang like the Sword of Damocles over the economy and require a creative solution”.

“When the next boom and bust comes around, India needs to be better prepared to distribute pain between promoters, creditors, consumers, and taxpayers. Being prepared for the clean-up is as important as being prudent in the run-up,” the survey said.
Private banks come under fire for slow growth

 Economic Survey 2014-15 criticised private banks, saying these entities had been growing slowly. The survey said aggregate growth in the share of the private sector in the overall banking segment “barely increased” at a time when other sectors in India saw a rapid rise of private players. It also raised concern over the lack of adequate competition in the sector. Though competition had picked up and private banks had seen steady growth during 1990-2007, after 2007, growth of private banks had been slow, the survey said.

 “India saw a steady rise in the size of private banks till 2007, both in relation to deposit and lending indicators. Thereafter, the process slowed considerably and in the aftermath of the Lehman crisis, there was a flight to safety toward public sector banks,” it added. Faster growth in this segment was necessary, as the banking sector had a big role to play, considering bank credit was a small part of overall credit needs, the survey said.

http://www.business-standard.com/article/economy-policy/world-bank-report-criticises-bihar-for-poor-power-condition-115022701423_1.html

My Observations on above news are as follows:

This refers to news related to 4D steps proposed by GOI to improve health of public Sector banks (PS banks).  I would rather say that 4 Dimension approach to fully damage public sector banks and promote future of private banks is going on without any check since long. For last four decades and more Government of India (GOI) has been prescribing one medicine or the other to cure the sickness of the bank . But unfortunately sickness of banks is growing without any sign of improvement.

First step suggested is to deregulate PS banks and redefine priority sector lending. SLR is a safety valve which ensures safety of bank in all conditions. GOI has been diluting and reducing SLR to create additional liquidity for PS banks. But it is known to GOI that almost all banks have parked their fund in SLR more than what is prescribed for them . Obviously banks are not sick because of liquidity problem or because of shortage of fund.

Rather it is undoubtedly the casual and corrupt approach of bankers and that of politicians and RBI regulators which has damaged banks more. It is top bankers, politicians , RBI inspectors or auditors who think it wise to keep their eyes and ears closed on all misdeeds committed by top bankers, by Finance Minister and by RBI regulators in their mutual interest. It is lack of proper regulation which has damaged the bank and unfortunately GOIs trying to deregulate it more . It means GOI instead of taking corrective steps to cure health of sick banks is trying to add fuel to fire . GOI is not striking at root cause of problem ,but simply conceal it somehow or the other.

I would like to say here that banks were nationalised in the year 1969 with sole purpose of giving relief to poor villagers and poor traders .GOI  prescribed 40% minimum lending to priority and neglected sectors for all PS banks and from time to time attached stress on it. They further prescribed various sub-target for agriculture , weaker section  and other neglected sectors of the society. Banks were allowed to use residual resources i.e. to the extent of 60% towards other commercial activities or personal loans to earn profit and to make banks able to meet the demand of Priority and neglected sectors. In this way GOI had contemplated a balanced approach towards weaker and stronger  sections of the society. Manufacturing activities as well as farming activities got desired importance.

But unfortunately in the year 1991 , GOI adopted so called reformative steps and put profit target above social obligation of the bank. To meet this hidden purpose, GOI from time to time included various non-priority lending done by bank to the domain of  priority sector lending and thus helped banks to achieve target for Priority sector lending by just manipulating and realigning lending under various sectors. Gradually culture of top management was changed  by injecting the need of lending for  non-productive and loss making infrastructure projects and by putting pressure on growth of  retail lending . Due to this, real farming and real manufacturing activities faced great setback in the country and bad outcome of this is now visible to people of India in general and to GOI and Management of PS banks in particular. 

By emphasising lending for housing sector and by giving all concessions to home buyers and home makers , GOI enabled various real estate builders to come into market , earn exorbitant profit and to increase the rate of landed property to such a high extent that it has become almost unaffordable for 95% of Indian population, i.e for common men. Thousands of apartment have come in the market but  there are no buyers or inadequate buyers to buy such highly costly flats and there is no reduction in selling price of these flats. As long as people of  India do not have buying capacity , all concessions goes in vain . Similarly making car loan cheaper may help car makers and help to upper middle class segment of society , but for common men it is of no use whether interest rate is made cheaper or costlier. Banks have diverted short term fund in lending long term infrastructure projects and still they are unable to use their full resources and they have to park the same under SLR funds under compulsion.

Now again GOI is trying to redefine PS lending and realign various targets under this sector so that banks may avoid lending to this sector to maximum extent and focus on non-priority lending . Another step to defeat the very purpose of nationalisation of banks. If GOI wants banks to earn profit and do all what is needed for increasing profit , then GOI should stop interfering in internal affairs of bank management and stop shedding Crocodile Tears for poor and neglected sector. Rather PS banks should be made as free as private banks are .

GOI has to understand that performance of public sector banks cannot be compared with that of private banks. Because former is meant to serve poor , common men and also to corporate sector . They have to earn and distribute its resources to poor and common men so that a balanced is maintained between producers and consumers. On the contrary sole target of private banks is to earn profit. They are least bothered about downtrodden and neglected sector of the society and they are not bothered of what sectors are to be given financial assistance on priority. PS banks are to fulfil the national objective whereas private banks are made to fulfil personal objective of promoters of the banks.

Further GOI prescribe new banks and new types banks to make PS banks healthier. I am unable to understand how GOI will make health of PS banks better by giving new licenses  for new banks or for payment banks. GOI failed to keep 28 or 29 banks healthy and to cure its sickness by various regulating steps taken during last 45 years . For last 25 years i.e. since 1991 they are speaking that banks are improving due to reformatory steps taken by GOI in the era of Liberalisation, privatisation and globalisation. Unfortunately the health of PS banks is so bad that their survival is at state, their ability to cope with Basel III norms on capital is doubtful and their expectation on capital infusing from GOI is also doubtful and imaginary.

GOI totally failed to control thousands of NBFC and chit funds who are looting public money by offering higher interest rate and then lying away from market. God knows how the same government will be able to control additional hundreds of new banks likely to enter the market under new license policy. GOI will make one after other experiment and it is always the poor depositors, tax payers, investors and other stake holders in PS banks who are to suffer due to wrong policies of the government and bad execution of good policies.

Lastly I do not want to comment on the proposal of the government to make Bankruptcy rule more effective. First they make all efforts to make banks bankrupt and then suggest ways how to cope with or it or how to close it by tagging them with the word  'inefficient' or 'unviable' or by suggesting closure of weak banks or by advising merger of weak banks with strong banks. GOI may change the name of a bank , open new banks or may go for consolidation of banks and in short may change the bottle but cannot dream of improvement until the wine is same in new bottle.

 Until culture change, until mindset of bank officers change, until culture of flattery and bribery ends at all levels, it will be foolish to hope that by 4D approach suggested by new government will be improve the health of sick PS banks.

AT most, private banks will prosper at the cost of PS banks , as private telecom service providers are prospering at the cost of BSNL an private airlines are prospering at the cost of Indian Airlines. By changing recruitment process of ED and CMD, or by splitting the post of CMD or by allowing officers of private banks to become Chief of PS banks, GOI cannot ensure good health of banks , but simply trying to put carpet on underlying malady. Health may not improve simply by manipulation in Balance sheet or by changing the face of ED or CMD or by hiding ill-motivated lending done by top bankers in nexus with politicians and corporate houses.

DanendraJain
28.02.2015 9.30 a.m.




Pannvalan Pann writes on Facebook as follows

Everybody talks about raising the standards of banks in India to the global level particularly in the areas of technology, customer service, transaction security and confidentiality, product range etc. But, neither the Bank Managements nor the Trade Unions in India are insistent upon implementing the same labour standards (service conditions and welfare measures) as obtaining in the developed countries in Indian Banks. Moreover, even today the infrastructure available in rural...l and semi-urban branches is not at all satisfactory and at a number of places, very pathetic too. Starting from safe drinking water, dining hall/rest room, clean and neat toilets, vehicle parking space, cosy and comfortable furniture, Generator/UPS etc. (other than for the computer systems) are not yet made available in nearly two thirds of the bank branches in India. A few banks like SBI and new generation private sector banks may be an exception.

But, I doubt how many of these new generation private sector banks have rural and semi-urban branches vis-a-vis urban and metro branches. Even whatever rural and semi-urban branches they have are situated on the peripheral areas of a big town or city (barring some exceptional cases). For RBI classification purpose, they will be rural and semi-urban branches. However, as they fall within Urban Agglomeration limits, staff working there (including the Manager) will be eligible for HRA/leased rentals and CCA as applicable to metros and they will be shuttling between the main city and their branches every day. Thus, nobody stays near their branches.

I have myself seen many bank branches that are situated in villages where no police station, fire station, post office, telephone exchange, primary health centre, or high school exist. Obviously, there will be no bus stand and railway station too. Even Medical shops will be situated a few kilometres away. Then, what to talk of availability of qualified doctors? Many bank branches are situated in remote corners and are not easily accessible , except by two wheelers. During rainy season, the roads will be muddy, having potholes and very rough patches, posing danger/threat to the users. But, no one has bothered about all these.

Why the government expects only bankers to work in such sub-human conditions?
Neither government department or public sector enterprise has any significant presence in rural places (as public sector banks do have) and their staff are not required to complete the mandatory rural service, if they want further promotions.