Time for third wave of banking reforms

1969 followed by 1980 were considered as years of radical reform when 20 banks were nationalized. 80 percent of the banking sector was brought under the control of GoI with the declared objective of ‘controlling the commanding heights of the economy’.

Access to banking for the poor was the main aim and rural development was the focus. This era saw loan melas, the first Agricultural Loan write-off in 1990 and the birth of new institutions at the apex level – one for agriculture and rural development, viz., NABARD and the other for small industries, SIDBI. Both these institutions cannot claim that they are close to achieving their intended objectives. They act more as banks for the governments doing more treasury business than banking for the target groups.

Come mid-1990s, Narasimham Committee recommendations were accepted and the big bang reforms as economists and bankers termed it, allowing for privatization of banks in the name of ushering in competition. Banks competed alright but not for serving the unserved population but for profits. Technology was introduced. Costs of technology being huge had to be recovered from the customers. Charges for services started rising. Internet facilities were introduced. Convenience banking and convenience charges became the order of the day.

Technology became the master and banks became servants. Huge numbers of complaints started and Banking Ombudsman had to be appointed by the regulator. Banks were supposed to be financial intermediaries – intermediation between those who save and those who require money for acquiring productive assets and even consumption requirements. This intermediation was taken to the extreme, introducing universal banking providing for sale of third party products .

Yet, the reach to the unbanked and under-banked had to be thought of through financial literacy and board approved financial inclusion agenda despite the emergence of new institutions: MFIs, Banking Correspondents, Small Finance Banks and India Postal Bank etc. 2014 saw the ‘Jandhan’ as new avatar of ‘no-frill’ savings bank accounts. Credit to the needy sectors and persons had signs of improvement, al bait for short period.

Overall economic health depends on the vitality of the financial sector. This vitality was lost during the last ten years with irresponsible lending to corporates, several at the behest of government and vested interests resulting in unsustainable non-performing loans currently standing at Rs.10trn. Mechanical application of accountability to credit decisions has left bank managers shy of taking normal business risks. This has led to committee decisions on credit to large conglomerates making no one accountable for their failure.  Efforts to ‘tame the shrew’ through legal support  systems led to SARFAESI ACT 2002 and IBC code 2016.

The worst scenario prevails now: where the CBI is digging the graves of past sins of several bank top brasses fixing accountability for the current unrecoverable debts. If these Bank top executives followed unethical practices and extended patronage, more unethical is the investigating agencies announcing the names of the ‘offenders’ even before the charge sheets are filed and guilt is fully  established.

There is again a call for third generation reforms. The central issue of banking today is reducing government ownership in banks. With 82 percent of total banking in public space, government is active owner. It appoints the Chairpersons, Managing Directors, independent directors It reviews performance and directs the banks in appointments, transfers and closure or expansion of branches. These banks lost their autonomy and the freedom to run as banks either with a social purpose or commercial outlook.

Chidambaram who presided over the Finance Ministry after leaving the portfolio, delivering the Rajiv Gandhi Memorial Lecture on 21^st August 1998 said: “the bureaucracy and the political system have developed a vested interest in maintaining the status quo – over 60% of the work of the Banking Division in the Ministry of Finance relates to Parliament work, a largely unproductive use of time.” It is a different matter that he did nothing after he again became the FM post 2009. Narasimham Committee suggested the winding up of Department of Banking for such reasons and is time to accede to this recommendation as the first agenda on reforms.

Cash credit system of lending should give place to working capital demand loan when the monthly or quarterly demands on the repayment become possible for review and timely action. Single dwelling house of any small enterprise should be prevented from SARFAESI proceedings in regard to micro enterprises, particularly when the Bank did not cover the loan under the CGTMSE.  

The second should be: let the ownership take responsibility for all the lapses and regulator admitting to laxity. This would mean refurbishing the capital of banks to the extent of shortfall in NCLT decisions by the government purely as a one-time measure.

Bank inspections and audits have become a matter of ridicule in the wake of serious frauds and malfeasance that came to light during this decade. ICAI should work on realistic accounting policies and accounting standards and disclosure norms. Audit begins where accountability ends, as the saying goes. RBI should restart the bank inspections of 1980s when a few large advances and branches were also being inspected. It should perform its regulatory function without fear of consequences.  Prompt action should follow on lapses noticed. 

Governance improvement in banks should be the third agenda on reforms. RBI should stop sending its persons to the Boards of Banks. Board should review its performance once in six months against the Director’s own commitment each year as to his contribution to the functioning of the Bank.

It’s time to restore the trust deficit in banks by GoI and RBI through vigorous media campaigns and supporting measures assuring service to every type of customer on time and at transparent cost. Safety, security, easy access at affordable cost of both deposit and credit services shall reign supreme on the reform agenda. RBI may appoint a high level committee of a few of the past governors and reputed economists sans MoF bureaucrat, with a mandate to provide the reform agenda within the next three months.

Published in Telangana Today, 19.7.18