Showing posts with label Sarfaesi Act. Show all posts
Showing posts with label Sarfaesi Act. Show all posts

Thursday, July 19, 2018

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 21st 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

India Enters 50th Year of Bank Nationalization



Just a year to go for the golden jubilee of bank nationalization on July 19 leaves nothing to banks for jubilation. Current generation of bankers working more on systems than on knowledge hardly visualize the journey of Indian Banking that is on rough roads today.

First decade of nationalization of banks was a decade of committees and committees; second decade was one of consolidation of the gains of nationalization; third decade was one of computerization, introduction of income recognition and asset classification norms, newer balance sheets and banking reforms; fourth decade saw introduction of Basel norms of risk management in full measure; fifth, a decaying decade for banking sector, ending from a year now witnessed the setting up of a Monetary Policy Committee, deterioration in assets through reckless lending resulting in huge non-performing loans, particularly, to infrastructure and big corporates at the behest of the government, demonetization, frauds and malfeasance, bad governance. Government’s proposals to set up Bad Bank drew flak. When LIC is there, why have a bad bank?

During the first decade, to bring about a change in the mindset and meet up with the goals of bank nationalization, GoI and RBI set up nearly 50 study groups and working committees. During the first five years, six groups went into the study of general functioning of banks, six more studied the priority sector lending and nine teams devoted their attention to giving a direction to industry and trade.

In the next five years, 10 working groups concentrated on general functions while 12 studied lending to agriculture and allied activities and seven groups studied aspects related to industry and trade. Persons who worked on those Committees, to name a few, are of high integrity and discipline: R.G. Saraya, D.R. Gadgil, R.K. Talwar, V.T. Dehejia, P.L. Tandon, R.K. Hazari, S.S. Shiralkar, B. Sivaraman, M. Narasimham. NABARD had been set up as a statutory body. Schemes like IRDP, SEEUY, DRI and modifications to certain institutional mechanisms like the Lead Bank Scheme and Service Area Planning, setting up of Regional Rural Banks, had their birth during this period. Bank chairpersons were visiting villages and several farm enterprises.

Second decade saw a spurt in social lending, project finance for agriculture with many a small and marginal farmer benefiting and lending to small scale industries. Directed lending came for attack with several borrowers turning as defaulters. Rajiv Gandhi in a public meeting mentioned that only 16paise of a rupee lent was going to the beneficiaries of government sponsored schemes.

Third decade has changed the texture of banking in India. Narasimham Committee set up by Government in the wake of liberalization, privatization and globalization recommended for providing space to private banks to usher in a spirit of competitiveness among PSBs among many others. IRAC norms were introduced. Balance sheets built on accrued income basis were given a go-by.
Profitability and viability of banking came to the policy front. Banks started looking at rural lending portfolio and rural branches as unviable. also witnessed the resurgence of private banking with ICICI reverse merger, HDFC Bank, UTI Bank etc. The traditional private banks with Federal Bank Ltd in the lead also started making inroads in to unserved areas. Retail banking and housing finance made inroads into the lending portfolio. Micro finance institutions also entered the finance space with aggressive approaches.

Fourth decade saw the surge of arm-chair lending and template-based lending. Systems have replaced men in intelligent appraisal of loans. Asset reconstruction companies were born following the enactment of SARFAESI Act 2002. India demonstrated its resilience to the 2008 World recession in the financial sector. Net banking made banks close in the time gaps in serving the customers, al bait, urban and computer literate customers. ATMs proved a good service delivery instrument.

Fifth decade saw the progressive downfall of banking system. CDR, S$A, and RBI’s Asset Quality Review, behest lending to the corporate entities, poor surveillance, unconcerned Boards, and poor governance ended up in over >Rs.10trn NPAs. It also saw the likes of Vijaya Mallya, Nirav Modi, Chokshi etc., who challenged banks’ lending patterns. They also challenged the regulatory institutions.

Adding to this, Demonetization has exposed the infrastructural inadequacies in banking to tackle a disruption of that dimension in the economy. Banks in their anxiety to retain profit started fleecing the customers with high service charges – some transparent and more non-transparent.
Distance between customers and banks has been increasing reducing the trust between them. Supply based banking ushered in. Banks do more non-banking business with hefty commissions that dwarf their salaries.

At a time when institutional memory is waning, this article should unfold to the policy makers a few  lessons: 1. Deal with problems comprehensively and address them through collective and well-informed wisdom; 2. Trust in innovation and assess the innovation of its capacity to offer solutions material to the sector; 3.  Improve governance: let there be a pool of independent directors from whom choice can be made by the regulator; 4. No Bank shall be left without a Managing Director even for a week; 5. Make sure that banks do banking and not selling insurance policies, mutual funds and other third party products that could also include laddus and medallions at pilgrim centers.  
The Hindu Business Line, 19.07.2018

Thursday, June 29, 2017

Obstinate NPAs refuse to leave

Dynamics of NPAs Defy Sensitivities
B. Yerram Raju*
Non-performing Assets (NPA) are a dynamic statistic moving from Rs. 2.50trn in 2013 by nearly four times in four years! Unless the patient cooperates the medicine never works in the sense that it has to be taken on time and in required dose. Here the doctor has been experimenting with the medicine and the patient is unwilling to take it.

Corporate Debt Restructuring measure suggested post 2008 crisis, corrective action plans, Joint Lenders’ forum, 5:25 scheme, strategic debt restructuring (SDR), Sustainable structuring of stressed assets (S4) Scheme have all proved a damp squib and now the regulator-led solution through amendment to the Banking Regulation Act to invoke the provisions of the Insolvency and Bankruptcy Code against the wilful defaulters is made to appear a surgical strike at bad debts.

Any credit decision is bounded by certain forecasts or predictions about future. It is unlikely that every such decision would end up as expected. Hence NPAs are inevitable in lending. But credit assessed for corporate entities requires a finesse. The promoters and directors should be put to the rigor of scrutiny. Environment and economic risks should be part of enterprise risk assessment. When we look at the largesse in lending in the corporate sector, hindsight and individual appraisal of the directors and promoters as also post disbursement monitoring appear to have taken a beating. Banks’ scrutiny lapses could not be drubbed as willful default for a forceful recovery.

The Banks, Government owning most of them, and the RBI have been in the know of the devil in detail. After the Development Banks have been wound up and universal banking came into being where banks started selling credit, mutual funds, insurance etc., and bank-participated rating institutions or their semblance commenced rating the companies, credit risk assessment has become farcical. Lenders are aware that they are lending short term resources for long term investments prone to very high risk of losses. Banks say they were forced to lend to PSUs.

Bank executives eyeing for the top post or those that are in such high post wanting to hold to the chair compromised institutional interests.  The other reason for such credit for infrastructure, real estate, housing, and retail facilitated arm chair lending suiting their limitations in staff recruitment. They earned profits at the cost of efficiency with impunity. 
Bank Boards having the regulators’ and the GOI representatives as Directors liberally subscribed their signatures to the sanctions. Risk management committees, audit committees of Boards, regular audits and inspection reports at annual intervals should have been the instruments of Board oversight mechanism.  Unfortunately all these would appear to have muted. Failures of governance are beyond action.

CDR mechanism helped greening the balance sheets of banks. The postponed debt obligations swooped on the banks after the CDR ended. Banks realized that they had to provide 30 percent of the secured portion and 100 percent of the unsecured for all the doubtful accounts. By the time the CDR ended Banks realized that the tangible securities have all vanished. To save the banks, RBI introduced SDR. Under SDR, banks can convert 51% of debt into equity to be owned by them and also change the management. New investors could hardly be found as the amount involved is over Rs.2trillion.  Management changes could hardly be seen. In the consortium of bankers another peculiarity noticeable was that while one bank declared the asset as standard asset other bank(s) declared it as doubtful calling for action due to the former finding ways to push the ghost of NPA under the carpet.

S4 can be termed a non-starter. Unanimity in restructuring effort proved rarity. On top of this, banks started showing ‘vigilance’ from agencies like the CBI as villains. In most cases where such vigilance stumbled upon, many skeletons in the cupboard of such banks came out and some executive directors and chair persons were also exposed!!

The latest RBI measure to invoke the IBC and also provide for deep haircuts without fear of the ‘vigilance’ bodies has to prove itself as the IBC requires thorough understanding of the art and science of negotiation and arbitration. Until all the stakeholders, advocates and the jury fully acquaint the terms used in the IBC, resolution through this process would be a long and difficult journey given the fact that the banks have not been able to make use of the easiest Sarfaesi Act and its rules in good measure.Recovery effort in most of the cases instead of ‘squeezing oil out of sand’ may be a milking cow for the errant.

It is time for the RBI to step out of the Bank Boards notwithstanding the losses that their planted directors by way of intangibles could be subject to. Regulatory arbitrage shall not take place to preserve the sanctity of central bank. In more than one way, dynamics of NPAs thus far defied sensitivities in resolution. Hopefully, RBI will be able to doctor a solution to the five-star hospital patient.


Tuesday, August 9, 2016

MSMEs on the Roller Coaster
Unhelpful Banks and Less Understood Regulations
B. Yerram Raju and K. Manicka Raj*
In a recent address RBI Governor Raghuram Rajan said: “A Banker who lends with the intent of never experiencing a default is probably over-conservative and will lend to too few projects, thus hurting the growth.” In the same vein he added: “Indeed, sometimes banks signed up to lend based on project reports by the promoters’ investment bank (in the case of MSMEs chartered accountants), without doing their due diligence.”

There is a total mismatch between the banks understanding and RBI's intentions on the guidelines issued in respect of MSME financing , follow up and useful implementation of the various schemes. Because of accumulation of NPAs banks seem to have lost their sense of judgement and MSMES are the victims and the SARFAESI ACT 2002 has become very handy. Even in the best of times banks did not revive or restructure small scale industries more than 1.5 percent of their own assessed potentially viable enterprises as revealed by the RBI Annual Reports.