Showing posts with label banking. Show all posts
Showing posts with label banking. Show all posts

Saturday, July 2, 2022

Privatisation of Banks - Reversing the history

 

Privatisation of Banks – Reversing the History

Good economy and bad banking can never go together. But will privatisation usher in good banking? Why at all the banks that were once private, were nationalised in 1969 and later liberalised in 1991? These are some questions that occur to any customer of a bank when he sees that the union government would like to privatise the nationalised banks by amending the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 in the monsoon session of the Parliament.

1970 Banking Act required the union government to hold at least 51 percent of equity. When Mrs Indira Gandhi overnight nationalised the banks in two bouts – first in 1969, fourteen and second in 1980, six banks with different capital thresholds, it was just not a political move. Banking as a public good, was not within the reach of millions, more particularly, the neediest, in the rural areas then.

When the first stage of reforms started in 1991, nationalised banks were found to have achieved the expectations, ushering in barefoot banking and phenomenally improving the reach through the Lead Bank Scheme and Service Area approach,  al bait at the cost of efficiency. The reforms helped cleaning up the banks’ balance sheets, introduced asset-liability management, prudential management, and better and responsible customer service. Within fourteen years, they became symbols of inefficiency reflected in large accumulation of non-performing assets (NPAs).

Inclusive banking approach, post 2005, led to the creation of banking correspondents (BCs), Small Finance Banks, Small Payment Banks. While in 1991 there were 76 scheduled commercial banks, excluding the regional rural banks and urban cooperative banks, the comparable figure now is 93.

From 60,220 total bank branches in 1991 – 35,206 rural, 11,334 semi-urban, 8,046 urban and 5,624 metropolitan branches, the total grew in 2022 to 158,373 (rural branches -52,773, the least to grow, semi-urban-43,683 branches; urban branches- 30,638, and 31,279 metropolitan branches). On average a branch covers 9,500 persons now against 14,000 in 1991.

Businesswise, the banks had Rs3.8 lakh crore deposits and a Rs1.32 lakh crore credit portfolio. Three decades later, the deposit portfolio is over Rs155.7 lakh crore and credit portfolio, Rs108.8 lakh crore. Credit – deposit ratio in terms of percentage scaled up from 34.2 to 69.88, that is more than twice. The cash reserve ratio or the portion of deposits that commercial banks keep with the central bank was 15% in 1991, as against 3%.  RBI ensured more liquidity in the hands of the banks to lend responsibly, while answering the needs of the society.

Banks have been given freedom to charge interest rates to different categories of the borrowers based on their risk perception. The core content changed in the banks. Although technology took the front seat, cost of banking went up over the years. During the last eight years, Jan Dhan accounts brought more than 43 crore persons into the fold of banking.

The decadal data between 2000 and 2020 indicates growth in advances in both private and public sector banks and their NPAs too. However, to expect banks to lend without NPAs will be amounting to calling on banks to give up risk appetite. Also, creating mega banks and Bad Bank would extinguish neither their toxic assets nor reduce their losses. The government ignored the experience of the 2008 recession that warned ‘too big to fail’ banks would demand more resources from the exchequer than earlier, when they created the monolithic SBI and merged major PSBs to be just ten now from 28 in 1991.

Private banks, foreign banks, and PSBs are not on par in the eyes of the regulator when it comes to meeting the priority sector obligations. While agriculture, small industries and small businesses, housing for the poor, education for the poor and transport including boats and catamarans were the priority sectors post-nationalisation, their composition and content changed dramatically during the last thirty years. Indian Banks Association, the lobbying agent for the banks, negotiated for redefining the priorities from time to time. The forty percent of total lending earmarked for this purpose is diluted for the poor and disadvantaged – the very purpose of prioritisation.

Shaktikant Das, RBI Governor, speaking at Ahmedabad University in 2019, recalled the status of banking pre-nationalisation:

“Five cities in the country, viz, Ahmedabad, Mumbai, Delhi, Kolkata, and Chennai accounted for around 44% of the bank deposits and 60% of the out-standing bank credit in 1969. This led to the widespread political perception that, left to themselves, the private sector banks were not sufficiently aware of their larger responsibilities towards society.” Quoting RBI’s History of Banking Vol III, he said, “nationalisation of banks was thought of as a solution for greater penetration of banking that excluded 617 towns out of 2,700 in the country. And, even worse, out of about 6,00,000 villages, hardly 5,000 had banks. The spread, too, was uneven… ”

The 2008 recession also led to demand for nationalisation in the UK, Australia, and the US to save the interests of the depositors and bondholders. The very purpose of nationalisation — namely, serving the unbanked and under-banked — is yet to reach its frontier. Financial inclusion cannot afford the luxury of complete privatisation. In fact, coexistence of private and public sector banks will lead to a healthy competition if governance issues in PSU banks are adequately addressed.

It is wise to turn the pages of reforms suggested by the Narasimham Committee-II and reiterated at Gyan Sangam-1 (Retreat for Banks and Financial Institutions), that the government would do well to provide full autonomy to PSU banks, not interfere in transfers and postings, and issue of loans. Behest lending should stop with setting goals by the RBI. Owner cannot be regulator. It can at best be a supervisor to ensure their healthy functioning. Government seems to have realized that its capacity to supervise is highly limited and therefore, it would be better to give up such responsibility. It must have also realized that its ability to improve governance in PSBs has reached its limits.

However, there is no evidence that all is well with the private banks, and they can deliver better to the people the banking requirements than PSBs.

The present government gives the impression that growth comes from the rich and the rich do not cry on inflation. They can pursue non-inclusive growth agenda more effectively if they change the institutional architecture, so that expenditure on institutions meant for delivering to the poor can be minimised, if not eliminated. This is undesirable both politically and economically. While privatisation by itself is not bad, the timing and motive behind the move at the moment, are suspect, particularly after the consolidation of PSBs took place.

The views expressed are author’s own. The author is an economist and risk management specialist.

https://timesofindia.indiatimes.com/blogs/fincop/privatisation-of-banks-reversing-the-history/ published on 30.06.2022

 

Wednesday, August 19, 2020

Human Resources Critical in Banks

 

HR in Banks Remain Critical

Banks are the talking point in any forum today, not because of deposits or credit held by them, but of the attitude of bankers to their customers. For every need, they look to the machine. One of my retired bosses prefers to attribute it to the HR practices in Banks. He preferred to call HR: “highly ridiculous”. Another retired top executive said: when was it good? The issues are worth pondering in the context of banks failing on several fronts and becoming inevitable cog in the wheel in the economy.

More acceptably, another senior banker said that the recipient system should be as responsible as delivery system. Citing his experience, he gave training to the staff at the Airhostess Training Institution. Customers complain of poor service, but when it comes to rectifying it through appropriate action, those same customers do not stand evidence, making a fool of management. This is not to say that all is hunky-dory with banks. Banks these days have no time to investigate. Firstly, they do not accept that something was going wrong and needed correction.

People over Machines

The most important resource for the banks is certainly not the machines – computers and mobiles – but the persons. They deal with customers – again not machines but persons, of all ages from school-going children to the senior citizens. But what is the attention banks pay in harnessing such resource?

At one time, people accused the PSBs as overstaffed and overpaid. Not anymore. The compliance burden on the manager is less known, a regional manager tells. Average The average business per employee – just deposits and credit - has no comparison with what it was during the 1990s.

Regional Manager would invariably say that he is either in a virtual meeting or busy in correcting a system or reviewing the targets for third party products like insurance, mutual funds.  He at best reviews that banking business his boss would like him to review – Mudra Loans or PMEGY or other government schemes. He would hardly claim full knowledge of all the managers and staff working under his control.

The remuneration and the comforts of the employees, thanks to the IBA’s periodical revisions because of negotiations with the bank unions, are market competitive. Social security including medical and health benefits, leave fare concessions allowing even overseas travel leave no grouse for any of them. Yet, none seem to be happy. Most customers in any case are certainly not happy. Frauds are on the increase.  

Higher the cadre in the Bank, more the necessity to toe the line of the boss than the market share in business he should seek to achieve or the business risks he should address. There is disillusionment in most cadres. It is important to go to the root cause of such situation.

High Aspirations

All those recruited into a bank are equally endowed on the day of recruitment, with an aspiration to move up the ladder. Why then, within a few years, either they become indolent or irresponsible? Why would an employee not so much care if his neighbour does not deal with an issue or customer as he should?

More than in any other institution, in Banks, ethics matter most as the employee deals with other’s money and money that is fungible. The entire surveillance system of the bank – monitoring and supervision should devote enough attention to this aspect. Culturing a person into continuity of ethical practices is the prime responsibility of HR management. Therefore, such responsibility rests with every supervisor – whether at the branch or regional/zonal/Head Office/Corporate Office.

If the employee perceives that at the highest level, persons are measured not for what they do but what they appear to do, like the drop of ink on a blotting paper, it spreads. It must be appreciated that persons are always unequal. Getting these unequal persons on board along with equals is the art and science of HR.

When employees see non-performers rise to the top because their slate is clean, for, nothing was written on it, the morale of the organization declines precipitously. Once such persons occupy the leadership positions at the performing levels, hiatus in attitudes develops. This needs to be arrested and this can be done through a process.

HR Balance Sheet

Banks should draw their HR balance sheet annually right from the branch to the Corporate Office with all intermediaries included. Such balance sheet, unlike the financial balance sheet should have more on assets side than on liabilities side for a globally competitive bank.

The balance sheet I am talking of, is that a person recruited has ‘x’ knowledge, endowed with ‘y’ skills and ‘z’ attitude and all persons recruited have x+y+z=1. They should periodically get enhanced with a score given to each of these x, y, Z. This score should increase with training, experience, and interactive processes on the scanner.

Each Manager should take pride in every person working with him. Annual assessment should be not on a tick in the box on self-assessment sheet but with a discussion between the assessor and assessed. A clear record of the assessment made transparently should detail what improvements are required and what supports he would get from the Manager. This exercise should be done at all levels.  

By the time a clerk reaches a supervisory level and a supervisor reaches a top management level, x2, x3, x4 levels with aggregates of ‘y’ also getting into similar or varying multiples but ‘z’ the attitude remains at the recruited ethical and understanding level. While dealing with customers of various hues, it is but natural that the response would correspond to the customer’s own approach to the issues. Second, it is human to err. Every supervisor should lend broad shoulder to the employee in all genuine mistakes and where required introduce corrections with sensitivity to the situation.

Transparent and timely redress of grievance and timely punishment to the errand should not be allowed to cloud the views of good performers. This is organisational ethics requiring scrupulous attention. If HR is taken care of, all the ills we now see in Banks will become history, worthy to forget.

*The views are personal. Author is an economist and a retired senior banker. My thanks are due to Santanu Mukherjee, former MD, SBH for his valuable suggestions on the draft.

https://telanganatoday.com/hr-in-banks-remains-critical published on 19.08.2020

 

 

Sunday, August 9, 2020

Monetary Policy Statement 6 August 2020

 

Some Healthy Deviation and Unfulfilled Expectations

The twin objectives of Monetary Policy – Containing Inflation and Promoting Growth – have largely been addressed in the latest Monetary Policy Statement of the Governor released on the 6th August, 2020. Economy continues to face unprecedented stress in the backdrop of unabated pandemic. Inflation of 6.1% is +2% over the inflation target of RBI.

RBI says that inflation objective is further obscured by (a) the spike in food prices because of flood ravage in the north and north-east and ongoing lock down related disruptions; and (b) cost-push pressures in the form of high taxes on petroleum products, hikes in telecom charges, rising raw material costs. These factors led the Monetary Policy Committee to hold to the existing policy rates undisturbed.

Fitch and other rating institutions say that global growth tumbles in the face of pandemic growing uncertainty. ‘All manufacturing sectors remained in the negative territory excepting pharmaceutical sector. Manufacturing PMI remained in contraction at 34.2. Rural demand increase is the only silver line in the economy. Services sector indices show modest resumption of the economy. Yet tourism and aviation, passenger traffic in trains and buses do not show any signs of recovery. There is broad realization that monetary policy should drive credit in sectors that need most and the Banking sector requires more attention.

Liquidity pumped into the banking sector is of the order of Rs.9.57trillion or 4.7% of GDP with no show of risk appetite among banks. This has only assured the Depositors that the money is safe with banks and there is no need for hurried withdrawals for consumption needs.

CREDIT POLICY

The main driver of the consumption, credit activity of banks is mooted. Lot has been expected from the RBI on the credit policy front. Let me first deal with the best things first: Priority sector lending guidelines have been revised reducing regional disparities in the flow of credit and broadening the scope of priority sector to include credit to the Start-ups in the areas of renewable energy, including solar power and biogas compression plants; and, increasing the targets for lending to ‘small and marginal farmers and weaker sections.’ Incentives for lending to these sectors is related to credit flow to the lagging districts and assigning lower weight to incremental credit to priority sectors in districts where comparatively higher flow of credit had already taken place.

MSME Sector:

RBI Bulletin July 2020 indicates that during the current financial year so far, year-on-year growth is -7.6% for manufacturing MSEs and -5.4% for medium enterprises.

MSME Pulse Report indicates covid vulnerability high among 63 percent of the MSMs. Only 31 percent are strongly positioned to come back. It is these that will be pepped up by Banks and not the vulnerable even if they are standard assets. The outbreak of the Covid-19 pandemic will impact the profitability of MSMEs due to the declining market demand and rising operating costs in the new way of working.

Number of Studies, notably, ITC, Skoch Foundation, RGICS, CII, FICCI etc reveal that 59-74 percent of the MSMEs are highly risky and would be on the brink of closure if cash inflows do not support them upfront. GoI took the stand that they will be supported by Credit while those that are weak will be supported by sub-ordinated debt or Equity. This Equity product is yet to roll out from the government although Rs,20000cr guarantee backed fund is allocated in the package.

The Policy nowhere referred to the credit-driven Covid-19 Atma Nirbhar Abhiyan packages. Package one related to the standard assets at 20% additional working capital under Automatic Emergency Credit Relief Guarantee from National Credit Guarantee Trust. Against the Rs.3trn target under this window for standard asset ( Units that are performing or continuing their manufacturing activity) to be achieved by the end of September 2020, Banks have so far sanctioned around Rs.1.6trn of which 60% is disbursed. There are field reports that Banks are seeking to extend the existing collateral and/or guarantee to the additional working capital. The disadvantage for the borrowers is on two counts: one fresh documentation involving stamp duty of Rs.1000 and 2) their existing collateral will get extended for the additional working capital and this is quite contrary to the intentions of the scheme.

The second scheme, involving stressed assets under the category of Special Mention Accounts-2. The broad guidelines released are:

¡  Account shall be -

Ø  Standard as on 31.03.2018

Ø  In regular operations during 2018-19/2019-20

Ø  SMA2 later or NPA as on 30.04.2020 , and;

¡  Commercially viable enterprises post revival

¡  7-yr moratorium for principal amount of subordinated debt/equity

¡  Interest payable every month

¡  Subordinated Debt amount up to 15% of Debt O/s or Rs.75 lakh, whichever is lower will be given as personal loan to the promoter for a 10-year tenure. This amount should not be used for recovery of NPA. Entrepreneur can use this to meet his cash deficit, for meeting the payments to labour and making the unit covid-19 compliant.

¡  Unit should revive in 5 years –RBI Guidelines of March 17, 2016.

¡  Unit should be on growth path for 10 years

¡  Scheme Valid till 30th September 2020.

Banks have not rolled out this package so far. RBI Master Circular of 2016 on Revival and Restructuring (RBI/16-17/338 dated March 17, 2016) stipulates: 1. Corrective Action Plan; 2. Revival and Restructuring of all viable manufacturing enterprises and 3. Recovery of the unviable through legal means. Banks have not implemented most of these instructions, save rare exceptions. Under the Subordinate Debt scheme, the enterprise should be first viable; it should be currently running whatever be the capacity utilization, and then, it should be restructured to see it as a standard asset in a year’s time and additional revival package and sovereign obligations if any to be recovered fully before the five year period concludes. Initial moratorium for the revival package would depend upon the viability arrived at. District Committees had to be formed and they should decide on the viability.

For all such units with outstanding liability of Rs.10lakhs and below, the Branch Manager is the deciding authority for reviving the unit while for the units over and above this limit, appropriate authority as decided by the Bank will take the call and place it before the District Committee. Though several Banks committed to the RBI that all such District Committees were set up even by December 2017, most of them are dysfunctional.

Under these circumstances, RBI announcing MSME revival and restructuring of enterprises falling under the category of GST-registered Standard Assets as on 1.3.2020 before 31st March 2021 looks ambivalent.

The virtuous thing about the current instruction is that the asset classification as standard may be retained as such, whereas the accounts that may have slipped into NPA category between March2, 2020 and date of implementation may be upgraded as ‘Standard asset’ from such date of implementation. Banks are expected to maintain additional provisioning of 5% over and above the provision already held by them for such assets.

RBI should have allowed such forbearance for all the assets revived under the Atma Nirbhar Bharat Abhiyan -2 (Equity-driven revival). While Banks are aware that such any additional loan consequent to revision will be treated as standard asset, their reluctance to revive the viable enterprises is absolute risk aversion.

The only saving grace is that sale of securities to the ARC will now attract higher provisioning. This should trigger the thought that by reviving the asset instead of sale to ARC they would gain in provisioning as the asset is likely to be standard asset at the end of one year of revival. 

Monetary Policy viewed from the MSME perspective, is like what GoI proposes, RBI disposes. Apathy towards MSMEs still continues.  It is suggested that the RBI and GoI be on the same page in so far as MSME revival is concerned and second, shorten the period of decision making to just two weeks as against 55 days’ process indicated in the Master Circular of 2016 referred above.

Government of Telangana seems to be taking the lead in the revival of MSMEs. Telangana Industrial Health Clinic Ltd., set up by it, has put on its website, the Learning Tool for Revival and a Revival Pre-pack online for the enterprises to log in and post the details for quickly deciding on the prospects of viability.

Retail Loans:

As regards personal loans, RBI recognising that these loans falling under Retail Loan portfolio will be the next NPA balloon that will blow off, has accommodated the Banks through a resolution plan. It has been the practice of several Banks both in the Public and Private sector as also a few NBFCs to grant the personal loans wherever the related corporate accounts are held by them. Because of slow growth and the pandemic, several have lost their jobs and personal loan segment has come under severe pressure. RBI left it to the wisdom of Banks concerned to invoke the resolution plan by December 31, 2020 and shall be implemented within 90 days thereafter. There will be no requirement of third party validation or Expert Committee, or by credit rating agencies. Board Approved Policy will be necessary, and the resolution plan shall not exceed two years. Banks will have big relief on this score.

This Monetary Policy recognized the economic environment as tough to recover in the immediate short term. At the same time, it failed to provide the real growth impulses in invigorating the MSMEs to the required degree and failed to generate the risk appetite among banks. It looks more worried about the capital of banks than credit to the required sectors at the required speed.

The views are personal. This is an invited article from Skoch Foundation.

 

 

 

Wednesday, February 5, 2020

Hopes, Aspirations and Disappointments - Union Budget 2020


Hope, Aspirations and Disappointments

Nirmala Sitaraman starts on Aspirational Note. The two hour forty minute long budget speech creating record could perhaps prove the dictum: ‘if you fail in logic resort to rhetoric.’ Let me deal with the hopes and aspirations first and then with the disappointments later.

It has for first time addressed the farm sector comprehensively providing end-to-end solutions but leaves no assurance for income in the hands of the farmer. Allied activities get a boost. If a farmer were to hold a few animals in the backyard, a fishpond and a small poultry in addition to crop farming or horticulture, he has everything in the budget to cheer. There is every chance to cross-hold risks among the farming and allied activities.

States should follow the intent and modify the Agricultural Marketing laws to make way for the responsible aggregators and technology. Warehousing facilities in the Agriculture Market Yards and cold storage facilities would insulate the farmer from fluctuations in returns to the farm produce.
FM has announced Rs.15lakh farm credit amidst unwelcoming banker in the rural areas and banks that have learnt the art of showing up in figures that they do not deliver to the intended customers. It is heartening to see the push for Primary Agricultural Credit Societies that were almost forgotten for decades. NABARD that has half of its fleet serving Mumbai Headquarters should have been restructured for focused attention on farm credit. She should have forsaken tolerance for not achieving priority sector targets to take the RIDF window. This is a lost opportunity.

While the erstwhile lost focus on Education, Health and Hygiene has been regained with appropriate budget allocations and set a new direction through internships in higher education, unless infrastructure for primary education and teaching skills are enhanced the foundations will remain weak. Introducing internships in higher education has potential to make education fit the employment bill. We may hope for a correction through the National Education Policy the Government is planning to introduce.

The District Teaching Hospitals and para medical services planned will sow the seeds for sustainable health interventions. This just marks only a good beginning as the effect can be felt only after five years.

With the measly allocation for MNREGS and not linking it to the farm sector the budget left a void. It failed to kindle the appetite for consumption, the trigger for growth. The consumer is not left with much surpluses either for increased investment or consumption. Growth impulses are not generated significantly.

MSME sector has got a new direction with the introduction of sub-ordinated debt or equity funding but it remains to be seen whether the Banks that failed them in credit would meet the new equity route and help scaling up process. TReDs and GEMs are not new interventions to talk of. Unless all the government departments and PSUs enroll on these platforms, MSM|E vendors would not get their due. For those moving to organized way of doing business with just 5% in cash are exempt from audit up to Rs.5cr turnover.

In the last budget, the FM made a reference to U.K. Sinha Committee Report, but she skipped it now. Neither Distressed Asset Fund to ensure that no viable manufacturing MSME downs its shutters, nor Fund of Funds found allocation in the Budget. In a slowdown, it makes lot of sense to ensure that no viable manufacturing MSME exits so that the workforce engaged therein would not add to the unemployed. 

Economic Survey 2020 made a very detailed analysis of the banking in the financial sector. FM did not seem much worried over the increase in frauds and poor credit risk of the Banks. Although it is heartening to see that no further capital allocation is made cutting into taxpayer’s purse, it is disappointing to see the absence of reforms in this sector. It would have been most appropriate to reduce the Government equity in these banks and usher in better governance than now. Bad banking and good economy are not good companions.

Banks irrespective of their size, in the current status will pull down the growth of the economy. The only solace is to the depositor whose Rs.5lacs is insured instead of just a lakh of rupees thus far. NBFCs are empowered to recover their bad debts through the SARFAESI Act provisions on par with Banks.

Extraordinary push to the digital economy with District Cyber Parks, AI, MML and ITES in addition to Travel and Tourism is likely to enhance the contribution of the Services sector. Start up, Stand Up India and Make in India have not thus far led to increase in the contribution of manufacturing sector and this budget also did not make significant strides to reverse the negative growth. Telangana State seemed to have provided inspiration on this count.

Agriculture sector alone may not reverse the slow growth of the economy. Employment intensity has little scope to increase. Unless 20% credit -GDP ratio is attained with better risk appetite among banks, recovery from slow growth is doubtful.

If both the government and private entities depend on market for raising the resources as indicated in the Budget, revised estimates of the budgeted revenues and expenditure fall short of growth expectations. The Budget failed to institute a monitoring mechanism for implementation of the ambitious projects. States should be taken into confidence while formulating the Budget as it is the States that should catch up and cooperate for the aspirational goals and ambitious announcements to turn into actions.

Intention of the FM to keep more money in the hands of the people did not result in compatible actions. Overall on a ten-point scale the Budget scores a liberal six, more due to comprehensive treatment to the farm sector than other sectors.

Published in Telangana Today 5th February 2020.




Saturday, January 4, 2020

Uion Budget 2020 worrisome


Hardly the time for a tight fisted Budget 2020-21


FM in her second year of budget presentation has very unenviable task in performing a balancing act. GST revenues are looking southwards and the input tax credit, the key for success of GST is mired in data upload controversy and hostile inverted duty structure. Markets do not seem to worry about this going by the forward movement of indices, blowing against the wind.

PSBs absorbed all the capital that the government buffeted and yet did not perform. On top, some banks have acquired the notoriety in manipulating balance sheets. Frauds have surfaced like never before to Rs.71,543cr – a rise of 74% over the previous year in the financial sector. NBFCs too joined the cry for capital or regulatory relaxations.
Through legal process – IBC, SARFAESI Act, DRT and Lok Adalats, 14.9% in 2017-18 and 15.5% in 2018-19 is the amount recovered out of the claims lodged. Recovery through IBC at 42.5% is the highest, while it is 3.5% through DRTs, the lowest, according to RBI -M&M Economic Research.

No economic recovery will be possible with a crippling banking sector like the one we have today. Some Banks having Insurance and Mutual Funds are still entrusting targets under these subsidiaries to the regular banking staff taking away their productive time for selling banking products like deposits, credit and digital services.

Creating demand in rural, semi-urban, and urban areas would occur when the people have enough money in their hands. Credit has not moved in tandem with the demand from farmers and MSMEs in manufacturing. RBI doing its job by reduction of 135 basis points in the base rate has no spread effect in retail lending market as there is no risk appetite among banks.

Knowledge in banking products and services has come down significantly among line staff and this is the reason for credit origination risk escalating to failure in repayments. Capital infusion without rectification of the basic malaise and governance, will not address the problems.

Why worry about fiscal deficit when the denominator GDP has many undisclosed data escaping entries? Several economists make mountain of mole hill while speaking about fiscal deficit. Right from the Union Finance Ministry to the regulators, all converge on the fact that the slowdown of the economy is real and need demand boosters. There were occasions when we reached around 6-6.5 percent (2008-11) of GDP and the economy registered growth thereafter.

The worry on employment growth is real. Unemployed youth hitting the streets would exacerbate the security risks. Industry, despite the skill development initiatives, bemoans that they do not find the right persons for the right job.
Sector-wise, agriculture grew 2 percent while manufacture showed less than 1%. Make in India, the flagship manufacturing initiative has not shown uptick during the last four years in continuum. Services sector too is showing decline.

Priced education and health have made increasing demands on the government. Several States and Union Government have schemes like Arogya Sri, Kutumba Sri, Ayushman Bharati etc., and yet their reach to the intended is still facing issues in payment for the services to the hospitals. Affordability is still an issue.

What should be the measures in the budget to boost employment? Which sectors need focused attention from such perspective by way of fiscal incentives? How can the States be brought on the same page as the Union Government?

The slowdown is both cyclical and structural. There should be consensus between the States and Union Government on the way forward. Union Government should release post-haste all the payments for the pending works under MNREGS.
Several States and Union Government have huge arrears to suppliers, contractors and sub-contractors for several project works that has choked the bank working capital releases and all these payments should be released to the last pie.

The paltry pension to farmers at Rs.6000 per annum should be altered to Rs.12000 per cultivator whereby even the tenant farmers would be eligible for pension payment after 60 years. Since the scheme envisages payment by the farmer between 40 and 60 years of age his/her contribution, several farmers who are of 60 and above right now, would not be benefitting from the scheme. The scheme should benefit those who are above 60 now. Adequate budgetary provision is necessary.

Budget allocation for health sector should significantly go up to a minimum of 6% of the total outlay from both the States and Union. Health infrastructure is pretty poor and needs improvement.

Education budget should target universal education up to Class 12 and this happens when teacher pupil ratio significantly improves, and school infrastructure also improves. National Education Policy shall indicate the prospect of resource allocation as well.
Ensuing Budget should convert intent into actionable allocations in the critical sectors and lay a path firmly for cleaning up the banking sector. Frustration should not be at the breaking point.

Published in the Hindu Business Line, 3.1.2020

Thursday, November 28, 2019

Negotiating a Loan during Slowdown


Ten-Point Recipe for Loan Negotiation with a Bank in Slowdown


Most first generation entrepreneurs, CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Banks usually are tight-fisted in times of recession to grant enhanced limits. They also claim full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations. Economy in slowdown is tough time both for Banks and Enterprises. One has to run twice the speed in slowdown to remain where they are like Alice in the Wonderland.

Exacerbated NPAs despite the IBC have made Banks risk averse. Increase in frauds further accentuated risk aversion. The enterprises requiring higher working capital and those in export markets requiring packing credit facilities are facing formidable challenges. However, Banks may not like to lose good clients. Further, particularly those in PSBs, are also under pressure from the government to expand the portfolio in farm and MSME sectors.

Banks also actively work on the recoveries, write-offs of NPAs and topping up their Balance sheets. They are under pressure on the Asset side of the Balance sheet and therefore, look for clients who, despite slowdown, come up with a good proposal. And a good proposal in their parlance means that they would have little to exercise their thinking. Their time is under pressure most times in video conferences, meetings, Seminars, publicity and several internal committees.

Look at Mr. Raman who understands the predicament of the current banker and who is a CFO of a mid-sized corporate entrusted with the task of increasing domestic market by 100% and overseas market of the Company’s innovated tablets and injections duly approved by the US Food and Drug Administration. He is sure that the Banks would not like to lose a good client for another bank. Since his Company has proven track record, he was hopeful of the deal for higher limits on both working capital and export packing credit.

He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his homework well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which the Company would like to expand; the types of clients the company are targeting; the distribution system of the new markets; the incentives Company has on table; the drug controls of both India and the Asian economies in which the Company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections.

He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that Bank officials do not have half the information, he had either on the product or competitiveness but are looking at only the financials and spreadsheets and not the rationale behind them, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank.

After three days, when the call came, he went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.

The recipe is simple:

1. Do your homework well: know your own enterprise, its SWOT.

a. Brainstorm possible implications of the proposal with the Board and internal management.

b. Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed.

c. Go as a team for presentation with your confident technical and financial team for discussion.

2. Do not thrust yourself at inconvenient times for the banker.

3. Be transparent during negotiations.

4. Be humble; but do not compromise on limits sought as it might affect profitability.

5. ERP will help keeping the data required by the Bank and tax authorities transparent and timely.

6. Go with a vision, objectives and goals for the future.

7. Keep also the succession plan ready.

8. Give reasonable time to the Bank to think and come back with their offer,  but indicate your expectation for the result and also indicate that a Bank and a leading NBFC have also indicated their willingness to look at the proposal to attract competitive pricing of the loan.

9. Post sanction and post disbursal, keep compliance of terms and conditions tidy.

10. Make sure of half-yearly review of the limits by the Bank by feeding the required data online.

The above principles work equally well for the MSMEs. Since the MSMEs lack the attributes of a CFO and accounting team, they need to look for committed process consultancy firms like the Telangana Industrial Health Clinic Ltd (TIHCL) who handhold them and help scaling up with strategic interventions at the right time.

Published in Telangana Today 

Sunday, July 28, 2019

Concept Banking


Concept Banking

The year was 1972. State Bank of India, under the Chairmanship of R.K. Talwar pioneered the concept banking with the opening of five Agricultural Development Branches (ADB)in the entire country on a single day. He chose the first set of ‘Agents’ (later changed to Branch Manager). Significantly, three of them were in Andhra Pradesh. I was asked to arrange for the inauguration by the District Collector as the first incumbent of Visakhaptnam ADB. The date was set by the Central Office. District Collector S.N. Achanta inaugurated in the presence of Regional Manager, Development Manager, Area Superintendent (Bank has divided each region into compact areas to give guidance to the managers and oversee the development lending that had social objective and also effectively liaise with the district administration).

Government of India by then established Small Farmers Development Agency (SFDA) and Marginal Farmers and Agricultural Labourers’ Development Agency (MFALDA). (Both were subsumed in Integrated Rural Development Program subsequently).Each of them had a Project Director – either a junior IAS officer or an experienced Block Development Officer as Project Director.

Though Bank was lending for Agriculture from the day of Nationalization of Banks, concept banking involved special attention to the target clientele under village adoption (VA) approach and Group Guarantee scheme (GGS) to cover the unsecured marginal farmers and agricultural labourers. Both village adoption and group guarantee were innovations at that point, of the SBI. Bank recruited agricultural graduates as Rural Development Officers to serve the extension requirements of credit and this proved a boon to farmers. Of course, Syndicate Bank pioneered in lending for rural development with extension and others followed with their own incremental innovations.

Bank strongly believed that credit risk can be managed adequately and appropriately only when its field staff and managers knew the area, the activity and the person behind the activity well. It is with this perspective that an elaborate 8page schedule was prepared for VA. Data requirements demanded both secondary data and primary data. Types of soils, area under cultivation under different crops and different streams of irrigation, bovine population, flora and fauna, demographics, number of holdings in the fold of small and marginal, details of opinion leaders etc., constituted the major components of the schedule. Bank held one-day workshops on the manner of filling up the schedules at its Staff Training Centers.

Branch Management that too of a concept branch, whose functioning was under review by the top management, was the most enticing challenge faced by me. It involved careful planning, effective public relations, responsible business operations, handing limited human resources, and above all proximity to the farmers, the live wire of our economy. Head Office posted one accountant and one field officer, with a promise to post two more field officers in a month.

Visakhaptnam was MFALDA district. Project Director Alla Pitchaiah disclosed that the Agency identified 500 agricultural labourers engaged in pineapple and cashew cultivation on the hill slopes and 5000 marginal farmers for crop cultivation in Bhimunipatnam and Pendurthi blocks. He expected that the ADB should take the leadership in lending.
Day used to start at 5a.m., when I used to pick up the field officer on the way to village after village for their adoption by the branch to deliver credit that was scarce and out of tune with farmer’s requirements. Collecting data about the village helped due diligence of the farmers later. Farmers knew what they do with their land, animals and tools. They were a beehive of knowledge in so far as agriculture is concerned. They taught me agriculture.

Bank gave a soil test kit with a manual of its usage. This helped me build close relationship with farmers as I used to test the soil and tell the farmer how much and what fertiliser should be applied. It was here I learnt the meaning and shape of udder of a milch animal; how important it is to take care of the calf to ensure yield to the optimum. It was the poultry farmer who taught me the way to weed out a sick bird from the flock to protect the asset. Knowledge of activity, knowledge of area and knowledge of person are three essential competencies of a good credit analyst. Apart from the ICAR-published Handbook on Agriculture and Animal Husbandry that provided academic inputs, farmer interaction helped me become a practical banker.

Since this was concept banking, press and media were after me to flash stories of how the bank was helping the farmers. One day, the UNI correspondent, Hanumantha Rao asked me whether he could accompany us (I and my 2 field officers) to a village, Pandrangipuram, 6km from Tagarapuvalasa (Bhimunipatnam Block) where I programmed on-site documentation for disbursing crop loans. Application for crop loan and loan document were each of four and nine pages. Each page required a signature of the borrower and guarantor and if it is thumb impression for an illiterate farmer, a signature of the witness at the end of each page. The process started at 7am and by lunch time about 30 of the 50 targeted farmers could be completed. At about 3pm he took leave of us. We did it for the 30 adopted villages in the two blocks.

Next morning, as I was having my morning meal, the Development Manager (Ag) and Regional Manager gave two separate calls almost asking my explanation for the news item that appeared in all the English and Vernacular dailies (those days, newspapers in Visakhapatnam used to be delivered post-noon and therefore I had no knowledge of what appeared). I told them that I did not issue any press statement, but the Correspondent picked up the story as he witnessed the onsite loan documentation. The news item mentioned: “Even for Rs.100 loan, 410 signatures are required. The Agent, State Bank of India ADB confirmed.” This was a box item that appeared underneath a photograph of the inauguration of State Bank Staff College by Y.B. Chavan, FM, with R.K. Talwar, Chairman. No wonder, it sparked lot of controversy. But the issue had to be handled. Regional Manager asked me to take the morning flight and reach directly State Bank Staff College, Begumpet for a meeting with the Chairman pre-lunch.

Girding up my loins, I left for Hyderabad. In the meantime, Chairman asked the Development Manager (Ag) whether it was true that the document required so many signatures. He counted physically and confirmed that the number mentioned in the news item marginally fell short. I went to the Staff College Visitors’ lounge and saw the RM and DM waiting. They took me to the Chairman. He asked me to join lunch.

After a few fondly enquiries about the branch, the number of villages adopted and the way of identification of borrower-farmers and the number of farmers covered by the branch flor lending etc., as also of my father and family, he asked me for a solution to the problem. My response was: when the law of the land was equal to all banks, why our bank should have a 9-page loan document compared to a 4-page document of Canara Bank. I have also told him that per day I was able to cover only 50 farmers with such elaborate application and documentation and I would not have the luxury of covering 2000 farmers before the onset of monsoon, he directed the RM to immediately post three more field officers and desired that the lending must be over before commencement of the crop season. Those days, cash and kind component were to be delivered separately.

Then, he asked the Chief Manager Agriculture, SBI Central Office to constitute a working group with me, DM (Agri) as members and phoned up to Chitale & Co, legal advisers of SBI to join the team. The task was to simplify the application form and prepare a simpler loan document for release of all loans to farmers, ahead of the season.

The initial tremors caused by the box item almost damaging the reputation of SBI, resulted in simplification of procedures for loan disbursements. Every Loan sanctioned had to be reported to the Controlling Authority. I devised a Control form containing the required details in a single sheet, the size of which was 15”x20” incorporating twenty sanctions in a sheet.

The branch during the first year established a record of lending 2000 farmers for crop loans and 50 farmers for term lending to various activities like construction of dug wells with motor and pump set, diary, and 100 agricultural labourers for pineapple cultivation on the hill slopes of Simhachalam. This Pineapple variety was a juicy variety and I realised that they needed marketing support as the local sale was only for table variety. Liaising with MFALDA Kolkata market was connected for bulk sale.

The recovery season started, and every jealous eye was watching us. Believe me, it was repayment and not recovery as I assured during the awareness camps for recovery that they would get next crop loan if they repaid on time both interest and principal. At least 10 percent pledged their jewellery and repaid the crop loans while the rest sold their crops and repaid. Agricultural Cash Credit at the beginning of next season had no non-performing loan with ‘nil’ balance., Cash credit

We had night halts in the villages and used to attend the marriages of the children of farmer-borrowers as also opinion leaders with a gift from the branch to the couple. There used to be quite a bit of socialization with the farmers and the reason: credit flowed with extension and advice in time.

Concept banking moved much latter to small industries. At the behest of GoI, banks set up SME branches. Bank after liberalization gradually diluted this type of concept banking and flow of credit with extension.
*This is part of my autobiography.

Tuesday, June 25, 2019

The Economy in Dilemma amidst Political Stability.



Union Budget by the first lady FM in 50 years is amidst great expectations in this era of political stability. For her, all is not hunky dory. GDP growth is projected by the RBI at 7.1% for the current fiscal. We can set aside for a moment the arguments of Arvind Subramanian and the controversies surrounding the calculus of GDP.

CEIC data reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter although Business Confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%.

The dilemma: household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019 declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space.

World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above poverty line, euphemistic subsidies should sharply decline. But the Union and several States are releasing unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!!

NCAER statistics place the middle-income population at around 153mn while the lower middle-income population is at 446.3mn (Krishnan & Hatekar, EPW 2017). The salaried persons constitute still the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against tax havens.

We have seen the way audits are conducted calling for disqualification of the so far reputed Deloitte, PWC not excluded. Hiding incomes has become honourable and paying taxes honestly unwise. This situation unfolds great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales.

All the legislators and Parliamentarians with very few exceptions are billionaires. It is time to start rationalizing subsidies and incentives for this group. There is also a case for taxing the rich among farmers – defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought but should be fought over by a stable government trading off with the benefits for the rest of the farm sector.

Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.

The rural-urban hiatus can be addressed adequately by encouraging investments in modernizing agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will two birds at one shot: achieving employment and economy growth.

Actual projections for such fiscal outgoes would be far less than the bonanza that the urban and rich as also the corporates expect from the FM. In addition, as I have been untiringly mentioning since 2005, a percentage of share transaction tax in a rising economy and growing stock market would fetch to the exchequer instantaneous revenue with no tax administration expenditure.

Government should stop incurring public debt to save irresponsible lenders with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the Chairpersons. Governance improvement shall be the focus and the RBI should withdraw its executives on all Bank Boards so that its regulatory rigour can be on par with a food regulator at the time of introduction of new products.

Women have more courage than men when it comes to the question of saving a child from a disaster. Madam Finance Minister should be able to pull it off.
*The Author is an economist and risk management specialist. The views are personal.
Published on 24th June 2019

Friday, February 23, 2018

10-Point Agenda for Rebuilding Trust in Banking - PNB Fraud


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Bad banking has now become major concern of the body democratic. PNB fraud of Rs.11300cr proved a saga of utter disregard to responsible banking. Ethics took hard beating and governance in utter disarray in the backdrop of unlearnt lessons of the similar past offences both within the bank and outside. It takes years to build reputation but only a few minutes to destroy.

Sunday, February 7, 2016

Big Data Helps Banks but should help customers too

http://www.moneylife.in/article/big-data-help-banks-but-benefits-should-be-passed-on-to-customers-as-well/45304.html
Banks collect and use client data for better targeting. They should also reduce operational costs by using technology and pass on the benefit to customers
I recall what Greg Baxter, global head of digital strategy at Citigroup mentioned almost a year back (reported in Financial Times on 1 February 2015) that big data is a big opportunity, making a big difference in how the banks serve their customers in future. Financial health barometer can be read by every customer, not just how much balance one has in the account as much as how much the money is likely to be overdrawn every month.

Wednesday, May 6, 2015

Bank Employees and Social Banking

Bank Employees and Social Banking
  


Bank employees and unions will have to recharge themselves to a new set of objectives that would enhance the business of banks on one side and help the society on the other.

May Day is usually the day to recall the assertion of their rights. For a change, the All India Bank Employees Association (AIBEA) during this 70th year thought of taking the initiative of enjoining social responsibility. Gone are the hard days of militant agitations as means to achieve fair compensation, safety, security and comfort in work places. Workmen and officer representatives are today part of the governance and management of banks. Machines dictate the employees’ ways of working. Discretion has less relevance now than in the past. Technology dictates the employees’ ways of working and management processes. But are the customers, a happier lot? The response is discouraging.

Ever since the introduction of banking reforms following the recommendations of Narasimham Committee 1 and 2 and the alignment with the global regulatory architecture through BASEL I, 2 and 3, technology and capital adequacy have become the prime drivers of growth in banking sector.

Mobile banking and micro finance institutions (MFIs) moved into the space left by the RRBs, weakened cooperatives, and rural branches of commercial banks. Banking correspondents and customer service points, White ATMs surfaced.  Who should we blame for providing this space excepting the lack of commitment and motivation of staff to align with the objectives of the nationalisation of banks?