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
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