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

 

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, x^2, x^3, 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

 

 

Little Cheer for Bank Nationalization

INDIA NEEDS TO DO SOMETHING MORE…

CRISIS OR NO CRISIS

                                                                                   

The Day of Bank Nationalization in India passed off on Sunday. Smiles were kept years behind. None talk of village adoption scheme; no Chairman would go to a village these days to see how their rural branches are helping the farmers or the MSME is financed. No pride in ownership. No regret for bad governance.

But for a full page pull-out by the All India Bank Employees’ Association on the 20^th July, 2020, who remembers the Nationalization Day? Neither the employees, nor the disappointed customers that include even the Banks’ own pensioners, nor those seeking credit from them recall the Day. People are only alert on wearing masks and spiriting their palms before handling the currency received from outsiders. Everyone cries wolf on the ever-bulging non-performing assets. The only solid reform that we boast of is the Insolvency and Bankruptcy Code. Job creation is hurt badly in the organized sector with near-65% of MSMEs shutting their windows in pandemic. Their markets are yet to revive.

Banks in UK, Iceland, and even the US resorted to the most criticized and least preferred route of nationalization of banks, when they confronted a crisis. The then OBAMA initiative that received positive response of stock markets since the announcement of Toxic Loan basket takeover under a joint Government-Private Fund, was however inadequate to retrofit the lost confidence in the financial system. 

The revival of ‘protectionist’ actions would seem to be asserting more in finance than in trade.  While the regulators of G-20 would be meeting at the shortly, global regulatory regime has serious limitations and they should be realigned with domestic regulations that have compulsive cultural characteristics. 

Events so far have proved beyond doubt that a global regulatory regime would not be able to provide appropriate solutions to the type of recession that had set in due to pandemic. No prediction as to when it would end. Annual Balance Sheets for 2020 are waiting for finalization in several institutions. Basel III may have introduced a modicum of discipline and uniformity in risk discipline among Banks globally. Several regulators sought more flexibility. It is important for India to realize its distinction in the emerging economic scenario and how necessary it is to turn the head on the screws.

At the commencement of Covid attack, India did well and even till now, we do not find people scrambling for food because farmer and rural India stood by the nation.  The biggest blunder of the system is more announcements than actions and imperfect monitoring and undependable statistics. All the rating agencies, IMF and World Bank kept the ratings low and estimated growth of 42% in 2021. Opening the economy with lot of courage has not been taken too kindly by Corona that has been surging every day crossing the 10lakh persons. India took the 4th rank in the world in Corona affected nations.

Second, we have the key sectors like Steel, Zinc, other Metals and Coal as also the transportation system largely in the public sector. We entered the Commodity markets and derivative markets in our anxiety to mix with the globe. WTO is almost nearing collapse with most countries choosing to adopt policies that secure their own nations and people, not caring so much for the global discipline. 

Third, there was no demand recession of the magnitude that the other countries in the globe faced.  Still the rural areas where still 65 percent of our population lives, drive the demand growth.  Having said that some facts that can be hardly ignored: there is a steep decline in job growth; steep declines have also set in the private sector trumped up by the global recession; the urban and metro retail chains took a severe beating; the real estate and housing boom that irrationally stepped up land values across the country took the first heat-stroke and with them, the dependent MSME sector that is seen as the engine of growth.

Fourth, Banks that lent heavily for the retail sector and real estate sector started facing the continuous decline in their performing assets.  They lost confidence in the resurgence of the demand and the productive capacities of the manufacturing sector.  Most public sector banks even, refused to go with the RBI to pump credit. 

Atma Nirbhar Bharat Abhiyan, the stimuli announced to combat Covid-19, injecting more than Rs.20lakh liquidity, still face risk aversion from the Banks. This high liquidity released only moved to the investments in treasury instruments and to quote Subba Rao, former Governor, gave confidence to depositors in the Banking system that their monies are safe with the Banks, notwithstanding PMC Bank resolution still waiting at the doors of the RBI. It has two windows: one, investments and the other credit. The latest report on Investments not withstanding the $10mn investment announced by Google, all the investment projects are reported to be lagging behind and the cost over-run of the projects already swallowed the entire incentive package.

MSMEs are yet to come out of the two shocks of demonetization and GST. After the redefinition, and after a host of digital platforms placed within their reach, the access to credit by all counts is a poor show. Out of the National Credit Guarantee Trust linked credit incentive to the standard assets, Banks disbursed only 50% or less. This was supposed to be automatic release of 20% additional working capital. The second window to the stressed assets through Sub-ordinated debt is yet to open as the operating instructions were received only a few weeks back.

SIZE – AN IRRATIONAL CONCERN

Merger of PSBs taken up while the economy was slowing down is yet to show up the results. The market value of the SBI post-merger is way behind its peer, HDFC in the private sector. Sanctioning Rs.1200cr to a known defaulter in its books and erstwhile chronic NPA resolving through IBC, does not hold SBI in any high esteem either among global peers or its own clients. Government of India, by merging PSBs to 10 from 28 did not gain either in image or confidence of the people. Several clients say that corruption has become endemic in PSBs and not even acknowledging a complaint, or a letter of customer is so habitual that the latter are in the lurch.

While the Government’s efforts to digitize the delivery system have borne fruits reasonably going by the way the MNREG wages and other direct benefits reached the intended groups during the last two years, financial inclusion is way behind. The reach of banks to the poor has declined.

Regulator’s job is to make sure that the vertical and horizontal growth of institutions should not be allowed to go with a feeling that because of their size they are insulated from collapse and that the Government and regulator had to do something to keep them afloat even in the worst event like bankruptcy.  This is where the RBI should reformulate its views and ensure that the organizational structures irrespective of their affiliations do not overboard the governance and do not oversize.

The silos-based regulatory system currently in vogue, with the RBI regulating Banks and NBFCs, Stock Markets by the SEBI, Pensions by the Pension Fund Regulatory Development Authority, Insurance by the Insurance Regulatory Development Authority, and Commodity Futures by the Futures Market Commission should be effectively brought under Financial Services Regulatory Authority. Department of Financial Services, Union Ministry of Finance may have persons of eminence but when it comes to examining micro issues for macro management, it left lot to deliver. Collective wisdom needs to emerge to improve financial regulation and governance that affects 130bn people does not brook delay.  

India, for example does not have credit risk insurance of the order prevailing in either Italy, or Germany or South Africa.  The Credit Guarantee Trust for Micro and Small Enterprises is but a poor cousin of the trade and credit risk. Credit Risk could not be introduced in India as the IRDA was apprehensive of the consequences of credit default.  It is perhaps of the opinion that the moral turpitude would reach new dimensions if credit risk is introduced. 

Percy Mistry Committee called for a unified regulatory architecture for resolving issues dealing with segmentation of financial markets into banking, capital markets, insurance, pensions, derivatives etc. Sweden, Singapore, UAE, UK, Republic of Korea to cite a few have already moved into the unified regulatory system.

OPERATIONAL ISSSUES:

Warren Buffet, the most reputed investor, is quoted at number of places: “Derivatives were financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Over-the-counter derivatives that are off-balance sheet instruments come to surface suddenly when their collaterals fall and when their values become riskier to hold, killing in one stroke rest of the healthy assets of the Banks. The delivery and recipient systems have not reached a level of maturity to play with them, even a decade after their active entry.  Indian financial system cannot afford the consequences of systemic risks arising from their instrumentality.

Let me go to the most familiar area – Credit Risk that is mostly understood as risk of default.  Here the risks arising from asymmetric information have not been dealt with. The Credit Information Bureau India Ltd.,(CIBIL) is the only institution that currently unfolds client’s historic information at  price.  Entry of multiple players with the enactment of Credit Information Services Act of 2005 is put on hold.  Trade and Credit information services should enter the competitive domain for the information system to get into a semblance of order.

Credit rating agencies in India that are approved by the RBI are none other than the Fitch, Standard and Poor, Moodys etc., whose ratings busted on the threshold of sub-prime crisis and beyond.  There is no proof that they are doing their job differently.  Until the rating agencies’ services are paid for by the financing institutions that make use of the ratings and hold them accountable for the ratings, there is no guarantee that the ratings per se would add to the quality of the credit portfolio the banks carry in respect of the rated assets. 

While the Government and the RBI, Insurance and Capital Market regulatory authorities have proved one-upmanship over the other regulatory authorities in reasonably insulating the Indian Financial System from the impacts of the current global crisis, a large gap remains in what is needed to be done. The time to put things in the right shape is now and right away.

It is high time to appoint a High-level Committee that should also include outside experts to clean up the banking system with an open mind.

------------------------------------------------------------------------------------------------------------*The Author is an Economist with three decades of banking experience and a Risk Management Specialist He can be reached at yerramr@gmail.com The views are author’s own.

https://www.moneylife.in/article/ramping-up-the-banks-india-needs-to-do-something-more-crisis-or-no-crisis/60966.html

Banking reforms the Budget should not miss

Banking Reforms the Budget should not miss

Former President of India, Pratibha Patil, in her address to the Lok Sabha on 4^th June 2009 said: “Our immediate priorities and programmes must be to focus on the management of the economy that will counter the effect of global (domestic) slowdown by a combination of sectoral and macrolevel policies.” She laid emphasis on accelerating growth that is ‘socially and regionally more inclusive’. 

The objective of overall policy in India is accelerated inclusive growth with macroeconomic stability. This approach is likely to reverberate in the ensuing Budget Session.

FM needs to give a measured response to the imperative outlined. In order to take the States on board, she may announce clearance of all the dues on GST to the States once the present audit of GST concludes. She may also like to give a new financial sector reform agenda to resolve the existing imbroglio. A few of the available options will be the focus of this article.

FM is at crosshairs between fiscal austerity and enhancing public spending to stimulate growth. Discomfort lies in the worst performance of Public Sector Banks (PSBs) and failure of NBFCs. While the RBI is balancing inflation and growth objectives, the recently released Financial Stability Report re-emphasis on the need for ‘good governance across board’, improving the performance of PSBs and the necessity to build buffers against their disproportionate operational risk losses.

None of the recent bank mergers added to her comfort. Hence there is need to look at the unfinished earlier reform agenda suggested by various Committees since 1991 and announce either a Reform Agenda or appointment of a High-Level Committee with a specific timeframe for actionable agenda that could stonewall criticism against the PSB failures, bank frauds and twin balance sheet problems. 

The issues surrounding banking are not peripheral.

The moral hazard consequence of banks receiving bailout is worrisome now and therefore, she may refrain from any further bailout announcement. Stress in the NBFCs and Cooperative banking seemed to have forced re-look at the Financial Resolution and Deposit Insurance Bill, 2017. While the Bill proposes to establish a Resolution Corporation to monitor the health of the financial providers on an ongoing basis, the bail-in by depositors and stakeholders is worrisome.

Increasing stress in various buckets of assets stands unabated and calls for a surgical strike. Banks’ credit origination risks need urgent evaluation. It is important to relook at the universal banking model the country adopted aping the west. Customer preferences and customer rights have taken a back seat.

Market-led reforms of the past have replaced social banking with profit-banking objective. 2025 $5trn GDP target should look at more efficient performance of banking as key to its achievement. There is a need for reconciling satisfactorily the dilemma of policies appropriate for short term with those suitable for the long term.

Governor, RBI in a recent address indicated that he would like to look at the priority sector categorization afresh to ensure that it delivers the intended. This assumes greater importance in financial inclusion agenda as efforts hitherto like Jandhan, Mudra etc could make only numerical and not qualitative advances. Provision of adequate and timely credit to the rural areas in general and agriculture, micro and small enterprises and weaker and vulnerable sectors, remained a major challenge for Indian banks for decades.

Direct credit programmes in Korea, Japan in 1950s and 1980s revealed the need for narrowly focused and nuanced programmes with sunset clauses delivered the results. The problem with directed credit is essentially three-fold: First, pricing at its true market level, second, avoidance of the persons who are not credit-constrained, and third, selection of focused areas and regions without political interference in undefined democracy.

Credit discipline and equity, the twin principles of credit dispensation suffered a systemic failure with politically motivated loan write-offs in several States. Both farm and micro and small enterprises require credit with extension, handholding, monitoring and supervision as key deliverable. This calls for out-of-the-box thinking.

While there has been broad recognition that increasing supply to cope with the rising demand through diversified lending institutions like small finance banks, and NBFCs of various hues, ever-increasing demand to cope with new technologies, low labour productivity, and absence of aggregators structurally to resolve the pricing of produce at the farmer’s doorstep, are all issues that require comprehensive solutions. Resources should not fall short of the requirement for such effort. Budget 2020-21 should make a bold and strategic announcement regarding the direction of investments in farm sector supportive for responsible credit flow. FM would do well to avoid announcing any crop loan targets and leave it to the RBI’s priority sector reformulation.

Supply-side issues cannot be adequately and appropriately addressed without institutional reforms focusing restructuring NABARD and giving a new mandate consistent with the future goals of the economy. SIDBI the second surviving DFI is living on interest arbitrage and enjoying the munificence of the Finance Ministry to the detriment of the sector it was intended to protect and promote. This also begs either closure or restructuring.

As regards governance of banks, the unattended reforms of Narasimham Committee -II deserve attention: Removing 10% voting rights; reducing the legally required public shareholding in PSBs from 51 to 33 percent; improving the Boards qualitatively with well-defined independent and functional directors’ roles.

Since the FM already announced that she is exploring the amendment to the Cooperative Act to skip the duality of regulation of cooperative banks by both the Registrar of Cooperative Societies and RBI, she would be going one step further in eliminating similar duality between her Department of Banking and RBI in so far as the PSBs are concerned, particularly because the RBI created separate Departments of Supervision and Regulation and College of Supervisors to improve the supervisory skills of RBI personnel.

the Hindu Business Line, 16.1.2020 https://t.co/eNEANVcaW8?amp=1

What went wrong with Mudra Loans?

Speed Thrills but Kills Too – A Story of Mudra Loans

B. Yerram Raju* & J. Sitapati Sarma**

The concerns on rising NPAs in Mudra Loans are red flagged by the Regulator starting from Shri Raghuram Rajan, followed by current Governor Shri Shaktikant Das and Dy Governor of RBI.   This only manifests the seriousness of the issue. 

The NPAs in Mudra saw a steep jump of 126% in one year – increased from Rs. 7227crore in FY 18 to Rs. 16481 crore in FY 19 with number of infected accounts totaling to 30.57 lakh. India Ratings and ICRA estimated NPAs under MUDRA between 10-15% as compared to 5.39% in March 2018.  Since the Mallya debacle, surging corporate NPAs are now in the company of their less endowed MUDRA borrowers pepped up by the Government.  Economy slowdown should have nothing to contribute to this sordid story.

What went wrong with Mudra Loans? 

Ever since the scheme has been flagged off in April 2015, the targets were not only set but closely driven breathing over the necks of the banks by the Ministry of Finance, to impress the importance attached to the scheme.  Bankers have exhibited more than required enthusiasm and competed with one another  to  achieve  targets to dwarf the peers before the Delhi bosses. 

While massive numbers are to be achieved within set deadlines, it appears that the appraisal was given a go by as hinted by the Deputy Governor urging banks to monitor repayment capacity of borrowers before disbursement.  All the targets – increased year after year - were achieved by not only PSBs but other participants too. 

The total sanctions till March 2019 since inception stood at Rs. 8.92 lakh crores.   The speed at which these loans are sanctioned can be noticed from the fact that Rs.18000 crore worth sanctions were pushed during the last 8 days of FY19 to achieve the target.  During FY19 an amount of Rs.970 crore was sanctioned per day by all Mudra Lending Institutions together. 

Coverage of these loans under Credit Guarantee Fund for Micro Units (CGFMU) up to Rs.10 lakh could be another reason for sloppy appraisal It is amply clear that these are push loans without proper appraisal and due diligence of the borrower.  Informed sources say that bankers chose this route to ‘evergreen’ their small ticket loans!  

The numbers reveal some different facts.  Of the total sanctions, the new loan sanctions hovered around 26% barring the first year of introduction where it stood at 36%.  Can we draw a conclusion that the renewals/existing loans accounted for larger share probably owing to evergreening process of existing loans with increased limits?  More than 70% of the loans are sanctioned under “shishu’ (Not exceeding Rs.50000), considered least risky in the portfolio. 

While Banks can finance up to Rs.10 lacs under the scheme, they preferred to keep the average ticket size to less than Rs. 1 lac.  To be more precise, the average ticket size of mudra loan increased from Rs.39405 in FY16 to Rs.52739 in FY18.  Statewise disbursals also indicate unequal distribution that also needs correction.

One way it is blessing in disguise; otherwise, the slippages and NPA accretion could have been higher.  But the only issue that remains in such small ticket loans is the adequacy of finance and resultant viability.   

During the current fiscal 29 million loans were disbursed amounting to Rs. 1.41 trillion, showing slight slowing down, against Rs. 3 trillion in the previous fiscal. Not even 2% has been sanctioned to the manufacturing enterprises because that involves onsite verification and follow up.  

The positive part of the story is employment creation.   As per an unpublished survey a total of 11.2 million new jobs were created in 2015-18, of which 5.1 million were new entrepreneurs.   If government were not to push for targets, Banks would not have touched these clienteles with a barge pole. It is however doubtful whether banks given a free hand would improve the quality of portfolio as everywhere else they had the free hand too, NPAs are surging ahead. Banks’ eye on quality has much to do with their knowledge, skills and attitude. All the three seem to be at low ebb.

Jandhan accompanied by savings and insurance and MUDRA led by credit with refinance and guarantee are two schemes of the most acclaimed inclusive agenda of NDA government. MFIs, Small Finance Banks also lent heavily along with PSBs in MUDRA realized that they did not have much to loose as the money to lend came from refinance window while post disbursement losses are guaranteed. Since the funds to MUDRA are from the Union Budget, the losses arising from the scheme devolve on the taxpayer.

RBI would do well to commission a detailed study of the portfolio and take corrective measures to ensure that the inclusive agenda of the government would not get undermined and the taxpayer is saved of the undue burden of the scheme.

Yerram Raju is an economist and risk management specialist and Sitapati Sarma is retired General Manager of SBI and present Chief Operating Officer of Telangana Industrial Health Clinic Ltd. The views are personal.

Published in Money Life on 2,12,2019 www.moneylife.in

Crisis in PSBs - II: Ethics Must Be Made Integral to Governance

Crisis in PSBs - II: Ethics Must Be Made Integral to Governance

Moneylife Digital Team

30.7.2019

If we want to improve the governance process, we have to make ethics at the centre. Ethics and values should be the basis on which all corporates and more particularly, banks dealing with public resources shall function, as trustees. It is the attitude to life and the value system one has to cherish and live with.

Values are universal in character whereas their application changes. Business executives apply various ethical tests as a guide. There is variation among them on what test they apply on different occasions.  These tests, developed by Fr K Cyric include:

Corporate Executive Ethics Tests[i]

Ethics Test	Focus Question by the Executive
Relevant Information Test	“Have I obtained as much information as possible to make a decision?”
Involvement Test	“Have I involved all who have a right to have input?”
Test of Common Sense	“Does the action I am getting ready to take really make sense?”
Consequential Test	Have I anticipated and attempted to accommodate the consequences of this decision on any, who are affected by it?”
Mirror Test	“What does the man in the glass really say?”
Conventionalist Ethics Test	“Does this fall within the legal framework?”
Hedonistic Ethics Test	“Does it feel good to make such decision?”
Intuition Ethics Test	“Does my gut feeling approve of this decision?”
Revelation Ethics Test	“Does the decision cause greatest good for greatest number?”
Professional Ethics Test	“Will the decision be approved by the professional peers?”
Organizational Ethics Test	“Is the decision consistent with organizational goals?”
Test on one’s best self	“Is this action or decision I am getting ready to make, compatible with my concept of myself at my best?”
Fairness Test	“Would I consider this decision fair from the point of view of stakeholders?”
Enduring Values Test	“Does this decision uphold the enduring values?”
Universality Test	“Would I apply this decision to all similar situations, even to myself?”
Test of making public	“How do I feel if others knew I was doing this?”
Test of ventilation	“How would others view my decision?”
Test of Purified ideas	“Am I thinking that the decision I am making is right because some authority says, it is right?”

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[i] R. Durgadoss & B. Yerram Raju (2011), ‘A Saint in the Board Room’, Konark Publishers (P) Ltd., New Delhi

Ethical Decisions Vary with Executive Profiles

A survey conducted in 1992 in Malaysia on 252 executives from different countries revealed that there were differences in ethical decisions, which varied with job position, job specialization, ethnic group, age and salary. There were differences in attitude between the USA and Hong Kong personnel. 77% of USA personnel said that they would report a defective or unsafe product, compared to 50% of Hong Kong respondents.

Three women, Sherron Watkins (ENRON), Coleen Rowley (FBI agent on clues to September 11) and Cynthia Cooper (World Com), all whistle blowers were named as the persons of the year 2002 by Time magazine.

Cuoto, an employee of Bayer Corporation who knew how Bayer was making wrong claims on the USA government, fought a hard battle to have his testimony recorded and videotaped in August 2002, even though he was struggling with terminal illness. Bayer pleaded guilty and paid fines under False Claim Act.

Such a strong level of conviction and whistle blowing attitude is not prevalent in many countries, where people do not come forward, even when they see wrong-doing happening in front of their eyes; thus, the behavior of executives differ from region to region. Moneylife in India has been acting as a whistle blower in many breaches to the legitimate claims of various stakeholders of the banks and FIs. Much ahead of the unfolding of the IL&FS collapse, it has warned that this monolithic institution has made many compromises of the rules and regulations of SEBI and RBI, though it took quite some time for the regulators to take note of them.  It is therefore important that each bank board should approve a Whistle Blower Policy and prominently display it on its website.

Facing Ethical Dilemmas

In business, not only are executives faced with questions between right and wrong, but also between right and right. We have experienced situations in which the professional responsibilities unexpectedly come into conflict with deepest values. Executives are caught in a conflict between right and right. And no matter which option they choose, they feel like they have come up short.

Research on moral standards and business ethics is sparse. Martin Weber in 1998 found that 85.9% of managers claim drawing their moral standards at work from the expectations perceived in the work environment. Organizational norms embodied by the corporation’s culture are strong determinants of individual thought and behavior in the workplace, whereas corporate culture establishes and maintains norms.

When employees have no clear picture of the moral or ethical stance of the organization, they tend to operate at the lowest perceived level. Going by the increasing frauds, the alleged corruption in banks at various levels where they interface with the customers on loans and the way persons in top positions compromised the principles and statutes leads us to conclude that the ethics committees of bank boards, even where they are in place, have not functioned effectively.

A quote from a Raghuram, Rajan’s speech of May 2014, would be an apt conclusion of this paper: ‘The banking sector is on the cusp of revolutionary change. . .  Let us remember that what is at stake is not just the tremendous amount of national value that is represented by public sector banks but future financing and investment in our economy. A healthy public sector banking system should be distant from government influence but not from public purpose.’ https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=893

  

PSB Goverance

Crisis in PSBs - I: What is the Responsibility of the Government as the Owner?

Moneylife Digital Team
29 July 2019

The government-owned, or public sector banks (PSBs), which are under severe stress, require an urgent surgical strike. Bulging non-performing assets (NPAs), increasing frauds, and declining credit to the key sectors is worrying. Moneylifehas laid bare many of the frauds and misdemeanours of the commercial banks that included Syndicate Bank (2014), Bank of Baroda (2015), Punjab National Bank (2017), to mention a key few. The free ride of businessmen started eroding confidence in banks due to questionable lending practices in PSBs.

 The rot goes deep. For example, what are the answers to these questions?

1. All limits above Rs5bn should be sanctioned by the board duly overseen by the risk management committee. Banks also have internal audits, statutory audits and financial inspection of banks by the Reserve Bank of India (RBI) annually. Then how were such limits sanctioned without due diligence of directors on the boards of top-12 defaulting companies referred to the Insolvency and Bankruptcy Code (IBC) in 2017? What role did various committees play during the currency of the loan?

2. Even after the roles of managing director (MD) and chairman are separated, why couldn’t the non-executive chairman provide the required guidance to the board in enforcing accountability and transparency?

3. Why did the banks fail in due diligence of directors of the companies to which they sanctioned loans? It was noticed in several cases that the directors held suspicious transactions with other boards or companies but did not go on record as such. Integrity of the borrowers was taken for granted, going by the way banks nurtured the accounts.

4. Why and how were the banks allowed to hold the accounts with recovery actions far beyond 90 days in regard to all the major corporate advances?

5. When the RBI is represented on the board and with data on non-performing assets (NPAs) and corporate advances and the analytics of the financial stability reports coming out every quarter, why could it not contain the contagion of NPAs?

6. Why couldn’t the RBI director on the board insist on the audit committee to steer clear of acts that led to prompt corrective action (PCA)?

7. All the banks are subject to risk based supervision by the RBI. Then how could the banks manage such supervision and yet hide the processes that led to the frauds that surfaced later?

8. What is the role played by the nominee director of government of India in the board approvals and the NPA status of the bank concerned? 

9. Did the board of any bank give a strategic direction to the MD and monitor such direction subsequently?

10. When government of India (GoI) directed merger of associate banks with State Bank of India (SBI) or later the merger of two other PSBs with Bank of Baroda, fait accompli, the boards passed a resolution favoring the mergers and the consequences and the impacts on customers and other stakeholders were hardly discussed and there were also no voices of either concern or dissent. The role played by independent directors becomes significant in such situations. 

Clearly PSBs are facing a huge goverance deficit. Year after year, volumes involved in frauds have only increased, notwithstanding the existence of internal chief vigilance officer, external vigilance commission, system audit, risk audit, stock audit, concurrent audit, and annual internal inspections by the banks’ own audit team, external statutory audit, forensic audit and the annual audit of the bank by the RBI approved chartered accountant firm. PNB fraudsters successfully hoodwinked all of them. 

The question is: What is the role of the owner, regulator and controller of PSBs? The government has announced recapitalisation to the extent of Rs211,000 crore to meet the regulatory capital requirement once Basel III becomes operational (Basel III implementation date has since been extended to April 2019 from April 2018).

The present finance minister, sailing with the wind, again provided another Rs70,000 crore capitalisation in the next nine months.

Many experts feel that good (taxpayers’) money is flowing to the bad (crooks) with no accountability.

Although the government seemed to recognise the need for reforms, it fell short of introducing the structural changes suggested in the report. At the root of the rot lies poor governance and the absence of ethics. Ethics took a hard beating and governance is in utter disarray against the backdrop of unlearnt lessons of similar past offences, both within the bank and outside. Bad banking has now become a major concern of the body politic. 

It is the boards that should make the difference between the most successful and the unsuccessful corporate, whether in banking or elsewhere. Managerial efficiency, risk management systems and efficient governance require urgent attention. 

The Financial Times had held a series of debates in 2013 on better boards and corporate governance. The strong message that emanates from the debates is that fewer rules and more significant consequences for breaking them would make a lot of sense. Further, it is not good to have one-size-fits-all approach to corporate governance and the organisations should be empowered to craft their own systems of governance.

Narasimham Committee-1 made some significant recommendations regarding governance that would require a re-visit.

Ownership Issues

SBI has its chairman, MDs and deputy MDs (DMDs) as members of its board. PSB boards have been reconstituted in line with the recommendation of PJ Nayak committee with MD and non-executive chairman as two separate positions with both of them requiring the approval of the RBI. 

MD of PSBs are selected by banks board bureau (BBB) since 2015. BBB proved not so effective with long delays in filling the top positions of several banks and overbearing influence of ministry of finance (MoF) in the selection process. SBI post-merger and PSBs have individual shareholders who include even employees and retired employees of the banks as minority shareholders. This status involves the issue of protecting the interests of minority shareholders as well.  

Ownership, governance and regulation have created inconvenient compromises in the PSBs. The roles of owner and regulator combined in GoI have a built-in conflict. The presence of RBI in banks’ boards is further conflict of interest. The Narasimham Committee -1 recommended 25 years ago that RBI should dissociate itself from bank boards. This obvious step has still not been taken.

The role and functions of the ethics committee have not been well defined. The board should have full authority for appointment of statutory auditors with no role for the RBI. But going by the experience of the failures of banks such as the Global Trust Bank Ltd, RBI decided that the auditor firm should be from its approved list. 

The GoI has a strong lock on the banking sector but talks of competition in banks, independence and autonomy. It plants its officials from the finance ministry as directors on PSB boards. At best, these nominated directors carry the proceedings with their own interpretation to the ministry, and such interpretation may cause some unintended consequences to the banks they serve. 

How Do We Avoid Conflict of Interest?

A governance code could have guidelines for the management on its behaviour patterns because it is they who are running the institution and making the day-to-day decisions and their behaviour will be of greater consequence to the functioning of the bank than that of the board that meets at pre-determined intervals. The ‘comply and explain’ requirements should be very clear and unambiguous. Non-negotiable rules would lessen the complexity of corporate governance from the investors’ perspective. 

In India, unlike in some European two-tier boards and unlike in UK, the boards of PSBs, provide for employee representatives too on boards from the workers and officers.

Although several PSBs in the wake of financial sector reforms allotted shares to their employees it is not necessary that the workmen directors need be shareholders. Systems of governance should be focused on empowering front-line staff—rather than trying to keep them in check, even the  debates in Financial Times concluded.

Though stakeholders’ interests should weigh more than those of the shareholders, it is the lack of ownership culture among this set of non-executive directors (NEDs) that results in their performance below the expectations of the group they represent and that should cause worry. This constituency of stakeholder on the board needs careful treatment and nurturing. Employees and pensioners would be a growing constituency and they should have a place in the board as part of minority interests’ protection. 

Audits and Audit Committees

Banks that complain of multiple audits interfering with their business could not justify the concern due to the alarming rise in financial irregularities and poor credit risk management. Systems have become vulnerable to intrusions putting the banks to losses not seen before. Therefore, system audits have assumed critical importance. 

The complexities of the systems are on the increase with increasing role for them—both in operational and instructional matters. There is a growing trend of addressing any customer grievance only through an instruction embedded in the system. Almost all banks have been generating only e-circulars. The employees and managers hardly go through them save exceptions – those in the regional/zonal/head/central offices. The ability of the banks to put them to institutional learning periodically is also dwindling. Learning mechanisms seem to have been severely impaired. This leads to unnerving top management not generally admitted in public but discussed internally. The board has a responsibility through the HR (human resource) committee to resolve such a dilemma. 

Need for an Independent Director with knowledge of Technology 

The world over, technology risks and cyber risks are overcrowding the banks and financial institutions. Michael Bloch et al of McKinsey in their "Elevating Technology to the Boardroom Agenda Report (2012)" insists that the boards call for periodic reviews of technology’s long-term role in the industry by pushing the IT jargon the background and bringing in the right people to the board meetings for discussions on technology adoption. 

Leveraging technology savvy board members and strengthening technology governance structure by delegating the related risk issues to the board committee that oversees the risk management portfolio are some of the key suggestions worthy of consideration.

Good Governance Requires More Than Rule Fixes

Universal banking that permitted the banks to take to finance housing, real estate, retail loans, and sell third-party products, like insurance, mutual funds, pension funds etc, followed by digital banking, has made banking a non-core activity with overwhelming incentives for performing non-banking functions. 

Banks insure their own assets with the general insurance companies. Bank employees are expected to handle the banking products of deposit, credit and investments and not insurance and mutual fund products. 

Boards were silent spectators when the banks were measuring executive and employee performance based on the earnings on third-party products. 

During 2018, MoF directed the banks not to pass on any incentive for selling third-party products to any employee or executive and the benefit of such business should be accounted for in the profit of banks. Thereafter, PSBs started refocusing on banking business. Performance evaluation criteria should be overseen by the board. Boards, therefore, have a serious challenge in HR management oversight.

RBI should approve those directors on bank boards who are of impeccable integrity and unquestionable character, with no role conflict at any point of time.

The ‘fit and proper’ criteria prescribed by the RBI need revision. It is desirable that the selected person should be asked to give a two-page write up on his knowledge of the board functioning; his intended contribution, and his relationships with the other directors on the board and of his views on the present management, as a third eye from the published data and information, as obtaining with the Netherland banks. 

This statement can be reviewed by the regulators who may even seek clarifications where necessary before confirming the appointment. Knowledge and culture are two different aspects though synchronisation would enhance the value of the person. Such a write-up from the prospective director, therefore, can help in self-assessment of the director and performance assessment of the board itself eventually.

The annual general meetings (AGM) should not end up as the presentation of the audited statement of accounts to the general body; it should have group discussions of the shareholders on wide ranging issues like the strategies, risk appetite and risk culture in the organisation. In the alternative, it is also worthwhile to have board retreats for two days annually for self-evaluation and the way forward prior to the AGM and have at the AGM a synopsis of the discussions in the retreats,  as a guide for future.

It is the banks that could alone answer these questions as board documents are confidential. The best way to prevent such transactions is to strengthen corporate governance by the regulators/supervisors at once disassociating themselves from being on the boards of all categories of banks.

*The Author is an economist and Risk Management specialist. These series of articles are the abridged version of the NIBM Conference (July5-6, 2019) Paper on “Good Corporate Governance – the Best way for resolving the Indian Banking Crisis”. The views are personal.