Banking Reforms

 Banking Needs New Direction

Monetary Policy breathed a fresh air and for once customers felt that some comfort existed for them too. Post-liberalization Banks went on investing in technology and realizing the costs of such investments through various types of charges. Even after realizing the cost of investment in technologies over the last two decades and over, it is time to pass on the benefits to the customers in whose name and style they infused technologies. Waiver of electronic transaction charges for a year at least to start with, has been viewed as a big relief.  ‘No Frills’ accounts norms also changed. Though interest rate changes disappointed the depositors, borrowers expect some rate reduction transmission soon.

Prudential norms underwent change giving comfort to the banks and borrowers alike. Resolution process provided leeway for the corporates running after Bankruptcy Courts to resolve their debt and start production/services to their full capacities sooner than later. The present environment of banking is transiting from dissatisfaction to hope for the better. But the real challenge still remains: public sector banks realizing their raison de ‘etre of their existence: emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. While retail banking, home loans, real estate and the failed infrastructure loans held sway during the last two decades the change should be in lending for agriculture, allied activities, MSME finance and segmentation of retail sector loans to the needy.

PSBs heaving a sigh of relief over their bad debt portfolio coming under control, should now be looking for new ways of doing businesses. But do they? Huge disappointment, however, is in the increase in bank frauds reaching >Rs.71500cr in 2018-19. Is technology facilitating frauds coupled with inability of banks to supervise staff and control them? Cultivating the technology to customers requires investment by banks in customer education, both online and offline.

Indian economy targeting double digit growth ere long has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Men at counters have now become slaves of the machine instead of being masters.

Apex institutions like three and half decades’ old NABARD and almost thirty-year old SIDBI are yet to deliver the intended benefits to the sectors they are meant for. Major earnings of these institutions come from treasury business. Multiple funds held with SIDBI are yet to reach the micro and small enterprises. Both these institutions that have wealth of knowledge in their human resources, need thorough revamp and restructuring. Delaying the process would end up further wastage of huge organizational resource.

Manufacturing MSMEs are in negative growth for almost decade and half now. Several NBFCs focused on small business finance but the IL&FS and consequent failure of mutual fund promises left disappointment. PSBs have the option of exploiting the co-finance window but they are bogged by the mindset of collateralized loans. It is here they need change. Interestingly, one of the senior bureaucrats recently rued: ‘when did the banks fall in line with the aspirations and goals of the government – whether DRI loans, IRDP loans, SEEUY etc., until they were forced? Now is the time to look at the way to culture the banks into new ways of thinking and acting. This can come of only through change in governance and regulation.

With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion Banks are yet to treat them voluntarily favoured agenda. Institutional innovations like the Small Finance Banks, Small Payment Banks, India Post and the likes as also the MFIs have also proved inadequate to meet the needs of the present leave alone the future banking needs of the population.

India’s future still lies in rural areas; agriculture and allied activities and providing value addition to agriculture at the doorstep of the farmer; weaning away unproductive labour from farm sector to non-farm sector; revamping agriculture marketing with infusion of technology so that price discovery takes place at the source of production and building new skills and upscaling skills in farm sector with measurable outputs of such investments. Government, owner of over 82 percent of banking, should drive the sector towards this agenda.

The reach of banking should be tested in rural areas. Several PSBs are winding up rural branches. Regional Rural Banks that are supposed to cross-hold institutional risks with their principals and do social banking are set to merge with their principals. Institutions thus created for the rural areas will soon become extinct. The big question that RBI should think is – will double digit growth target of the Indian economy possible without mainstreaming rural banking efforts? Should there not be a rethinking on maintaining balance between proximate physical banking and digital banking? A committee of either RBI or GoI could look into this aspect and arrive at the future course of action.

The whole incentive system in HR in Banks should move towards such agenda. Selection of Managing Directors and Directors on the Board should discerningly look at the perceptions of such persons with such agenda.

Kisan Bank for farmers, allied agriculture and agriculture marketing; Udyog Mitra Bank for lending to micro and small manufacturing enterprises and small business finance, Vanijya Bank for retail banking, home, education and transport loans, Moulika Vitta Vitarana Bank ( revive the Development Finance institutions for lending to infrastructure) would make banking portfolio banking with capacities to cross-hold inherent risks of lending. GoI would do well to have brainstorming sessions on these areas as the sector is trying to breath fresh air now.

https://www.moneylife.in/article/banking-needs-new-direction/57446.html

Why Merger of PSBs not a good idea?

Human resource and cultural issues apart, most mergers in the past haven’t led to improvement in profits

Emboldened by the apparently frictionless merger of the associate banks with SBI, the Ministry of Finance has decided to merge two weak banks with one strong bank, namely, Bank of Baroda, Dena Bank and Vijaya Bank, in the PSB (public sector bank) space. That this should happen exactly 10 years after the Great Recession of 2008, which was triggered by big banks, indicates a certain overconfidence about financial stability in India.

Since nationalisation, Indian banking has grown and exhibited much diversity in size, content and structure, represented by PSBs, regional rural banks, new generation private banks, old private banks, foreign banks, cooperative urban banks, cooperative rural banks, small payments banks, small finance banks, and NBFCs.

Business correspondents support the financial inclusion efforts of banks. Such diversity and effective regulatory oversight contained the contagion effect of the decade-old global recession on the Indian economy. The Narasimham Committee (1994), while arguing for six large globally competitive banks, preferred closing the weak banks to merging them with strong ones.

 

There have been 39 mergers and takeovers during the post-nationalisation period, which includes the SBI merger. It is important to draw lessons from all these mergers. While all banks reduced their presence in rural and semi-urban, non-profitable centres post-liberalisation, SBI, post-merger, closed 5,000 branches, thus effectively guillotining the plan to reach the unbanked poor.

Regulator-driven financial inclusion efforts of 2005, board-monitored measures, and Jan Dhan have supplemented the financial inclusion agenda. India Post Bank is the new institution aimed at taking banking services to the doorsteps of the least banked.

Against this backdrop, the latest merger is enigmatic.

Former RBI Governors YV Reddy, D Subba Rao and Raghuram Rajan have, on one occasion or the other, cautioned the government against seeing consolidation as a panacea for the ills of the banking system.

Though the RBI’s Financial Stability Report has estimated healthy economic growth of over 7.5 per cent for 2018, it has warned against complacency. And, this comes despite legal and regulatory measures to stem the NPA (non-performing asset) rot in banking through ‘market-based resolution plan for insolvency’ (IBC), putting 11 banks under surveillance via prompt corrective action plan, and continuing efforts to de-stress the sector.

The government, however, has put together another merger, even before the results of the PCA were known.

Of the three banks — Bank of Baroda, Vijaya Bank and Dena Bank — slated for merger, BoB is on the plate for the second time in the merger exercise. As at the end of 2017-18, BoB was the biggest with a total income of ₹50,306 crore, a net loss of ₹2,432 crore and net NPA of 5.5 per cent. Vijaya Bank comes next, with a total income of ₹14,190 crore, a net profit of ₹727 crore, and net NPA of 4.4 per cent. And, Dena Bank recorded a total income of ₹10,096 crore, a net loss of ₹1,923 crore, and a net NPA of 11.95 per cent.

Profitability ratios

Results of a study by Jagadeeswaran et al on the pre- and post-merger comparisons of profitability — with the year of merger as base year — in the case of SBI, IOB, BoB, PNB, IDBI and OBC reveal that net profit to total income, net profit to interest income, net profit to total assets and net profit to net worth declined for all except PNB and BoB. The exception was partly due to the period of merger, when the capital regulations post-Basel did not hit them. Banking is all about financial intermediation. People are at the epicentre, both in front and behind the counters. The culture of the institutions is intertwined with the culture of the regions. Human resource and cultural issues have impeded the success of mergers across periods and nations.

It is, therefore, important that the big banks think twice before turning into unwieldy conglomerates. Basic banking and customer services cannot be compromised.

The government would do well to start development banks to fund infrastructure projects and, thereby, relieve PSBs of this task. Experience has demonstrated that PSBs are not right channel for the job as it involves their funding long-term projects with short term resources.

Universal banking did enough damage with banks selling more third-party products, eyeing hefty commissions, instead of focussing on core banking operations. Hopefully, thanks to the latest directive from the Finance Ministry, this damage will be minimal, where banks alone will stand to gain, and not the officials selling such products.

Looking ahead

While past accomplishments are no guarantee to future success, past failures can serve as good foundation for enduring success. To improve its own stock, the government would do well to concentrate on improving governance in PSBs, pledge not to interfere in loan sanctions, and move a resolution in Parliament that no party would indulge in loan write-offs either for the farm or other sectors unless the areas are affected by severe natural calamities.

Further, higher capital allocation with or without Basel-III cannot prevent bank failures triggered by systems, people and processes. Both demonetisation and GST had hit not just the MSMEs but also resulted in the lengthening of processing time. Even politically speaking, with elections round the corner, toying with the financial sector with mergers looks faulty, unwise and untimely.

The Demon of Demonetisation

http://www.moneylife.in/article/the-demon-of-demonetisation/49255.html

In recent RBI history, some highlights: smooth transition to Basel regulations and efficient monetary policy under Bimal Jalan and Rangarajan, global aplomb post-recession under YV Reddy, preventing hyperinflation by Subbarao and taming of the NPAs by Raghuram Rajan. These achievements have put the RBI in prime position among central banks of the world. But the utter lack of planning and monumental mismanagement post-demonetisation by the same institution have tarnished its image.  

Banking operations other than currency operations in the country have almost come to a halt, barring exceptions. Credit is on a downturn. All the rating agencies, including Nomura, have down-rated the economic growth. The road to recovery sans GST is going to be difficult.

Budget 2016 Transformational Budget

Karl Marx once said speaking of the goals of economic satisfaction: ‘each according to his needs’ (communists achieved it); ‘each according to his ability’ (capitalists achieved it) -- extend this to each according to his greed (modern economies surpassed). Democracy means great expectations and the FM has to meet these expectations in the most unenviable challenging environment.

The stunning defeat in the States’ elections during the year made the FM look at Rural India, agriculture, irrigation and infrastructure in this budget as key to regain its political prominence. Noses ground to the soil made different voices allocating more than 8% of the budget 16-17 to agriculture, rural development and irrigation. The Economic Survey forebode it to a degree.

Economic Survey 2016 read between the lines indicates that the economy would travel in uncertain growth territory due to weak growth of world output (around 3%), declining commodity markets, turbulent financial markets, and volatile exchange rates. The current expectation of 7-7.75% growth during the current year and 8% in the succeeding years is the hopeful. Agriculture sector constituting around 15% of GDP at current prices having 60% of population dependent on it just ended with 1.1%; manufacturing with Make-in-India push surged to 9.5% and services in spite of start-up and digital India efforts slackened to 10.1%.  Unless manufacturing start-ups attract angel funds in a big way it would be difficult to show a double digit growth in the sector as the credit markets are weak.

Capital Infusion in PSBs – Need and the Deed

Capitalization of Public Sector Banks has been incorporated as one of the seven items in ‘Indra Dhanush’, dubbed as part of Banking Sector Reforms.  Before addressing the issue of such capitalization it is important to understand some of the historical developments in banking globally and the way different countries responded to addressing the issue of refurbishing capital in the banks.

As part of the global financial system, Reserve Bank of India made us to believe that banks in India have to fall in line with capital adequacy norms under Basel regulations. Even prior to the embrace of capital regulations of Basel India had CRR and SLR as regulatory instruments to safeguarding the financial stability of banks. 70 percent of the Banks’ assets in India are in the public sector.