Wednesday, September 4, 2019

Big Bang Bank Mergers


Bank Mergers Again at Most Inopportune Time

Strong economy and weak banking can hardly coexist. We have been stuck with weak banking for the last eight years in a row despite most wanted reforms like the introduction of IBC, drive for financial inclusion like Jan Dhan and introduction of MUDRA. There were 40 mergers and takeovers during the post nationalisation period including the SBI merger.  One wonders whether we have drawn lessons from these experiences.

Looking at the immediate past, SBI merger with Associates is yet to deliver the intended results. 5000 branches were wound up effectively guillotining the reach to the rural clientele. Decision-making is at its lowest speed. Highly informed sources say that the merged associate bank staff at all levels are looked down upon by the pre-merger SBI. Achievement motivation is at its low levels.

Even as such settling was in the process, second bout of merger took place with Bank of Baroda, Vijaya Bank and Dena Bank. While the SBI balance sheet took two years to come back to profit, BoB jumped to profit at the end of first year itself. Obviously emboldened by the apparent frictionless mergers in the immediate past, MoF announced merging ten banks into four.

Can this be at any worse time than now, when headwinds of recession are blowing hard and global uncertainties are on the rise with trade wars between US and China and our own economy’s GDP growth tanking to 5% this quarter, the lowest in the last eight years?

25 years passed since Narasimham Committee recommended for six large banks but warned that it should not be with a combination of weak banks. Watch out: just eight months back, all the targeted banks were under Prompt Corrective Action Plan (PCA). Nine out of the ten have net NPAs above the danger level of 5%. Further all these banks are to be recapitalised meaning that they are weak upfront on capital. Further, lately, their balance sheets are saddled with Derivatives and Guarantees that may move up and add to the losses. Therefore, those targeted for merger are weak banks and not strong ones.

Y.V. Reddy, D. Subba Rao and Raghuram Rajan on one occasion or the other have cautioned the government over consolidation of Indian Banks as a panacea for the ills of the banking system.

While past accomplishments are no guarantee to future success, past failures can serve as good foundation for enduring success. Financial analysts like Anil Gupta of ICRA feel that the merging banks require harmonisation of asset quality and higher provisioning levels among the merging banks. 

Every merger or acquisition is expected to create value from synergy of some kind, and yet all the statistics show that successes are in the minority and failure can be quite expensive. Excepting that all the targeted banks have technologies in sync, no other synergies are seen on the horizon. Each suffers from heavy baggage of NPAs with several of them in the uncertain NCLT window.

Banking is all about financial intermediation. People are at the epicentre of banking both before and behind the counters. Culture of institutions is intertwined with the diverse cultures spread across the country. Success of mergers across periods and nations is elusive regarding the human resource and cultural issues.

Canara and Syndicate Banks are of the same soil and they have better prospect than the rest to derive advantage of merger. All the other merging banks would struggle to synergise on cadre management, incentive system, risk practices etc. Let us not forget that there is a 74% spurt in Bank frauds in PSBs more than others and several of them emanated from system weaknesses.

It is therefore important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of unwieldy nature. Banking basics and customer service can hardly be bargained.

Government after hindsight decided to start the Development Banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut for that job well due to their funding long-term projects with short term resources.
McKinsey has recently warned in an article: “Today’s environment is characterized by rising levels of risk emanating from the shift to digital channels and tools, greater reliance on third parties and the cloud, proliferating cyberattacks, and multiplying reputational risks posed by social media. Faulty moves to make risk management more efficient can cost an institution significantly more than they save.” Will the new CROs, when appointed, be capable of taking care of this concern?

In another study on M&A, Becky Kaetzler et al. argue for a healthy Organisational Health Index post-merger where they say that unhealthy acquirers destroy value, while healthy acquirers create value and tilt the odds toward success. Leaders considering mergers should first assess their organization’s own health to better gauge whether or not to take the merger plunge. In the instant case, all the organisations in the target are not at the expected health in the financial sector.

Leadership for transformation and good governance are critical for financial mergers to be successful. These emerging big Four out of ten should prove on these two counts that they hold these necessary virtues.

The announcement on governance improvements simultaneously released by the FM need a lot more assurance on the selection processes for the Independent Directors, non-executive Chairmen and their role. It would in fact be prudent to introduce a Declaration in 250 words annually as to his contribution to the Organisation so that the Board and the Directors can measure up the achievements against such statement. The bigger reform required from the owner is a pledge not to interfere in loan sanctions and move a resolution in the Parliament that no party would indulge in loan write off 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. Capital infusion should be done after specific commitments from the capital-deficit banks on the credit flow to the prioritised sectors, revival and restructuring of viable enterprises in accordance with the RBI mandates and recovery of NPAs.

There can be no energy without friction. The envisaged mergers are bound to have friction and it is the future that decides whether this will bring positive or negative energy. It’s to be hoped that even renewable energy through the cross-culture merger would bring the intended results. Let us not forget the dictum – too big to fail’ would eventually require the government to bail them out of any failure that ordinary citizens would not like to see or wish.





Monday, August 5, 2019

Is rate cut desirable?


Is Rate Cut Desirable?

Monetary and Fiscal Policies are the two engines of growth. While the fiscal policy is annual and out with the Union Budget, Monetary policy is more dynamic and adaptive to the economic environment and conditioned by the inflation target. It matters little either for the FM or the RBI Governor whether tomatoes are sold at Rs.80/kg or potatoes Rs.12/kg. Inflation target of 4% still appears to leave headroom for the RBI to go in for further rate cut – a policy of continuity.

US Federal Bank opted for rate reduction signaling the need for buttressing the US economy in the wake of another impending recession, much to the chagrin and disappointment of Europe and UK. Will India have to follow suit or should it go on its own? What is desirable?

Exports are on the decline. Complacence in forex reserves at the present level at around  $450bn would appear misplaced viewed against the China’s reserves even against their declining growth rate and current trade war with the US. With the UK on Brexit mode for certain going by the promise of present Prime Minister by October 2019 would further alter the trade balances globally. The present trade balance looks only a temporary comfort.

Our careful management of exports and continuous search for new markets for Indian goods call for an aggressive manufacturing policy and prevention of asset deterioration in the corporate and MSME sectors. Export of culture related products and traditional artisan products would hold good prospect and this can happen in dynamic credit markets at affordable rates of interest and not so much the subsidies.

View this in the backdrop of major central banks’ similar exercises this season: whether US or Canada and Basel warnings. Financial columnists like Ian Mcguan warn the Federal Bank against further rate cut. Eric Lascelles, Chief Economist at RBC Global Asset Management says: “the longer that people go in an environment of lower rates, the more accustomed they get to them – and the more difficult it is to raise borrowing costs.” This should explain the reason for the Indian banks going slow on rate cut transmission to the borrowers.

Further, their net interest incomes of banks have been looking south for the last five years. On top, their off-balance sheet exposures are more than the balance sheet trending to a danger that the world economy saw in 2007 and 2008.

Stock markets largely influenced by global trends and the announcements in the Union Budget over the FPI are tottering. Bond yields are also not so attractive unless they are of longer duration than 10years. Increase in minimum public shareholding could trigger a sale of shares – but not when the market is poised for decline. Company valuations are causing a serious concern at the moment.
Major Banks including SBI transmitted Central Bank rate cut on deposits. Domestic Savings already on decline could slide down further. Depositors and investors looking for safe returns year after year are a disappointed lot, for they are at their near-zero return of the money held.

Consumer index and business confidence index for June 2019 are on the disappointing numbers. Indian economy is not on a borrowing spree during the last five years. Instances like Amrapali, Hiranandini, DHL, have enough caution on hold for lending aggressively for real estate. Real Estate and housing finance, if pushed beyond limits, would put the lending institutions in a more beleaguered position than now. Priority sector lending is any way on low yields.

IMF downgrade of global growth rate to 3.2% in 2019-20 is a pointer to bolstering growth through debt route with interest rate cuts by the central banks. It should however be kept in mind that Central Banks and Governments have actively encouraged debt-driven consumption and investment in order to prop up growth. Such policies alter the dynamics of credit markets.

Climate risks are accentuating credit risks. Indian banks are yet to poise themselves to cushion against such risks. When global banks take the climate risks seriously and Indian banks delay, the impact on Indian credit markets is going to be high risk driven.

Budget lines amply indicate the necessity of more private investments to flow to key infrastructure sectors like roads, railways, airways, ports and such investments need to come from more debt than savings and investments in the emerging low rate scenario. With the uniform corporate tax rate at 25% government expects that there will be more corporate participation. But the emerging context does not elude much confidence among several well meaning economists.

If growth is a concern and if it should look only to credit markets then, infrastructure for lending needs to improve and this calls for re-positioning and reforming banks and setting up Development Banks where long term funds will be spent for long term purposes. Structural reforms should follow any impending rate cuts.

August first week is with expectation of a further rate cut to bolster the staring decline in growth. Is growth contingent upon debt or investment? This is a question that should deserve serious consideration in the context of risk-starved banks yet to recover from the self-built shocks of the NPA-overhang.

Published in Telangana Today, 5th August 2019


Tuesday, July 30, 2019

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?”


[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?

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.
  




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.