Roots to Fruits - The Journey of Development Banker

 

ROOTS TO FRUITS

This Book is all about Yerram Raju? Not just that. Apart from his life story, this book is the quint essence of development banking and financial inclusion that the country has been pursuing as its unfinished economic agenda.

 

He is perhaps one of the few to start his writing spree at the age of 20 and continuing for 60 years in a row. Not a single year was without a few articles from him, that too in reputed financial dailies and journals. This is perhaps his last book in life, that will end up with the publication of Part 2 by December 5, 2020.

 

Large families of the ilk to which the author belonged are consigned to history, following the family planning since the 1950s. Eldest of the twelve children, the author describes vividly how his parents have instilled great values, ethics and austerity. This formed the roots of his career path to pluck of the fruits in his later part of life.

 

Author’s mother proudly said that her contribution to GDP of India was significant with two of her children – one a reputed gastroenterologist in Texas and the other a reputed Certified Professional Accountant in the US. The second son is a Professor in Yoga at Chennai. With all the sisters married to their choicest spouses, they had a fulfilled life. The parents of the Author Dr. Raju who lived beyond 94yrs and 81yrs respectively had an enriching life nurturing great ambitions in their children.

 

The Book depicts his intense affection towards parents, his own family, and great reverence to his teachers. His verse on Mother and his prose on Father are moving stories. It is a tell-tale story of the growth of a large family and its contribution to the growth of the economy.  All the children of this large family, however, preferred nuclear families.

          

Since Yerram Raju, the author, grew up in austerity and simplicity, he saw his three daughters grew up in the same environment. Though they all wanted to stay in India when married, all of them moved to different countries.

 

The Book offers lessons to several upcoming youth on the choices one can make when confronted with multiple options having equal opportunities for career growth. The interviews faced by him can guide the youth. His career in Textile Mills threw up lots of challenges that he ably faced. His parental dependence made him leave the opportunity to take up one of the more challenging competitive careers – civil services and financial services.

 

His choice of banking backed by emotion had its fruits. He could see the rarest of rare things to happen – retirement of his father serving the same branch where he was posted as Agent, at his hands. Doing PhD instead of pursuing professional course that would have seen a rise in the banking career faster than he had, speaks of his continued choice of academics. This enabled him later to teach the civil servants at Lal Bahadur Shastri Academy of Administration, Mussoorie and Administrative Staff College of India. He was also an external examiner for doctoral degree of three universities. It is difficult to find a banker adorning     s u c h     position.

 

Lending to agriculture and allied activities, particularly to the financially excluded like the marginal small farmers, potters, small enterprises was an obsession with him. Simplification of systems and procedures always attracted his attention.

 

The author in this brief of 130-odd pages, describes the journey of development banking as it took place post nationalization of Banks in India. For those looking for solutions to the problems of credit to the poor and needy, this book offers ready-made solutions. The presentation is simple and lucid.

 

          According to him, “Development Banking involves deposit mobilization through innovative schemes considering the needs of a variety of customers and servicing them, both online and offline, and financing development projects that add scheme specific infrastructure for lending and financial inclusion. Social banking is part of development banking. Both require efficient credit risk management. Extension services is part of social banking. Handholding, mentoring, counselling are essential requirements for social banking. It is treated as part of narrow banking, these days.”

         

          He won many an accolade both in the Bank and outside. One such is the recognition as International Man of the Year 1991 by the International Biographical Society, Cambridge for his contribution to rural development.

 

This book offers lessons on recovery of agricultural loans. According to the author, recovery is both an art and science. His success as banker, offers many a lesson for the current day bankers deeply mired in NPAs.

 

The Book is laced with quite a few case studies and provides lots of lessons on development banking. Part 1 of the Autobiography of the author up to the age of sixty years, ends with his transition to academics and consultancy. His relocation prompted by his stint with LBS National Academy proved a good decision at the right time of his career.

 

Readers can look to Part 2 for a greater excitement as it covers policy analysis of the country’s transition to liberalization, privatization, and globalization. The key milestones in this part 1 indicate that the areas would cover financial risk management and institutional innovation.

Available at Amazon store: www.amazon.in/amazon.com

 

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

 

 

Monetary Policy Statement 6 August 2020

 

Some Healthy Deviation and Unfulfilled Expectations

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

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

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

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

CREDIT POLICY

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

MSME Sector:

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

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

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

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

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

¡  Account shall be -

Ø  Standard as on 31.03.2018

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

Ø  SMA2 later or NPA as on 30.04.2020 , and;

¡  Commercially viable enterprises post revival

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

¡  Interest payable every month

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

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

¡  Unit should be on growth path for 10 years

¡  Scheme Valid till 30^th September 2020.

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

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

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

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

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

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

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

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

Retail Loans:

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

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

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

 

 

 

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

Cooperative Banks move to a single regulator

Cooperative Banks move to a single regulator - RBI

PMC Bank failure triggered the action on the part of Union Government to amend Banking Regulation Act 1949 bringing the Cooperative Banks in the direct regulatory ambit of the RBI, putting a full stop for dual regulation of the Cooperative Banking sector. The ordinance does not include Primary Cooperative Societies, the principal constituents of the State Cooperative Banks (StCB) District Cooperative Central Banks DCCBs). Urban Cooperative Banks and Multi State Cooperative Banks and the rest of Rural Cooperative Credit structure falling in the ambit of NABARD supervision will all be subject to such amended regulation.

The preamble of the Ordinance on Banking Regulation Act 1949 Amendment makes us understand that the cooperative banks are not well managed; not properly regulated; and the affairs conducted are detrimental to the interests of the depositors. They also lack professionalism, good governance and sound banking practices. The objective of the amendment is to correct all of them. It is important to view this ordinance in the backdrop of the latest Report on UCBs chaired by R.Gandhi, when he was Dy.Governor.

R.Gandhi (2015) Report says: “As UCBs form an important vehicle for financial inclusion and facilitate payment and settlement, it may be appropriate to support their growth and proliferation further in the background of the differentiated bank model. However, the question remains whether unrestrained growth can be allowed, keeping in view the restricted ability of UCBs to raise capital, lack of level playing field in regulation and supervision and absence of a resolution mechanism at par with commercial banks.” UCBs now have high aspirations of competing with commercial banks and they expect RBI to provide relaxations in various regulatory restrictions.

In countries like Canada, Cooperative Banks pose a formidable challenge to commercial banks and the former follow the capital regulations of Basel, conduct elections regularly, Associations of Cooperatives conduct induction courses and retreats for Board members on governance. Without harming the principles of cooperatives the Cooperative Banks pose a stiff competition to the commercial banks.

A study was conducted on behalf of Gandhi committee to ascertain the range of loans granted by scheduled and non-scheduled UCBs. The study shows diametrically opposite trends in the range of loans granted by the two types of co-operative banks. While the scheduled banks granted 59.6% of the total loans in the largest loan size ranges of Rs.1-5 crore and above Rs. 5 crore, non-scheduled banks catered to the small loan segments up to Rs.10 lakh in a substantial way as this segment constituted 59.5% of the loans granted by this component of UCBs. The study further supports the premise that large MS-UCBs have aligned their business models and goals with those of commercial banks while availing of the concessions granted to the sector. Even this study could not bring out the frauds and maleficence of Bank like PMC because the fraud has been traced to even earlier period.

“The Report says; major considerations to be kept in mind are the aspirations of large UCBs, conflicts of interest, decline in cooperativeness, regulatory arbitrage, limitations on raising capital, limited resolution powers of RBI, the capital structure of UCBs and opportunities for growth that will accrue after such conversions.” The UCBs are subject to annual inspections by the RBI. Yet it could not hold accountable for the large scale frauds in UCBs.

In so far as StCBs and DCCBs are concerned, they are under the supervision of NABARD and the Board appointments are supposed to be done as per the ‘fit and proper’ criteria fixed by RBI. Elections to the Cooperative Societies are conducted by the Registrar of Cooperative Societies. Cooperative Societies as per cooperative statute are member-driven, member-controlled and member-protected. If members who are large in numbers choose to abdicate their responsibilities or do not take enough interest in their activities, jeopardising the interests of other stakeholders and particularly the non-member depositors, the remedy rests only with the Registrar.  In so far as banking is concerned, it is only RBI that regulates all and all UCBs are subject to inspections by the RBI annually or whenever any aberration comes to their notice even during a year. Depositors’ constituency for long has been asking for a representation on the Board and this can be done only by amendment to the Cooperative Act.

The latest report on Trend and Progress of Banking in India from RBI (December 2019) has highlighted the importance of cooperative banks in India lies in their grassroots’ integration into the life and ethos of the widest sections of society and effective instruments of financial inclusion. They account for about near 10 percent of total assets of scheduled commercial banks in 2017-18. It also clarified that the combined balance sheet of UCBs witnessed robust expansion underscoring the effectiveness of measures taken to strengthen their financials.

Although 89.5% of the UCBs’ resource base happens to be Deposits, their growth is muted and remains well-below the average of 13.9 per cent achieved during 2007-08 to 2016-17.” A CAMELS (capital  adequacy;  asset quality; management; earnings; liquidity; and systems and control) rating model is used to classify UCBs for regulatory and supervisory purposes. UCBs in the top-ranking categories— with ratings A and B—accounted for 78 per cent of the sector. Only 4to 5 percent are in D category for the last five years. And yet, the well-rated UCBs have defalcated with immunity for years. Will this ordinance rectify this malady?

UCBs are under the regulation of RBI and Registrar of Cooperatives of the State Government where they were situated. The regulatory conflicts were being resolved through TAFCUB during the last ten years to the satisfaction of both banks and the regulators at the altar of RBI.

During the last two decades, Marathe Committee, Madhava Rao Committee, Malegam Committee, Gandhi Committee and RBI’ Vision of UCBs have gone on record on the measures to be taken for strengthening them in the face of a series of frauds and maleficence and even closure of several UCBs in Gujarat, Maharashtra, Andhra Pradesh etc.

GoI even brought out a comprehensive 97^th Amendment to the Constitution of India in 2011 as a Model Cooperative Act to be enacted by the State Governments. None except the Government of Orissa showed interest. Had this Act been passed and implemented in letter and spirit there would have been no need for the Ordinance now.

No State is keen on legal reforms to cooperatives. Cooperatives are the seedbed of politics and every prominent politician of the country, barring some Rajya Sabha or Legislative Council Members, everyone started his/her political career with Cooperative Society as the base. To borrow an acronym, cooperatives without politics is lame and politics without cooperatives is blind. Viewed from this perspective, this ordinance makes a great difference. It sets at naught all political interferences beyond the primary cooperative societies.

Several Commercial Banks, fully under the regulation of the RBI since 1949 have also been victims of frauds and maleficence. Several Banks, both in the public and private sector like SBI, ICICI, PNB etc continue to hit the headlines on such count.

The difference is that in all such cases, the interests of depositors have been protected. There were mergers or amalgamations but there were very few occasions where the affected Banks were closed or deposits barred from withdrawal. It should be worthy to recall that even in case of commercial banks the deposits are secured to the same extent as UCBs/MSCBs, viz., Rs.1lakh earlier and recently enhanced to the extent of Rs.5lakhs per depositor. 

Several UCBs are already part of the National Payments System. Financial inclusion demands customer centricity and smart technology applications apart from financial learning at the institutional and client level.

Rural Credit Cooperatives have been in the throes of change: accounting practices,  (from single entry book keeping to double entry book keeping), technology change; regulatory changes and structural changes. They have come into the mainstream of financial inclusion agenda of the country.

When NABARD has a new guard, it would have allowed scope to the new management to carry out the required improvements to the Short Term Cooperative Credit Structure instead of clubbing them with the UCBs. All the DCCBs have already been brought under the regulation of RBI notwithstanding the ordinance. Further, RBI invested in computerization of both the UCBs and Rural Coop Societies and banks with the allocation of Rs.4lakhs per UCB and maintenance cost of Rs.15000 per month for a period of 3 years post implementation. Government of India in their 2017-18 Budget allocated Rs.1900cr towards computerization of PACS. This initiative should have been properly monitored to ensure transparency, better accounting practices and better customer service on par with commercial banks. To search for a solution of lost opportunity in the ordinance does not reflect a good governance practice.

Though the organization may introduce appropriate strategies, it is the culture of the organization and governance that would require to be looked at in cooperatives. They can improve the bottom lines through reduced costs; enhance the customer experience; and strengthen security and compliance through state-of-the art encryption practices, audit trails and security certifications. Customers always need their data to be safe and secure.

When the problem rests with regulator – lax inspections, lack of transparency in dealing with the Banks and improving governance, the remedy is sought through a legislative amendment!!     This may perhaps provide a better lever to the RBI to  merge weak UCBs with strong ones and disable closures as a  solution to protect the interests of depositors. Will the PMC depositors now get fully all their deposits and interest?  We should wait and see.

Development of cooperatives is no longer an option, but a compelling necessity to achieve financial inclusion. Implementation of the Ordinance should only strengthen the cooperative system and not eliminate them in the guise of regulation.

https://www.moneylife.in/article/cooperative-banks-move-to-a-single-regulator-rbi-and-not-a-day-too-soon/60767.html 

Governance back on RBI Drawing Board

Governance in Banks back on the Drawing Board of RBI

India’s emergence as a global player is imminent and so would be a strong financial sector. RBI’s very comprehensive Discussion Paper on Governance in Banks comes as a formidable effort to set the house in order and bring about the much needed reforms in Banks. Large Balance Sheets do not add so much strength as it is just a reflection of one day in a year not so much as good governance.

There is a broad realization that change in the mindset among bankers would not come about by either the dictates of the RBI or its owner but internalizing the best governance factors. In evidence is the excess liquidity pumped into the Banks during the last six months and yet credit to the needy does not flow. Risk aversion needs reversal and this can happen with good, responsible and accountable governance.

Increasing Bank frauds, cyber crimes, arrest of some top executives and Chairpersons of reputed Banks like the ICICI, failures of PMC Bank, Times Bank, Yes Bank and several in hiding have obviously triggered the RBI getting to the drawing Board on Governance. The Paper has heavy referencing to the BCBS, OECD and Ashok Ganguly Report, bringing back to the drawing board of RBI its seriousness in action and not just intention.

Contextually, it is heartening to see that what I have been articulating since 1999: Corporate Governance in Banking & Finance (Tata-McGraw Hill, 2000 with YRK Reddy) and ‘A Saint in the Board Room’ (Konark Publishers: 2011) with R. Durgadoss, finds echo in the Paper. Two decades of wait is worth it.

The Government, going by the experience so far, considers that institutions created under its fold are sacred cows and should therefore be protected at the cost of the exchequer. Hopefully, the GoI would embrace these governance reforms in PSBs and hasten corrections with a sense of urgency.

There is enough proof in India that regulation and bank supervision are interdependent and not of independent of governance in banks. Both have limitations with effective interplay among them. Viewing from this angle, the discussion now unfolded specifies the key stakeholders’ role; distinguishes the role of non-executive director from independent director and workmanship Director.  

A foundation is built for the whole house; there are not separate silos for the kitchen and bedrooms. In the same way, audit, compliance and risk management should maintain their necessary independence — but not operate in three different silos. Governance is the binding force/material and it rests on the Board. It helps all the three groups speak the same language and connect with business processes and products.

The Discussion surrounds the audit and risk processes as more proactive than reactive unlike now. Once the house is built, no one would like to go to foundation to make changes. Therefore, change management is extremely crucial. Board cannot be expected to do the change management function. Change management requires federated ownership to cite a GRC framework study.

There are two aspects needed for the actions mentioned in the discussion paper to trigger, although experts in various fields alone are taken on bank boards. Knowledge cannot be taken as something given and permanent and it requires frequent updation.

1.    Board of Directors should themselves be prepared for new responsibilities and new roles. In the first meeting of the Board, the first item of the agenda should be the series of actions ordained in the Discussion Paper of RBI and their understanding in the present and emerging context. Each Director may be asked to furnish upfront what he or she would like to contribute to the Board and the objectives of the Bank. This would be the Board’s review point half-yearly and annually. Qualitative change will become possible through this measure.

2.    Half-yearly retreats for self-renewal of Board Directors away from the traditional Board meetings has potential for a free and open discussion on the issues - both internal and external to the organization. It is not common practice to have separate budget for Board management. It is good to have Board approved budget for its own functioning and knowledge upgradation. Usually good directors will be on the learning curve and hence, wisdom lies in taking advantage of it. ‘Fresh thinking’ that the RBI advocated would be possible with such measure.

Even mega Banks, measured by their Balance Sheets, suffer from issues that they would prefer to hide, wherein lies the danger. One of the leading large PSBs in its latest balance sheet has very low net interest earnings – not just due to low credit outflow but more due to gains in the reduction in the interest rate on deposits, for 9 times in a year! Depositors are minority stakeholders. It’s profit is made up out of sale of its stake in a subsidiary and not due to core banking business where credit sale is poor and deposits rose despite and not because of its efforts.

RBI cannot be a gatekeeper of the Banks. It can only direct the Banks to take care of the interests with due concern for the economy and the various other constituents. It is here that whistle blower policy implementation becomes crucial. We have seen lackadaisical responses even on RTI questions and references to the Courts for seeking responses. Such approach will not hold validity if transparency in dealing with issues that affect the persons in responsibility.

The Paper has fully accommodated the recent statement of the FM that the Banks need not be afraid of the three ‘C’s – CVC, CBI, CAG by such references being made only on Board decision  after fully exhausting internal examination and action.

While minority shareholders’ interest may be taken care of, depositors turning a minority stakeholder, would harm the interests of banks in the long run. The correction can come from governance and the RBI’s latest approach makes adequate mention of it in its paper.

It is also interesting to find that the RBI as regulator would divest its participatory role in the Board. Hope Government of India would not raise any objection on this issue. It has been noticed thus far that the value RBI Director imparted in the Board disclosures has not been significant.

There is a thin line between the non-Executive Directors and Independent Directors and this subtlety has been well addressed in specifying their roles in the NRC Committee and Audit Committee. Risk management Committee Chair to be directly responsible to the Chairman is worthy to note. It has rightly identified Risk Appetite framework as crucial for the eventual risk measurement and management. Those who cannot risk prudently cannot get reward. It could have specified that non-performers, because of their clean slate, cannot be elevated to key management positions in the organisation and the Board should ensure this through its effective oversight.

While it has kept its banner line on culture and values, it could have also constituted Ethics Committee with an outside expert nominee of the RBI to chair it and make it responsible to the Chairman directly. Business Ethics is an oxymoron and therefore, defining it is crucial in financial institutions. Measuring Ethics has been templated by the writer in the book A Saint in the Board Room. Corporate Executives can be subjected to this test while the Board Directors are supposed to be ethical, having right values to uphold the organisational culture. The future tells it all.

*The author is an economist and risk management specialist. The views expressed are personal.

https://www.moneylife.in/article/governance-in-banks-back-on-the-drawing-board-of-rbi/60655.html

 https://www.moneylife.in/article/governance-in-banks-back-on-the-drawing-board-of-rbi/60655.html

MAKING THE NEXT NORMAL WORK FOR TELANGANA MSMEs

Making the Next Normal Work for MSMEs:

NSS 73^rd Round estimated 63.4mn non-agricultural enterprises in July-June 2016 with 84.2% as own-account enterprises, that is, entirely run by the promoters or their family members. They employ 111.3mn workers and remain as the second largest employer next to agriculture. 40% of the employment is with 11.4% of such enterprises. This formidable driver of the economy started shaking in the pre-covid slow down. Covid-19 compounded the problems. Several of them, known to be in the unorganized sector, often do not have regulatory compliances as their focus and this has mostly led to lack of trust between them and their lenders.

Several Surveys, CII, FICCI, Skoch Foundation, RGICS reveal that near about 70% had adverse effects on their businesses. Only 4-5 percent mentioned that their businesses improved. The sector has the resilience and entertains optimism in going forward.

Telangana, the fastest growing State in India with good and consistent EODB rankings has many things to ponder post pandemic as the markets and the world are not going to be as before. Preparing for the future has to be on strong foundation.

Economic growth engines of State of Telangana - the real estate, infra and construction, Pharmaceuticals, IT and ITeS are likely to be on tardy growth for the next six months. Tourism, entertainment, event management that have seen phenomenal growth during the last four years will have to wait for almost a year to come back to their glory. All these have strong supply chain linkage with the MSMEs at the front-end.

Telangana State, with around 33000 MSMEs (with 7842 sick or incipient sick), the steady growth can be expected from only 10% of them in pharmaceuticals, biotechnology, electronics and defence-oriented industries. Aeronautics will be on slow gear for a year.

Contribution of Mining, a fast growing sector, emerging from Nizamabad, Warangal and Khammam, Nalgonda districts is unlikely to recover because of the low footfall of Chinese buyers of granite in February due to Covid-19.. Marketing pitch through select Indian embassies showcasing Telangana strengths in raw granite and the incentives they offer for setting up processing investments and pollution clearances faster than any other country, should be a strategy worthy of pursuit.

As one of the leading growing States in the country, we have the unique advantage of Make-in-Telangana brand for all the food and aqua manufacturing industries. Packing, packaging, logistics should back-end the efforts of agro-industrialisation of the State. If we can keep safety standards in place we can really replace Philippines, Vietnam, Australia, Taiwan and Indonesia in agro-based industries. We should develop them in small village clusters and not aim big clusters. It is good to have large number of well-integrated small clusters around villages and have well-developed logistics at each Mandal level.

HR mapping is extremely important. Every industry would like to optimise on time and resources. Work from home may become the new normal. After all, industry having tasted human meat in tough times, would like to continue. New wage norms will also come in to being. Focus will be more on leadership challenges and quick deliverables. Job losses will stare at the State.

All the skill development centers should be developed in consonance with the requirements of the agro-industrial and agri-business clusters. Post-school education should be integrated with the requirements of the industry. Telangana will thus be the largest employer as well.

New enterprises should be built on knowledge and skills. Forward integration in Markets and Backward integration in raw material supply with strong value chains built, the State will bejewel the country. Focus more on employing 75 to 85 % of both rural and urban working force.

Effective mobilization on global funds may be cost effective beyond FRBM norms for agricultural and allied sectors and for SME's to be globally competitive. It is time that the State should have its own Small Finance Bank not that it will have freedom to do as it likes beyond the RBI norms but will have the scope to leverage its priorities and timely deliveries on its own call.

When it wants more FDIs and FPIs to come in, it should be strong in MSMEs. The present near 25-26 percent of sick MSMEs will not certainly be able to attract the global investments. Hence Telangana Industrial Health Clinic Ltd needs to be strengthened with better inter-linkages with the existing lenders and NBFCs and greater resources – both by way of grants and loans.

MSME growth is debt driven thus far and not equity driven. Atma Nirbhar Bharat Abhiyan targeted release of 20% of additional collateral free credit and the State’s share is estimated at Rs.12,000 cr. Of this, as per the data of Ministry of Finance, GoI as of 9^th June 2020, of the Rs.1129.69cr sanctions to 19,965 accounts, Rs.633cr has been disbursed to 11,133 accounts. Banks will go for safe target and provide credit to not all those who need and who had adverse Covid impact, but to those who will reverse their NPA path. The subordinate debt to the stressed enterprises with Rs.20000cr fund backed by CGTMSE to the extent of around 23% default rate, is yet to benefit stressed enterprises due to delayed release of operational guidelines.

We need a strong and unwavering banking sector. State can think of having its own Small Finance Bank with public equity participation. Coupled with Telangana State Cooperative Bank, Srinidhi Bank and TIHCL the State’s credit infrastructure has potential to address the future needs of the state economy.

Tough times requires more tough solutions and we should be part of solution and not of the problem as Sadguru mentioned. The State has no room for complacence.

*Published this invited paper in the CII-Telangana News Letter MARCH-MAY 2020 ISSUE.

Making the best of the situation - Ten Point Plan for MSMEs in Pandemic

MSMEs – Think Anew and Act Afresh

A Ten Point Plan

MSME Surveys done by various organizations revealed that the packages released by the FM under Atma Nirbhar Abhiyan are not going to benefit them much. Now is the time to think afresh and move fast to be back on rails without expecting much from the Government over and above the guarantees announced. There is full realization among the MSMEs that they should live in debt, survive and if God helps, grow.

If there were perverse incentives earlier that only made them perpetuate small in size and not grow, now they will have to contend with no incentives but to grow with their own ingenuity. In a debt syndrome, this can happen only when there is a strong environment of mutual trust between the lender and borrower. Some State Governments are trying to create a better ecosystem and help the MSMEs.

What you should do as a MSME in this emerging scenario?

Covid-19 in a way opens a chapter in their enterprises. You are an important link in the supply chain and it is time that you make the government come to you and not you stand before them with a begging bowl. You should be able to dictate your supply terms instead of bemoaning that you are after all a cog in the wheel.

There have been surfeit of ideas and strategies but the question that stands in front of you, is: how to respond to their work force who were forced on holiday under lockdown and incentivize them to work for the Company?

All that the Bank wisemen would do is to give a moratorium for principal and interest if their credit record held you good – a standard asset in bank language – by January 2019, a la March 2020, the beginning of lockdown.

1.    

Make a reasonable assessment of receivables by discussing with the debtors. This will measure up the duration risk of receivables.

2.    Take full count of the stock available and see if there is any redundancy. Clear up all the useless stock.

3.    Assess the demand for the product in the context of sluggishness around in Consumption and the steep fall in Consumption index. It is very likely that the product required either a makeover or change in complexion.

4.    Set up a digitization environment – have a desktop or laptop and buy a ERP solution if you are beyond Rs.1.5cr turnover. Up to 1.5cr turnover, you have Zoho ERP solution offered by the MSME Ministry free of cost. Avail it. Incorporate every aspect of your data – from buyers to sellers, buy to sale, cash to credit, stocks to receivables and enable GST compliance. This will save you the bother of compliance. Any regulatory requirement either from the Bank or the Government, you can pull out.

5.    Take work force into confidence: Discuss with them how they would like to be paid their arrears given the firm’s predicament. Place before them your increased obligation to the Bank and tell them what would it mean to pay wages and salaries from the Credit window of the Bank and how much dip would be there for the firm. Disclose your own financial position.

6.    Present the future market scenario before them and the prospects it holds both within and outside the country. You may also discuss with them whether they would like to partner with you in the future of the enterprise taking into account the new dynamics of the market. Give them an undertaking that their wages and salaries will be packaged as mutually agreed after paying at least one month’s arrears.

7.    Strategize for attaining a brand value for your product within a set timeframe.

8.    Discuss with all the other units engaged in producing similar products to gain advantage of (a) a co-working space; (b) co-branding; (c) rational pricing of the product; (d) clusterizing for purchase of raw material in bulk on a shared e-commerce platform; (e) rediscovering the price of the final product taking the logistics into consideration.

9.    Rework your Business Continuity Plan and arrive at viability of your enterprise in the emerging post-Covid environment.

10. Place your cash flow position for the next 3, 6, 9, and 12 weeks and seek your Bank’s support.

In States like Telangana you have Industrial Health Clinic to help you out. In other States you have some responsible outfits of Associations like FISME in New Delhi, TANSTIA-FNF centre, KASSIA in Karnataka, etc., that would be happy to suggest right strategies. There would be little purpose in wasting your time any longer waiting for things to happen since the economy is opening up.

*The writer is Adviser, Government of Telangana, Telangana Industrial Health Clinic ltd and author of the Story of Indian MSMEs.

https://knnindia.co.in/news/newsdetails/msme/msmes-think-anew-and-act-afresh-a-ten-point-plan