Time for third wave of banking reforms

1969 followed by 1980 were considered as years of radical reform when 20 banks were nationalized. 80 percent of the banking sector was brought under the control of GoI with the declared objective of ‘controlling the commanding heights of the economy’.

Access to banking for the poor was the main aim and rural development was the focus. This era saw loan melas, the first Agricultural Loan write-off in 1990 and the birth of new institutions at the apex level – one for agriculture and rural development, viz., NABARD and the other for small industries, SIDBI. Both these institutions cannot claim that they are close to achieving their intended objectives. They act more as banks for the governments doing more treasury business than banking for the target groups.

Come mid-1990s, Narasimham Committee recommendations were accepted and the big bang reforms as economists and bankers termed it, allowing for privatization of banks in the name of ushering in competition. Banks competed alright but not for serving the unserved population but for profits. Technology was introduced. Costs of technology being huge had to be recovered from the customers. Charges for services started rising. Internet facilities were introduced. Convenience banking and convenience charges became the order of the day.

Technology became the master and banks became servants. Huge numbers of complaints started and Banking Ombudsman had to be appointed by the regulator. Banks were supposed to be financial intermediaries – intermediation between those who save and those who require money for acquiring productive assets and even consumption requirements. This intermediation was taken to the extreme, introducing universal banking providing for sale of third party products .

Yet, the reach to the unbanked and under-banked had to be thought of through financial literacy and board approved financial inclusion agenda despite the emergence of new institutions: MFIs, Banking Correspondents, Small Finance Banks and India Postal Bank etc. 2014 saw the ‘Jandhan’ as new avatar of ‘no-frill’ savings bank accounts. Credit to the needy sectors and persons had signs of improvement, al bait for short period.

Overall economic health depends on the vitality of the financial sector. This vitality was lost during the last ten years with irresponsible lending to corporates, several at the behest of government and vested interests resulting in unsustainable non-performing loans currently standing at Rs.10trn. Mechanical application of accountability to credit decisions has left bank managers shy of taking normal business risks. This has led to committee decisions on credit to large conglomerates making no one accountable for their failure.  Efforts to ‘tame the shrew’ through legal support  systems led to SARFAESI ACT 2002 and IBC code 2016.

The worst scenario prevails now: where the CBI is digging the graves of past sins of several bank top brasses fixing accountability for the current unrecoverable debts. If these Bank top executives followed unethical practices and extended patronage, more unethical is the investigating agencies announcing the names of the ‘offenders’ even before the charge sheets are filed and guilt is fully  established.

There is again a call for third generation reforms. The central issue of banking today is reducing government ownership in banks. With 82 percent of total banking in public space, government is active owner. It appoints the Chairpersons, Managing Directors, independent directors It reviews performance and directs the banks in appointments, transfers and closure or expansion of branches. These banks lost their autonomy and the freedom to run as banks either with a social purpose or commercial outlook.

Chidambaram who presided over the Finance Ministry after leaving the portfolio, delivering the Rajiv Gandhi Memorial Lecture on 21^st August 1998 said: “the bureaucracy and the political system have developed a vested interest in maintaining the status quo – over 60% of the work of the Banking Division in the Ministry of Finance relates to Parliament work, a largely unproductive use of time.” It is a different matter that he did nothing after he again became the FM post 2009. Narasimham Committee suggested the winding up of Department of Banking for such reasons and is time to accede to this recommendation as the first agenda on reforms.

Cash credit system of lending should give place to working capital demand loan when the monthly or quarterly demands on the repayment become possible for review and timely action. Single dwelling house of any small enterprise should be prevented from SARFAESI proceedings in regard to micro enterprises, particularly when the Bank did not cover the loan under the CGTMSE.  

The second should be: let the ownership take responsibility for all the lapses and regulator admitting to laxity. This would mean refurbishing the capital of banks to the extent of shortfall in NCLT decisions by the government purely as a one-time measure.

Bank inspections and audits have become a matter of ridicule in the wake of serious frauds and malfeasance that came to light during this decade. ICAI should work on realistic accounting policies and accounting standards and disclosure norms. Audit begins where accountability ends, as the saying goes. RBI should restart the bank inspections of 1980s when a few large advances and branches were also being inspected. It should perform its regulatory function without fear of consequences.  Prompt action should follow on lapses noticed. 

Governance improvement in banks should be the third agenda on reforms. RBI should stop sending its persons to the Boards of Banks. Board should review its performance once in six months against the Director’s own commitment each year as to his contribution to the functioning of the Bank.

It’s time to restore the trust deficit in banks by GoI and RBI through vigorous media campaigns and supporting measures assuring service to every type of customer on time and at transparent cost. Safety, security, easy access at affordable cost of both deposit and credit services shall reign supreme on the reform agenda. RBI may appoint a high level committee of a few of the past governors and reputed economists sans MoF bureaucrat, with a mandate to provide the reform agenda within the next three months.

Published in Telangana Today, 19.7.18

Proportionate Regulation helps MSMEs

Huge NPAs in corporate sector of the order exceeding Rs.10trillion and the increasing credit outflow for MSMEs from the NBFCs, on the verge of taking away the meat our of the portfolio have woken up the commercial banks to lend to this sector more responsibly. Banks like SBI, Canara Bank, Indian Bank, Syndicate Bank, and PNB are in the lead while the others are still in wait and watch approach. This context demands an inquest of the present status. Definition of the sector matters when we want to measure the MSME credit growth.

SIDBI defines MSMEs having credit outstanding of less than Rs.1cr as micro; 1cr-25cr as small and Rs.25cr-100cr as medium and beyond Rs.100cr as large for measuring credit growth while the MSME Development Act 2006 defines manufacturing MSMEs by way of investment in plant and machinery as of now: Less than Rs.25lakhs as micro; Rs.25lakhs-500lakhs as small; and Rs.500-1000lakhs as medium. An amendment is awaiting Parliament’s nod for changing the measure to turnover to make the sector ‘globally’ competitive and investment friendly. The new definition keeps micro enterprises at Rs.5cr annual turnover. SIDBI’s analysis follows neither the impending change nor the existing pattern for analyzing the MSME credit growth.

MSME Pulse April-June 2018, an arm of SIDBI measures growth in the sector by credit exposure mentioned above: MSME with a portfolio of Rs.12.6trn is pitched at 22.2% for micro and 12.8% for small Y-o-Y at the end of March 2018. Medium and large industry has recorded 7.2% and 5.9% correspondingly. The market share of new private banks and NBFCs has been growing at 30% and 10.9% respectively. NBFCs are now permitted the CGTMSE cover as well and this measure would see further growth in lending by these enterprises.

RBI Bulletin June 18 puts the micro and small, medium (as defined under MSMED Act) and large enterprises’ credit growth Y-0-Y at 1%, 0.3% and 3.6% respectively while in the financial year so far (up to end April), -1.8%,-2.7% and -0.9% correspondingly. Manufacturing enterprises under micro and small segments registered just 0.3% Y-o-Y reflecting the poor risk perception of the banks of these enterprises. Viewing from the risk perspective, even according to MSME Plus, NPAs of micro enterprises have been stable and range bound at 8.8% while for SME segment it is 11.2%. NPAs of MSMEs have a cascading effect of the NPAs in the corporate sector to which they act as vendors.

The Corporate entities issue cheques for the bills payable to the MSMEs before the last date of the quarter only to ask them not to present during the first week of the following month lest their order book shrinks. This measure will help conformance to the rule that above Rs.2lakhs dues to the MSMEs should be reflected in their quarterly balance sheets. No MSME can complain openly as they are in captive markets.

Most of the PSUs and Government departments do not honor the bills on time and the MSEs approaching the MSE Facilitation Council gets hardly a reprieve. The lender is a government owned bank; the defaulter is a government department or PSU; the arbitrator is a Government Executive. With such deep rooted conflict of interest, the MSEs hardly got justice. Even the disputed claims are not followed up with deposit of 75% of the amount settled by the Council. Even if deposited such amount would be in the Court but would not go for credit of the judgment debtor MSE that is reeling under NPA. Banks left with no option are proceeding under SARFAESI Act provisions even against the only dwelling house of the entrepreneur. They hardly have capacity and financial muscle to fight legally. Many capable of producing to capacity close their shutters prematurely.

Trade related electronic discounting system (TReDS) has on board only 34 PSUs. Several Government departments are yet to register on the exchange. This is a platform created for facilitating payment of 75% of the bill amount traded through this exchange for MSMEs that also register on the exchange and sell their goods to the registered members. Only a few banks registered on the exchange. Several state run firms did not register on this exchange. To swear by this instrument as a big boon to MSMEs will be  unrealistic.

Banks have not been putting their Board approved policy on their websites either for MSME lending or OTS or Revival and Restructuring. Banks are also reported to be charging huge penalties at no less than 18% p.a., on irregularities in the accounts and collecting inspection charges for inspections they rarely did. So is the case with SME Exporters. Banks have been mandated in June 2016 itself to set up zonal committees to ensure conformance to put in place corrective action plan, revival and restructuring and as a last resort recovery. But these instructions are sparingly implemented. The recent amendment to NPA recognition at 180days is hard to implement as the systems do not allow.

In the current environment of trust deficit, proportionate regulation by the RBI should help. RBI should move away from its stance of distancing from micro management since banks are failing the MSMEs. They levy inspection charges for visits to the units that were not made; debit interest and penal interest on the overdue amount fully knowing that the account became overdue not because of willful default but due to the cascading effect of the corporate NPAs. RBI should therefore prescribe boundaries of penalties for the irregular accounts; charges on forex dealings; modifying the IRAC norms and better monitoring of the revival and restructuring processes. Instances are staring at us where the proprietor or proprietrix falling terminally sick and unable to run the industry seeks exit but has no exit route. Government of India would do well to amend the SARFAESI Act 2002 provisions exempting the only dwelling house offered as collateral and not recognizing collateral going concurrent with the CGTMSE thresholds on par with the agricultural lands.

*The Author is Adviser, Government of Telangana, Telangana Industrial Health Clinic Ltd., The views are personal.

http://knnindia.co.in/blog/blogdetails/msme-credit-on-the-banks-radar-again-proportionate-regulation-helps

 Published on 12.07.2018

India Enters 50th Year of Bank Nationalization

Just a year to go for the golden jubilee of bank nationalization on July 19 leaves nothing to banks for jubilation. Current generation of bankers working more on systems than on knowledge hardly visualize the journey of Indian Banking that is on rough roads today.

First decade of nationalization of banks was a decade of committees and committees; second decade was one of consolidation of the gains of nationalization; third decade was one of computerization, introduction of income recognition and asset classification norms, newer balance sheets and banking reforms; fourth decade saw introduction of Basel norms of risk management in full measure; fifth, a decaying decade for banking sector, ending from a year now witnessed the setting up of a Monetary Policy Committee, deterioration in assets through reckless lending resulting in huge non-performing loans, particularly, to infrastructure and big corporates at the behest of the government, demonetization, frauds and malfeasance, bad governance. Government’s proposals to set up Bad Bank drew flak. When LIC is there, why have a bad bank?

During the first decade, to bring about a change in the mindset and meet up with the goals of bank nationalization, GoI and RBI set up nearly 50 study groups and working committees. During the first five years, six groups went into the study of general functioning of banks, six more studied the priority sector lending and nine teams devoted their attention to giving a direction to industry and trade.

In the next five years, 10 working groups concentrated on general functions while 12 studied lending to agriculture and allied activities and seven groups studied aspects related to industry and trade. Persons who worked on those Committees, to name a few, are of high integrity and discipline: R.G. Saraya, D.R. Gadgil, R.K. Talwar, V.T. Dehejia, P.L. Tandon, R.K. Hazari, S.S. Shiralkar, B. Sivaraman, M. Narasimham. NABARD had been set up as a statutory body. Schemes like IRDP, SEEUY, DRI and modifications to certain institutional mechanisms like the Lead Bank Scheme and Service Area Planning, setting up of Regional Rural Banks, had their birth during this period. Bank chairpersons were visiting villages and several farm enterprises.

Second decade saw a spurt in social lending, project finance for agriculture with many a small and marginal farmer benefiting and lending to small scale industries. Directed lending came for attack with several borrowers turning as defaulters. Rajiv Gandhi in a public meeting mentioned that only 16paise of a rupee lent was going to the beneficiaries of government sponsored schemes.

Third decade has changed the texture of banking in India. Narasimham Committee set up by Government in the wake of liberalization, privatization and globalization recommended for providing space to private banks to usher in a spirit of competitiveness among PSBs among many others. IRAC norms were introduced. Balance sheets built on accrued income basis were given a go-by.

Profitability and viability of banking came to the policy front. Banks started looking at rural lending portfolio and rural branches as unviable. also witnessed the resurgence of private banking with ICICI reverse merger, HDFC Bank, UTI Bank etc. The traditional private banks with Federal Bank Ltd in the lead also started making inroads in to unserved areas. Retail banking and housing finance made inroads into the lending portfolio. Micro finance institutions also entered the finance space with aggressive approaches.

Fourth decade saw the surge of arm-chair lending and template-based lending. Systems have replaced men in intelligent appraisal of loans. Asset reconstruction companies were born following the enactment of SARFAESI Act 2002. India demonstrated its resilience to the 2008 World recession in the financial sector. Net banking made banks close in the time gaps in serving the customers, al bait, urban and computer literate customers. ATMs proved a good service delivery instrument.

Fifth decade saw the progressive downfall of banking system. CDR, S$A, and RBI’s Asset Quality Review, behest lending to the corporate entities, poor surveillance, unconcerned Boards, and poor governance ended up in over >Rs.10trn NPAs. It also saw the likes of Vijaya Mallya, Nirav Modi, Chokshi etc., who challenged banks’ lending patterns. They also challenged the regulatory institutions.

Adding to this, Demonetization has exposed the infrastructural inadequacies in banking to tackle a disruption of that dimension in the economy. Banks in their anxiety to retain profit started fleecing the customers with high service charges – some transparent and more non-transparent.

Distance between customers and banks has been increasing reducing the trust between them. Supply based banking ushered in. Banks do more non-banking business with hefty commissions that dwarf their salaries.

At a time when institutional memory is waning, this article should unfold to the policy makers a few  lessons: 1. Deal with problems comprehensively and address them through collective and well-informed wisdom; 2. Trust in innovation and assess the innovation of its capacity to offer solutions material to the sector; 3.  Improve governance: let there be a pool of independent directors from whom choice can be made by the regulator; 4. No Bank shall be left without a Managing Director even for a week; 5. Make sure that banks do banking and not selling insurance policies, mutual funds and other third party products that could also include laddus and medallions at pilgrim centers.  

The Hindu Business Line, 19.07.2018

All about NPA imbroglio in MSME sector Co-financing provides adequate risk mitigation to existing lenders

RBI statistics show that stressed assets in Indian banking have reached the alarming level of 16% of the total assets. MSMEs, however, suffering a cascading effect of their elder brothers in corporates as vendors, are at the fringe, with around 8%. The extent of ‘wilful default’ as defined by RBI and the contribution of ‘financial illiteracy’ of MSMEs cannot be established by data. Hidden or undisclosed reasons for NPAs in banks’ books have been narrated in a few research studies that include CII, FICCI, ASSOCHAM, CAB, etc, but they had no institutional solutions.

Karimnagar district in Telangana has thrown up a few cases. An entrepreneur manufacturing unbranded detergent who received all accolades from the government found himself on the decks due to his market restricted only to the state government during 2008-14. Another from the same place, engaged in manufacturing and innovative recycling of batteries for automobiles with market restricted to the state public transport undertaking that actually saved no less than Rs 35 lakh per month to the entity, became an NPA and sold off his property to settle debt under the OTS. A third entrepreneur, engaged in manufacturing paints at Jeedimetla IE in Hyderabad, similarly suffered in strategically positioning himself in the market.

Shadowy Growth Cloaking disparities

Growth Mystery and Imbalances

India has been the cynosure’s eye in regard to the announced growth of 7.1% for 2017-18 in spite of fall in manufacturing growth and wavering agriculture growth. Analysts have various expectations ranging from 7.5% for the next fiscal even amidst fears of rising inflation expectation from the RBI. For 2019, Goldman Sachs downgrades its estimate of growth to 7.6% from 8% made earlier.

The much touted macroeconomic fundamentals, EODB rankings not withstanding are shaken with frauds and scams surfacing day after day in the financial sector. Good economy and bad banking are strange bedmates.  

Contextually, Kenneth Rogoff aired concerns about ‘the ethical and social implications of material growth’ in his most recent Project Syndicate article. In a country where 500 billionaires are expected to take decisions for 23-34% of the population that is poor, such concerns surrounding inclusiveness of growth will be a concern.  

The way we measure growth appears faulty and the manipulative statistics to suit the political agenda giving macro economy the look of strong fundamentals and the increasing focus on the movement of share indices – that is basically an index of the corporate wealth movement, are distortionary providing a lever for the rich to play upon their resources adverse to the national interest of inclusive growth. We need to measure the Happiness Index. Increasing focus of budgets on health and education with definite measurable outcomes is the only route.

While the output related IIP and the input related PMI of recent times are showing up in the manufacturing sector, sustainability is on a weak wicket given the Corporate failures and tottering telecommunication sector. 

Focus on rural infrastructure and agriculture at this point become relevant. It is a moot point whether loan write off of some states is the right solution for the farmers’ woes. Farmers are misled and they unite only under sterile leadership. Little did they ever realize that by frequently demanding such write off they created a deep mistrust in lending institutions and walked into the trap of money lenders instantaneously because debt and farming are inseparable universally.  Solution lies in reforms to the Agriculture markets, price discovery mechanisms for the farmers, crop planning and efficient delivery of inputs. Government of Telangana could prove a worthy model in this regard and the future would decide the efficacy of institutional transformation results.

Another important aspect is that the injustice to the weaker sections has regional disparities. Some States like Tamil Nadu, Kerala, Telangana etc., have performed well while the others did not on Human Development Indices. Best practices of some states are not picked up by the other states that continue their feudalistic practices.

The Ma-Baap attitude of the Union and State Governments is now being questioned for good with the people asserting their rights due to higher literacy rates and visual media within the easy reach. Though the earlier marginalised sections have occupied seats of power both in politics and bureaucracy their contribution to correcting the situation is minimal and this aspect is mainly responsible for the imbalances in the economy.

In democracy, admittedly, consensus on issues concerning the inclusive agenda does not get so instantaneous approval as the salaries of Parliamentarians or gubernatorial posts. Whenever Elections are ahead, the interests of the poor get widely discussed. This is where ‘ethics’ come into play. This is manifest in unemployment growth; inflation; rural urban disparities and the social unrest in areas neglected and people unattended.

What worry me are the technological innovations like the AI and MMT, IoT that take away more jobs than they create. I love the technologies that really are helping access to information in real time, transparency and more accountability. But the perilous consequences of intrusion into privacy, scope for fraudsters and manipulators getting an edge over the right doers, making persons and institutions slave to technologies are no insurance for sustainable employment growth in the economy.

I notice that there is maturity in our democracy and more and more people are voicing their concerns and political activism could be the answer if there is proper leadership and mentoring of the activist groups. Protection to the activist groups from the powerful also needs emphasis in such context.

In spite of 73^rd and 74^th Amendments to the Constitution, those states who are seeking legitimacy of the Federal structure have been found to be defaulting in recognizing the power of local bodies both in political and financial terms.

In the Federal context, it is the view of some political analysts whether the country can have two Deputy Prime Ministers – one representing the North and the other South, as there is a feeling of total neglect of Southern States in certain key economic dispensations.

Alternate institutional mechanisms, political stability, bureaucratic reforms and eternal vigilance are the remedies and eminent persons of stature who have a vision for the future would make a significant contribution in driving them. They would eventually also reduce the sovereign risk and bring about stability in domestic markets.
Published by Telangana Today on 24th March 2018. 

10-Point Agenda for Rebuilding Trust in Banking - PNB Fraud

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Bad banking has now become major concern of the body democratic. PNB fraud of Rs.11300cr proved a saga of utter disregard to responsible banking. Ethics took hard beating and governance in utter disarray in the backdrop of unlearnt lessons of the similar past offences both within the bank and outside. It takes years to build reputation but only a few minutes to destroy.

Tepid Union Budget 2018

This budget has an increment of Rs.11000cr over the previous outlay. But the direction has changed more to the health and education sectors. The effect of these interventions will be experienced more in future than immediate present. 

In so far as Agriculture is concerned the farmers get some announcements and hopefully, appropriate rules will be made to ensure that the farmers get 1.5 times the cost price for their produce. So far they have not been able to get the dividend out of the MSP. E-Nam spread though welcome has not so far stabilised in delivering the intended benefits to the farmers. 

A non-budget allocation of Rs.11lakh crores to farm credit is again a please all announcement. If NITi Aayog comes up with a modicum of lending to the tenant farmers with the owners' interests duly protected, things may change in the short term credit. Any short term credit not matched with the term lending or investment credit for farm sector as has happened so far, would end up in only irresponsible target chase. 

Agriculture should have been provided a separate budget because of the low growth experienced (just around 2.1%) and the already admitted climate change risks in the Economic Survey 2018. 

In so far as MSMEs are concerned, emphasis on the food processing, leather and apparels would provide great fillip. National Bamboo Mission would provide the bamboo based artisans and small enterprises in rural areas and tribal areas a great opportunity for developing branding and move to export zone. 

MSEs' major problem is availability of land for setting up the enterprise as the land prices everywhere are just soaring to unbearable heights. If he had announced tax exemption for five years for infrastructure and land cost in Rural Industrial Parks - either private or state - it would have been of great help.

In the name of MSME sector, the corporate tax exemption threshold rise to Rs.250 crores would help the medium enterprises and mid-corporates that constitute less than 2% of the total number of MSMEs. This is more an apology of support to the sector.

Mudra Loans target increase by 3lakhs should have been more specific to manufacturing MSEs. So far less than 3% of the total loans have been given to manufacturing. 

SHG credit allocation of Rs.75000 cr - a non-budget allocation would be rebalancing the gender portfolio of banks in the MSME sector.

As a senior citizen I am happy that my medical bill is better met now than before. The FM deserves thanks for this concern.

11 Point Plan for the Union Budget 2018

An 11-Point Agenda for the Union Budget

Dr B Yerram Raju

18 January 2018  

Weighed down by internal pressures from the party to present a Budget that gets accolades from a large voter constituency in the face of General Elections 2019, Finance Minister Arun Jaitley,  has a few ready options to pep up the economy.

1. Go all out to clear the misgivings on the Financial Resolution and Deposit Insurance (FRDI) Bill by incorporating oral assurances given in the Parliament into the proposed Bill.

2. Announce a winding up plan for the sinking PSBs instead of piling them on to those that are working efficiently.

3. Insist on all the banks to stick to banking work instead of selling third party products that carry hefty commissions as these products are invariably dumping unknown and unannounced risks on the unsuspecting users. Restart development banks to finance Infrastructure. Turn banks into growth engines.

4. Announce withdrawal of government funded programmes that failed to take off or made only a symbolic entry. Over 110 schemes launched for the Micro, Small & Medium Enterprises (MSMEs) failed to reach even 0.5% of the eligible enterprises. These resources can be earmarked to finance those schemes that showed performance. 

5. Re-engineer financial incentives to go online only with appropriate safeguards also announced. Fiscal incentives have more transparency than financial incentives. 

6. Scrap all the cess hat have no specific account of expenditure earmarked for them.

7. Appoint a committee to amend the treasury code with its rules formulated during the British Raj. This is the root cause of corruption and delays in the release of funds for government expenditure. 

8. Announce the date for incorporating the related Rules whenever the Parliament passes a particular Bill, so as to remove ambiguity and ensure compliance. Every Act must have priority do-ables for all the stakeholders as an Abstract. 

9. Introduce a modicum of agricultural tax, with a threshold of income over Rs25 lakh per annum. All the small and marginal farmers, as well as tenant farmers will be exempt as they would have not earned this much even for a five year period. The rate for them can be 10% over the Rs25 lakhs. Multiple slabs need not exist for them.

10. Manufacturing start ups should be tax exempt for five years or till their turnover crosses Rs2 crore.

11. All corporations spending a minimum of 5% on research and development or incubation centres recognised by the governments shall be exempt for such spend, treating it as Investment.

The FM would do well to make specific allocations for agriculture, education and social services that make good sense not just from the viewpoint of electoral benefits but as overall economic benefits. It is obvious that the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) will be thrown overboard but for some jugglery with numbers. There are a few states like Telangana, AP and Karnataka that have introduced agricultural budgets. It will be necessary for the Union government to go in sync with the states in its ideal of cooperative federalism to ensure the outcomes.  

(The author is Adviser, Telangana Industrial Health Clinic, Government of Telangana. Views in this article are personal.) 

  

 www.moneylife.in/18.1.18