With rising concerns on the health of banks and a flagging global economy, our PSBs need to act as engines of growth and not political piggy-banks
These suggestions discuss improving the financial performance of banks, and also improving their performance in terms of improved customer service, contribution to the growth of our economy and enhancing the trust and confidence of the public in the banking institutions of our country.
1. Improving employee productivity:
For the last about 50 years, the banking industry has been following a system of industry-wise wage settlement with its employee unions once in five years. This has caused considerable disenchantment among the banking public, as has always been preceded by strikes and long drawn out negotiations. This is because individual banks have no say in these settlements, and they had to simply nod their head for what is decided at the Ministry level, without any consideration for each bank's capacity to pay such wages. This system of industry-wise settlement has outlived its utility as it has robbed the banks of their freedom to negotiate with their own employees. The time has come, to completely dismantle the industry-wise wage settlement system in favour of individual banks entering into wage agreements with their own employees. They can deal depending on their own profitability, productivity and service requirements.
2. Improving customer service:
A robust and transparent charter of bank customers’ rights with built-in compensation for non-compliance by banks will greatly improve customer service in banks. The charter of customers’ rights must specify in clear and unambiguous terms the rights and responsibilities of both banks and their customers, coupled with stringent penalties for non-compliance. At present, banks levy penalties on customers for non-compliance with their rules and regulations, but there are no penalties on banks and no compensation is paid to customers when banks fail to honour their own obligations towards their customers. Even the latest charter released by the RBI has little in terms of accountability by banks. The charter currently reads more like a vision statement that a concrete framework.
3. Improving trust and confidence of the public in banking institutions.
Banks have started levying charges for withdrawing your own money from ATMs. Limits on the number of free transactions and such measures do not inspire confidence among consumers. Banks today are known for mis-selling of third party products without any regard for the customers’ needs and priorities. This has only worsened the situation, affecting the credibility of banks and there are no penalties for their misdeeds. Therefore, there is an urgent need to clear this mistrust and lack of confidence in banks, by laying down clear cut guidelines for banks in terms of the products they can and cannot push or charge for.
4. Improving NPA management:
Today, banks are at the mercy of big borrowers. The biggest problem faced by banks is that the companies go bankrupt, but the promoters remain wealthy and healthy and they force the banks to give all sorts of undeserved concessions. Simply declaring them wilful defaulters, as banks do now, does not solve the problem for the banks; on the contrary it results in further siphoning off of funds and stripping of assets of companies leaving the banks high and dry.
In the words of RBI Governor, Dr Raghuram Rajan the most obvious reason is that the system protects the large borrower and his divine right to stay in control.
A special insolvency law should be immediately enacted by which all those who borrow from banks beyond a certain amount should be subject to a legal stipulation that mandatorily declares the promoters and those in management unfit to continue in management, if the company they own and manage goes into negative net worth in any financial year due to whatever reasons. Such companies should be considered bankrupt and the promoters should not be allowed to continue in management.
Following this, the recovery process from large borrowers, including sale of assets etc.
needs to be expedited. Unscrupulous borrowers with political or big corporate patronage are mainly responsible for the poor performance of public sectors banks in our country.
This single banking reform will be the biggest game changer for the entire banking industry in our country.
5. Improving the norms of priority sector lending:
In order to improve the performance of banks, there is a case for improving the norms for priority sector lending by banks, which needs changes with changing times. In order to serve the twin objectives of serving social good with equity and justice for banks, the priority sector lending norms be modified to provide incentives to banks which perform well in this area of lending activity. The best way to incentivize banks is to offer to those banks, which achieve higher level of lending to this sector, relaxations in regulatory prescriptions like reduced SLR and CRR requirements etc.
6. Improving corporate governance:
In order to improve the performance of public sector banks, it is necessary to bring all public sector banks under the Companies Act, 2013 and make them accountable to public shareholders. Today they are only accountable only to the majority shareholder, and the AGMs are a mere farce. They bend backwards to appease the powers that be and follow hackneyed policies to suit political bosses without any innovation in their operations. The system of appointment of independent directors leaves much to be desired. There is a need to overhaul the entire system of appointment of the top management of banks, making it transparent and merit oriented.
7. Placing inspection rating of banks by RBI in public domain:
The RBI conducts an annual financial review of all banks, but their reports are kept confidential and their findings are never published. Those banks who continue to be rated poor must be pulled up and made answerable for their poor performance. The banks’ performance under all parameters must be made known to the customers of banks to keep the managements of banks on their toes.
8. Making bank auditors more accountable for their failures.
It is a well-known fact that window dressing of balance sheet of banks is most common in our country. The most common occurrence in this sphere is fudging the balance sheet just before the retirement of a CMD of the bank. Now that the appointment of auditors is proposed to be delegated to individual banks, the chances of such financial jugglery taking place will be much higher, unless drastic steps are taken to ensure that the auditors are made accountable for large variations in key parameters every quarter and shown the door if found to be hand in glove with the management.
9. Avoiding dual control of public sector banks:
The RBI is the banking regulator but public sector banks have a super regulator in the Finance Ministry of the Central Government, who by virtue of their majority shareholding, take the liberty to issue periodic directions to public sector banks in matters of banking operations. While the Central Government as the majority shareholder is represented by a Finance Ministry official on the boards of public sector banks, it is preposterous to issue separate directions which are outside their domain, which put the public sector banks in a bind and undermines the authority of RBI
10. Eliminating political interference in functioning of banks totally.
The public sector banks in our country are highly politicized due to interference from all those in power. The top officials of banks owe their positions to these bigwigs in the higher echelons of the government and are bound to show obeisance to their demands, putting the banks at risk, It is necessary to issue strict instructions to public sector bank chiefs that they too should insist upon written instructions from all those in power and act upon them only if they are in accordance with rules and are in the best interest of the banks concerned. This would go a long way to improve the functioning of banks and serve the interest of our nation.
(The author is a banking analyst and he writes for Moneylife under a pen name ‘Gurpur’)
It is possible that work on Indo-French Rafale combat aircraft may start soon!
After a series of serious tests and studies, in 2012, India selected the Dassault Rafale medium multicore combat aircraft as suitable for the Indian Air Force. Almost two years have passed in sorting out various issues on the project.
Originally, the project covered the purchase of 126 Rafale fighter jets from France and the tender had stipulated that the first set of 18 jets should come in "fly-away" condition. The remaining 108 were to be manufactured by HAL (Hindustan Aeronautics Ltd) in Bengaluru by the Transfer of Technology (ToT).
While the full details of the ToT have not been made public, there seems to be trouble or difference of opinion with the IAF seeking a delivery guarantee for the HAL made aircraft. What percentage of goods will be actually manufactured? What percentage of goods would be supplied by France? All this is yet to be clearly stated.
Sadly, the projected cost has gone up from $10 billion to $30 billion in two years and the project is "still in negotiation." It is possible that the costs will escalate further in the coming years after the initial production starts.
In the meantime, the French Defence Minister, Jean-Yeves Le Drian met his Indian counterpart, Manohar Parrikar, to expedite the ongoing discussions in order to clear the differences on delivery guarantees, price and at the same time expand Indo-French strategic cooperation. Further details may be expected soon.
In the meantime, while speaking at the Eighth L M Katre Memorial lecture, organized jointly by Air Force Association, Karnataka Branch, HAL and the Aeronautical Society of India, Dr Tyagi, Chairman of HAL, stated that more than 70% of the manufacturing needs of the IAF are met by HAL.
He is reported to have further said that, with the help of the DRDO (Defence Research and Development Organisation) and BHEL (Bharat Heavy Electricals Limited), HAL is "contemplating development of aero-engines" and that it is "gearing up to emerge as a technology-driven company".
According to Dr Tyagi, HAL "already has a blue print in place for creation of new divisions, modernisation and expansion of the existing plants, providing increased thrust to indigenous technology development, productivity and quality improvements to meet the challenges."
There is seems to be little doubt that Dr Tyagi has robust plans in place to include the proposed Indo-French manufacturing plans for Rafale fighters over the next 7-10 years. However, a 200% increase in the initial estimated cost of the project, which has now ballooned to $30 billion, is too high and needs to be thoroughly re-examined, as the project still looks to be at the blue-print stage. The story may take another turn when the production starts.
Also, to ensure quality and delivery guarantees, a workable solution needs to be found by mutual discussions, but all these should be done with a clear timeline, and not dragged on for years. Otherwise, there ought to be sufficient provision that any changes made in Rafale fighters, back home in France, need to be automatically incorporated in the Indian version to be made in Bengaluru.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
The real drivers of employment and growth in India are not the exalted corporates, but MSMEs, its time to stop giving them a raw deal
The clock is ticking fast for action by the Bharatiya Janata Party (BJP) lead government's action on job-oriented growth. The BJP manifesto also focused on what needs to be done to go beyond the appointment of committees for the Micro Small and Medium Enterprises (MSME) sector as the driver of ‘Make in India’ campaign launched during the first six months of the new government.
“Not all the perfumes of Arabia will sweeten this little hand,” goes the old adage. Over the years, a number of committees were set up to strengthen the micro and small enterprises sector. From the times of Puri and Thombe Committees of 1970s to the Dr KC Chakrabarthy Committee of the Reserve Bank of India (RBI) and the recent PMO Committee of the previous government. None of these failed to mention MSMEs as engines of growth of the economy.
Currently there are 32 national level funds which are in some way related to small enterprise development. Based on the Interim Report of the Committee on Financial Inclusion, the Union Budget- 2007-08 created two Funds of Rs500 crore each called: (a) Financial Inclusion Fund; and (b) Financial Inclusion Technology Fund, both with NABARD. Out of 32 existing Funds, 15 Funds were maintained/ implemented by NABARD and 7 by SIDBI. However, only 13 Funds were related to the MSME Sector.
The Dr KC Chakrabarthy Committee appointed by the RBI itself failed to give the required impetus for rehabilitation of a number of sick units. In fact, several bankers say that there are sick enterprises and healthy entrepreneurs driving Mercedes cars.
This sector employs on average of 4 persons for every one crore of rupees invested while for the same 4 persons a larger enterprise invests Rs50-100crore.
SIDBI, a specially created institution for the SSI/MSMEs, did not change its legacy as an outfit carved out of IDBI, dedicated to work for the large sector. In fact, the MSME ministry did compensate with several rightful interventions at different points of time both for entrepreneurship development and clusterisation as a panacea for several ills of the MSME sector.
Even today no bank branch displays the terms and conditions of financing MSMEs; no bank branch lends money without asking for collateral, save exceptions, notwithstanding the agreement with the Credit Guarantee Fund Trust for Small and Micro Enterprises (CGTMSE) that allows a Rs10 lakh loan without collateral or guarantee. Several Prime Minister's Employment Generation Programme (PMEGP) targets are either not met at all or half-met. This is in spite of relatively lower NPAs in this sector, when compared to all the other priority sectors and endemic NPA-hold of the corporate sector.
There are three distinct categories in the MSME sector that deserve careful inquiry and out-of-the-box solutions:
• The Micro enterprise sector consisting of artisans, village craftsmen, micro entrepreneurs and small service operators: These operate from cultural domains and inherited skills and locally available raw materials. These are all built on inherited skill-sets and keeping the artists and craftsmen barely on subsistence incomes. These are all treated as unorganized and high risk ventures by the lenders, which needs to change.
• The second category is the manufacturing sector in the micro segment: These include the carpenters, the cobblers, the blacksmiths and copper smiths in villages. Several of these categories are in the proven inefficient Khadi and Village Industries Commission (KVIC) umbrella. KVIC as intermediary financier is the biggest single NPA holder in the MSE lending portfolio of the PSBs. KVIC is the implementation window of PMEGP schemes. The targets were met to the extent of 30%-40% on an average and several evaluation studies revealed a list of benami borrowers that hurt the banks. The sooner this expensive outfit is reformed the better would it be for the country.
• The third important category is Manufacturing SMEs: In the event of a large enterprise failing due to market forces, inefficient management or lower growth of the economy, the supply chain is broken and the small and medium enterprises are hit. While the Debt Restructuring mechanisms work for corporates, it doesn't for the SMEs. SMEs should get access to these tools of debt management like larger corporates.
Grave injustice has been done to the sector in clubbing the first two categories with the third category. In fact, if one were to look at the lending mat for the sector one would realize that 85% of the MSME lending categorised as such under the priority sector took place in just 12 states in the country.
District Industries Centre, the delivery outfits of the state governments, save exceptions are working with outmoded ideas and support systems. The industrial extension officers hardly provide extension support. Some states like Tamil Nadu have revamped but much more is needed.
The task before the present government is huge but has to be attended with a sense of urgency if the ‘Make In India’ and Made in India have to move into high growth hemisphere. The first, of course, as the Finance Minister rightly identified is redefining the sector. The second is making guarantee mechanisms really work for the sector. The third is making the financial institutions leave off the hypocrisy while appraising the needs of the sector. Exceptional problems require exceptional solutions. India has tremendous opportunity to build a brand image around the MSME sector like never before. Acting in time is the essence.
(Dr Yerram Raju Behara is a former senior executive of SBI and former Dean of Studies at Administrative Staff College of India (ASCI). He is presently visiting Professor at Institute of Small Enterprise Development, Kochi and Advisor, KESDEE Inc, the E-Learning Centre at San Diego. The views expressed in the article are his personal.)