LEST CREDIT CULTURE GETS KILLED!
This is with regard to “Greater Scrutiny, Not Less Vigilance” by Sucheta Dalal (Moneylife, 17 April 2014). I wish to make a few comments on large corporate loan approval system generally prevalent in the PSBs (public sector banks). You are absolutely right in calling for greater scrutiny of large credit/advance proposals and their follow-up. Here are some hard realities.
In most banks, proposals first get processed in the corporate finance/large credit branch which has fairly well-trained staff. The staff here have interaction with the client’s representatives, not uncommonly, accompanied by consultants—nothing objectionable, by itself. But it is known that some of these ‘consultants’ are little more than brokers appointed for the purpose of ensuring smooth processing. They follow the movement of the files all the way up.
From this branch, the proposals move up in the hierarchy—to one general manager (GM) in the immediate controlling office to a group of GMs at the head office who recommend the proposal to the EDs (executive directors) and then to the CMD (chairman and managing director).The proposal then reaches the board for sanction. It is not often that head office officials have any discussion with the borrower; nor do they visit the place of business or manufacture to get a perception of risk. Senior management, by and large, thus get led by the initial recommendation from the branch. These officials are expected to bring to bear risk perception on a credit proposal based on their experience, general reading of industry, economic activity, policies of the government, Planning Commission. But they often end up as file-pushers. They are an overworked lot.
It is unfortunate that credit departments are understaffed which is one of the basic causes of inadequate appreciation of risk at the appraisal stage; worse still, there is not sufficient critical follow-up.
In recent years, consortium meetings of lending banks have been ineffective as member banks, often, send their relatively junior officers, who do not know enough about the credit proposal, to participate. The meetings generally tend to endorse the stand taken by the leader without much meaningful discussion. The consortium system is not only for sharing of loans but also to appraise the risk potential and evolve a system of follow-up to make sure the risk element has not got widened or the borrower is not acting too smart. If the follow-up were effective and the consortium members were vigilant, the Kingfisher loan would not have sunk so low, for example. As the old adage goes, eternal vigilance is the price of a healthy credit portfolio. Understaffed credit departments and frequent transfers of officials (as prevalent in PSBs) are not compatible with this objective.
One other failure in the appraisal system is inadequate market intelligence which the bank officials can gather, if they meet a cross-section of industrialists, traders in, say, the chambers of commerce and such other organisations. The Deccan Chronicle case is one glaring failure of market intelligence. More than 10 banks gave the company unsecured loans of Rs4,000 crore as a herd as an exercise in name lending without much scrutiny about the purpose, or even knowing the overall debt the company was gleefully contracting. Being unsecured, there was no charge created on the assets and, hence, no registration of banks’ interest was required at the registrar of companies office. The rest of Hyderabad knew about the daredevilry of Deccan Chronicle, not the bankers. Some other cases cited in the article fall into this category.
The ultimate check, or scrutiny, is at the level of the board or its committee. Given the composition of the board (which, in many banks, is plainly ineffective), one can hardly expect better results. Add to this the myth that large loans to PSUs (public sector undertakings) are virtually risk-free and PSBs have an implicit duty to assist them—for example Air India, Scooters India or even the state electricity boards.
As was rightly pointed out by Moneylife, the entire system needs revamping; interaction with CVC (chief vigilance commissioner) is only one such effort, lest credit culture should get killed.
PV Maiya, by email
BRANCH MANAGER EXPERIENCE NEEDED!
I am a registered user of Moneylife website. I have also subscribed to the magazine Moneylife. I regularly go through all the articles. Moneylife is doing a wonderful job.
I am a retired banker settled in Chennai. I have seen the pre-nationalisation, post-nationalisation periods of banking. Now, I am witnessing the liberalisation, privatisation and globalisation in banking.
If we sit in the balcony of the fifth floor in a busy area like Fort (Mumbai) or Connaught Place (New Delhi), during the peak hours and watch the traffic without being caught in it, it will be very amusing. The present financial markets offer similar experience.
I read the Moneylife article (3 April 2014) about Dr Chakrabarty, outgoing DG (deputy governor) of RBI (Reserve Bank of India). I know him personally. He is a brilliant man with excellent understanding. When I look at him, I am reminded of a story on Adi Sankara.
When Sri Sankara defeated Mandana Misra in his debate, Misra’s wife joins for a discussion on family life. Sankara had to seek some time to understand family life to participate in the discussion. To become a complete person, one has to undergo all facets of life. Unfortunately, Dr Chakrabarty never worked as the branch manager of a bank to have the first-hand feel. He is an intelligent economist. This alone will not make him a perfect banker. One senior bureaucrat used to say, unless an IAS officer works as the district collector for some period, he cannot become a perfect secretary. I am an admirer of Dr Chakrabarty but sometimes feel sad to hear about stripping of his portfolios or his premature exit. After all, life is not what we want but what LIFE wants.
SM Ravipati, by email
WHY CHARGE FOR DEBIT CARDS?
This is with regard to “Happy days are here again for bank customers?” by Gurpur. Charging for issuing a debit card, by any bank, is a ‘crime’. Issuance, and the consequential use, of the debit card saves the bank a variety of costs, viz., deploying men and machines at the counters and also saves a lot of managerial time.
RBI is earnestly requested to intervene and direct the banks not to charge for debit cards.
RBI SHOULD BE MORE TRANSPARENT!
This is with regard to “'Get More Customer-friendly', says Rajan” by Sucheta Dalal. Thanks, Dr Rajan for making a good beginning.Moneylife has always rightly demanded an end to commercial banks indulging in hawking of third-party products which they are simply not geared to service after sale. They should simply not carry out any business other than traditional banking.
The Reserve Bank of India has to be more transparent and invite more dedicated bank customers and professionals on their committees rather than continue to retain the same old ones, however big a name he/she may be in the profession.
No political appointees please!
This is with regard to “Madras Stock Exchange to be history soon.” I am feeling nostalgic. I still remember the days I bought and sold Orkay, TISCO, GV Films, Kothari Industries, etc, from MSE through a broker. The shares were ordered, if activity was witnessed in any counter. quotes of these shares, published in The Hindu’s stock prices page, were the main source of information for judging whether a counter was active or not.
GOOD, ANALYTICAL ARTICLE!
This is with regard to “Consequences of Income Inequality” by William Gamble. Good, analytical article! Not many serious readers to appreciate?