Banks are basically meant to allocate capital to businesses and consumers efficiently. Post demonetisation, customers feel the pain more than gain in banks. Farmers getting inadequate and untimely credit from banks take to huge private debt, only to commit suicide later.
Manufacturing micro and small enterprises, the seed beds of employment and entrepreneurship, are being shown the door by the banks, notwithstanding the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) guarantee up to Rs2 crore. Banks never went beyond the mandated Rs10 lakh guarantee cover for the medium and small enterprises (MSE).
A large number of customers are slapped with irrational minimum balances in their accounts and levied of penalties at will. The Reserve Bank of India (RBI) is averse to regulate such actions on the excuse that micro-management of banks is not their role.
With over 38% of the population illiterate, Jan Dhan and Mudra Yojana, as instruments of financial inclusion, have only become compulsive agenda for the banking sector. Banks, public or private sector, have their eyes set only on profit. Such profits are dwindling with net interest margins declining following the growing non-performing assets (NPAs).
Institutional innovations like the small payment banks, India Post and their likes, as also the micro finance institutes (MFI) have also proved inadequate to meet the banking needs of the population.
Cashless banking leading to poor inflow of deposits during the last four months and cashless automated teller machines (ATM) demonstrate the erosion of faith in banking in India. Bad banking and good economy cannot co-exist and, therefore, it is imperative that innovative institutional solutions should be thought of.
The Indian economy, targeting double-digit growth, has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Executives at counters have now become slaves of the machine instead of being masters. Public sector banks (PSB) have long back forgotten their purpose, with their owner proving no better.
The emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. In fact, the Narasimhan Committee (1991) suggested consolidation and convergence of the PSBs into six banks to serve the needs of the service sector, to hold government securities and for retail lending; local area banks (LABs) to cater to farmers and small entrepreneurs; an international bank to cater to the needs of exports and imports. Development finance institutions, left untouched, would fund the infrastructure sector. The Financial Sector Legislative Reforms Commission (FSLRC) also echoed the same in its report. This is the time to look at the spirit of such recommendations and rebuild the banks to regain the fast eroding trust in the banking by the large customer base of this country.
Breaking the nexus between the farmer and politician can happen only when there is mutual trust between the bank and the farmer. The farm sector, consisting of crop farming (organic, precision, and green technologies), dairy farming, shrimp farming, poultry farming, sheep farming and agricultural marketing, by itself is inherently capable of cross-holding risks, save exceptions like the tsunamis, severe drought for long spells and typhoons. It is only in the event of such natural calamities that a Disaster Mitigation Fund should come to the rescue.
The existing commercial banks should shed this portfolio in favour of regional rural banks (RRBs) and merge all the rural branches with the RRBs. RRBs should be redesigned to take to farm lending in a big way – from farm machinery to crop farming and allied sectors -- on a project basis. Insurance plays a vital role in mitigating credit risk and, therefore, the insurance products should be redesigned and modified on the lines of the South Korean model.
All the rural cooperative banks (RCB) could continue their lending to the farm sector, parallel to the RRBs, as the lending requirements are huge and farmers require multiple but dedicated lending institutions.
The RBI has not been comprehensive in regulating the sector. It is better that the National Bank for Agriculture and Rural Development (NABARD) is restructured to play an exclusive refinance and regulatory role over the entire farm and rural lending, consistent with its purpose of formation. Its other functions like the Rural Infrastructure Development Fund (RIDF) can be relegated to a new institution hived off from the NABARD.
Udyog Mitra Bank
Nurturing entrepreneurship and promoting employment in manufacturing are moving at snail’s space in the Start Up, Stand Up and Make-in-India initiatives. The Prabhat Kumar Committee (2017) called for setting up a National MSME Authority directly under the Prime Minister’s Office (PMO) to correct the milieu.
All the MSEs should be financed by dedicated MSE bank branches. All the existing SME branches should be brought under a new regulatory institution. Small Industries Development Bank of India (SIDBI) has disappointed the sector. It has to first consolidate all its funds into just five: incubation fund; venture capital; equity fund to meet the margin requirements of MSEs when and where required; marketing fund to meet the market promotional requirements; technology fund; and revival and rehabilitation fund.
SIDBI should reshape into refinance and regulatory institution for the MSME sector with focus on manufacturing and manufacturing alone. It should divest its direct lending portfolio to avoid any conflict of interest. Its present lending to real estate and non-manufacturing MSME lending should be transferred to the commercial banks. RBI, which is not currently able to cope with the regulatory burden of this sector, can transfer it to SIDBI,
Vaanijya Banks (Commercial Bank)
All the existing commercial banks – both in the public and private sector – would do well confining themselves to project finance, lending to real estate, services sector, housing, exports and imports etc. All the banks should constitute, at the board level, a sub-committee on development banking to work on the transition arrangements to the above functionality.
Maulika Vitta Vitarana Sanstha (Infrastructure Bank)
Huge NPAs have grown from the practice of lending long with short-term resource base, coupled with lack of experience in assessing the risks in lending for infrastructure projects. ‘All the perfumes of Arabia’ (RBI’s structural debt restructuring solutions) did not cleanse the bloody hands of banks. It is time to revisit the universal banking model and re-establish an Infrastructure Bank to fund the infrastructure projects and logistic parks.
These measures would help achieving growth like never before.
RBI and government of India could constitute a high level committee to work on the modalities for transiting to the new structural transformation of the financial sector.