Money & Banking
'Tough times ahead for public sector banks'
Government-owned banks command a market share of around 70 percent
 
Government-owned mortgage lenders are suffering slippages in their non-performing assets (NPA) and would continue to lose business to private sector players till the Indian economy picks up, say experts.
 
"It is seen from the results declared by the government-owned banks they are continuing to suffer slippages in their NPA levels. Many banks are posting profits due to income from treasury operations and others," P.Karthikeyan, research analyst, Cholamandalam Investment and Finance Company Ltd, told IANS.
 
"The credit growth for banks remain muted. The NPA slippages have peaked out and should start coming down once the economy recovers and interest rates go down," he added.
 
According to Karthikeyan, the government-owned banks would lose market share to private banks in the meantime.
 
"Their profits would improve only from lower NPA when economy improves rather than increased business volumes. It would be difficult for government banks to regain from private banks the lost market share," he said.
 
Government-owned banks command a market share of around 70 percent.
 
Global credit rating agency Moody's Investors Service also expressed a similar view.
 
According to Moody's, the improvement in the credit profiles of Indian public sector banks will be achieved only in the medium term, given their high levels of impaired loans and weak capital positions.
 
"The improvement in the asset quality of Indian public sector banks for the fiscal year ended March 31, 2015, was marginal and much weaker than we had expected at the start of the same year," said Srikanth Vadlamani, a vice president and senior credit officer at Moody's.
 
Vadlamani was speaking at the first Moody's and ICRA Annual Credit Conference in Mumbai on Wednesday.
 
"A longer time-frame is needed for the credit profiles of public sector banks to improve, because their asset quality is tied to the slow, multi-year recovery of corporate balance sheets, and the lagging recognition of associated credit costs," he added.
 
According to Vadlamani, public sector banks exhibit significant capital requirements over the next few years, but their internal capital generation capacity is weak, while access to equity markets has been difficult.
 
The banks are therefore highly dependent on the Indian government (Baa3 positive) for fresh capital.
 
Experts however say that government will not be infusing additional funds into banks as in the past.
 
The central government has said capital infusions into its banks would happen only to relatively profitable banks.
 
"This may result in some weak banks getting merged with stronger one," Karthikeyan said.
 
"Given the low capital levels of public sector banks as a whole, the government's selective approach to capital infusions will put further negative pressure on the credit profiles of weaker banks," Vadlamani said.
 
On the modifications to India's framework for corporate bankruptcy, Vadlamani said the Indian budget's proposed introduction of a new bankruptcy law is credit positive if implemented as recommended, because the current weak framework is a major impediment in the banks' enforcement of creditor rights.
 
According to him, poor implementation of such bankruptcy regimes in the past was due to institutional capacity issues, and unless such issues are addressed, the weak mechanisms for the resolution of stressed corporates will remain a structural weakness within the Indian banking system.

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MUDRA Bank: Confusions galore
MUDRA’s listed role and functions carry with them a lot of ambiguity and confusion. Is even the Reserve Bank of India clear as to what role MUDRA would play?
 
The launch of Micro Units Development and Refinance Agency (MUDRA) Bank by Prime Minister Narendra Modi before he left for Canada, Germany and France on a nine-day tour is being seen as a landmark akin to ‘Garibi Hatao’ and Integrated Rural Development Programme (IRDP) of the forgotten decades. People say that name has a lot to do with institutions. The name and style of MUDRA has built into it an agency and a bank. It has in it, development and refinance as functions. 
 
What will be the rules of refinance? Same as that of National Bank for Agriculture and Rural Development (NABARD)? The failure of both NABARD and Small Industries Development Bank of India (SIDBI), which were opened with much more fanfare, have disappointed because the persons occupying key positions after the initial progressive Chairmen, were all from their parent institutions and their mindset did not change. 
 
Even today, a decision from NABARD moves like the wheels of the chariot of Lord Jagannatha of Puri. For example, the fund announced for promoting processing companies in 2014-15 languished till 31 March 2015 for want of putting in place the needed architecture. Same is the case with SIDBI, where the fund announced for micro and small enterprise (MSE) promotion and development hardly took off till the end of March 2015. 
 
NABARD has significant achievements on its report card like watershed management, self-help group (SHG)-bank linkage and dairy finance. It failed to strengthen the cooperatives and regional rural banks (RRBs), both as a refinance agency and supervisor. Similarly, SIDBI jumped into micro finance. It still has many unfulfilled expectations from the micro and small enterprises (MSEs), its principal mandate. Its IDBI culture made it move in favour of collateralised large volumes and prime lending institutions hardly saw it as leader in lending to the micro, small and medium enterprises (MSME) sector. Its Credit Guarantee Fund Trust Scheme for Micro & Small Enterprises (CGTMSE) has little to claim. Now MUDRA Bank joins as one of its arms! 
 
Both NABARD and SIDBI are fully owned institutions of government of India. Bharatiya Mahila Bank (BMB) that joined the league a year ago, is yet to report its strength in fulfilling the objectives for which it is set up. Is it failure of management or governance or policy or regulation? Is there a guarantee in waiting for the MUDRA Bank to behave better? How?
 
Both NABARD and SIDBI have grown under the culture of ‘suspect and respect’ instead of ‘respect and suspect’ borrowers who belong to the neediest sections of the society. MUDRA Bank for the time being at least is an appendage to SIDBI. Mudra’s role as has been announced includes:
Policy formulation for financing micro enterprises, small business firms and registration of microfinance institutions (MFIs);
Rating and accreditation of MFIs;
Setting benchmarks for best practices of lending , client protection and customer service;
Providing technology support to cover the last mile entity;
Formulating and running a credit guarantee scheme for micro enterprises;
Setting up a good architecture for micro finance; and
Acting as a development and refinance institution.
 
The above listed role and functions carry with them a lot of ambiguity and confusion to say the least. Is it going to be an institution engaged in policy for funding the poor or be a regulatory institution for the MFIs? It will secure a capital of Rs20,000 crore from the union government as part of budgetary grant. It will also gets Rs3,000 crore to provide credit guarantee to the primary borrowers as a risk cover fund. 
 
The Finance Secretary, while responding to some queries on the set up and functions mentions that the Bill, a year hence, would define the umbilical cord between the MFIs (even the MFIs would be defined then) and MUDRA. I am not sure whether even the Reserve Bank of India (RBI) is clear as to what role MUDRA would play and what type of clientele it would embrace? Will it be a refinancing institution as the name indicates? 
 
Any financial institution should have built-in capabilities for cross-holding risks among various client groups. MUDRA does not exude confidence in this direction, as there would appear to be a concentration risk in operations and sovereign risk in funding and governance. These risks need resolution up front instead of later.
 
The loan products announced, Shishu, Kishore, Tarun are highly innovative and one would like to see the conditions and timelines attached for the sanction of loans. Will MUDRA sanction them? Or will it refinance them? If it is refinance, when the banks do not fall short of resources, why would they borrow from MUDRA and do on-lending to the retail borrowers? Glitter of products should not be allowed to fade away in acts of inefficiency.
 
The political desire to provide access to the informal sector is one thing and putting in place the right policies, processes and right persons to execute it is another.  Hope that the government would carefully ponder over the organisational structure, nature, role and functions and have informed discussions and wide stakeholder consultations sans the west-bound institutions like the Accenture or PWC. 
 
MUDRA should be an institution embedded in the culture of promoting equity and discipline the cardinal principles of lending for the poor. Like many, I also have lot of hope and a hope that should see its fulfilment.  
 
(Dr Yerram Raju Behara is a former senior executive of SBI and an economist and risk management specialist. The views expressed in the article are his personal.)
 

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COMMENTS

Matyamad

2 years ago

The article doesn't specifies how NABARF and SIDBI failed and disappointed in development of MSMEs.

Satish Kalra

3 years ago

Dr Yerram Raju Behara has raised the right concerns at the right time. I think we should learn the lessons from the way NABARD & SIDBI has performed or not performed. NABARD has virtually become a Research Agency. SIDBI also is far from the desired objective of promoting the entrepreneur in the informal sector in Micro and Small Category. It is also difficult to break the inertia of Commercial Banks and generate in them the love for the informal sector.

REPLY

Bal krishna Gupta

In Reply to Satish Kalra 3 years ago

i AGREE.

Satish Kalra

3 years ago

I think the author has raised the right concerns at the right time. RBI and the GOI may like to examine. NABARD has become a University of Research Reports instead of making real contribution to being a Bank for Agricultural and Rural Development. SIDBI too has not contributed significantly to the Micro & Small Segment in the formal sector. If some readers need any data a casual perusal of the websites and reports of these institutions can make it clear.

Satish Kalra

3 years ago

I think the author has raised the right concerns at the right time. RBI and the GOI may like to examine. NABARD has become a University of Research Reports instead of making real contribution to being a Bank for Agricultural and Rural Development. SIDBI too has not contributed significantly to the Micro & Small Segment in the formal sector. If some readers need any data a casual perusal of the websites and reports of these institutions can make it clear.

Bal krishna Gupta

3 years ago

There is no point in designing new bottles for existing wines.
There are enough seekers : only the vendors, the usual suspects, the commercial banks,are missing in action.

The refinancing body, MUDRA, cannot by itself disburse the Micro loans.

As soon as it condescend to allow MFIs to lend to the Micro enterprises and refinance the MFIs in turn, the vicious circle would have started. The middlemen and in many cases the promotes of MFIs themselves would create Muster rolls of Farzi Borrowers and gulp the proceeds.

Bal krishna Gupta

3 years ago

There is no point in designing new bottles for existing wines.
There are enough seekers : only the vendors, the usual suspects, the commercial banks,are missing in action.

The refinancing body, MUDRA, cannot by itself disburse the Micro loans.

As soon as it condescend to allow MFIs to lend to the Micro enterprises and refinance the MFIs in turn, the vicious circle would have started. The middlemen and in many cases the promotes of MFIs themselves would create Muster rolls of Farzi Borrowers and gulp the proceeds.

Ramesh Ramaswamy

3 years ago

Very well articulated....

MG Warrier

3 years ago

One cannot deny that there remains enough ‘space’ for some more new institutions in the Indian Financial System. Problem arises, and that problem should not be seen lightly, when new institutions are floated when existing ones stray away from their responsibilities or government finds it expedient to entrust funds and responsibilities to a new organisation because the one which exists follows prudent norms, which, if applied to the clientele now targeted, will delay things. In addition to Mahila Bank of 2014 and MUDRA (Bank?) of 2015, RBI Governor is optimistic about a variety of small, medium and large banks opening shops during the next couple of years.
When SBI, UTI, IDBI, SIDBI, NABARD, RRBs and EXIM Bank were formed or structural or ownership changes were made in commercial banks and banks cooperative sector, there was close consultation between GOI and RBI which ensured smooth launching of institutions and introduction of changes. Mahila Bank and MUDRA are concepts which had fast=track launching. Regulatory and supervisory concerns and concerns of overlap of responsibilities should be addressed by GOI and RBI.

V. Jaganmohan

3 years ago

To convert MUDRA Bank into a potential game changer, Government should consider the following:
1) The Headquarters of the proposed MUDRA Bank should be located in any city which has less than one million population. Being in small city, it would be able to appreciate the requirements of small and micro businesses which are spread over thousands of villages and small towns. 2)It should recruit all young staff below age of 25 who have graduated in Commerce, Economics, Social Sciences or Rural Management. There should not be any deputation of staff from Commercial Banks, NABARD and SIDBI 3) 75% of staff recruited should have origins in small towns and villages of India. There should be minimum representation from Metro cities. 4) The Bank should adopt technology from the day one. 5) The Bank should also provide some refinance, apart from MFIs, to RRBs, Small Finance Banks and State Cooperative Banks for reaching last mile connectivity to small borrowers in non-formal sector. 6) The shortfall of targets in Commercial Banks with regard to lending to MSMES should be invested in MUDRA Bank on the lines of RIDF window of NABARD so that MUDRA would get cheap resources. 7) Govt. of India should place annual progress report on the performance of MUDRA Bank to Parliament to assess the impact being made by the Bank in reaching the unfunded.

Ajeesh Balu

3 years ago

How can one blatantly say that NABARD and SIDBI were failures? Compare various statistics- Incremental Food grain production during decades after independence and till now- Credit flow in rural areas- Self Help Groups that flourishes in the country- people who have come out of poverty. They might not have lived up to every expectations, but surely they have made a difference.

Further, the food processing fund was allocated to NABARD in October 2014 only and it could come up with the guidelines, get proposals and sanction projects worth 215 Cr. One should not forget that NABARD has consistently achieved the targets set to it by union government.

The job of an academician or a stray commenter is easy. The statements must be accompanied with real facts. As far as MUDRA bank is concerned, it will act as a refinancing agency. The author has pointed out that 'when the banks do not fall short of resources, why would they borrow from MUDRA'. The simple reason is if the banks were really into micro credit there would not be any need for MUDRA. But as we know the banks are hesitant towards micro finance sector. Refinance from MURDRA would provide them more funds(@low interest rates) to play around with even if they are flushed with funds. Hope MUDRA would realign the MFI sector with the much deserved focus and attention it deserves.

REPLY

B. Yerram Raju

In Reply to Ajeesh Balu 3 years ago

No public sector bank ever failed to achieve a target and NABARD too!! The speed of execution and reach are important. Look at the annual reports of NABARD that vindicate my point: Cooperatives that had share of 62% in agriculture credit when NABARD was established has come down to 14% in 2014 and still down now. Remember I gave credit where it deserved - watershed management, dairy, shg-bank linkage. it has more earnings from the armchair lending of RIDF and treasury management.
My comments are not from an academic economist comments - they are borne of the concern for the emergence of organisations with proper policies and culture up front. Anxiety to jump into bandwagon should not obfuscate the purpose and raison de etre for emergence for new institutions.

Charu Dutt Sharma

3 years ago

Very well written point Dr. Y. Raju. Headline should be Mudra Bank : Way Forward. In my view its right step in right direction. Only concern which you have pointed very well, is execution with right intent.

S K Agarwal

3 years ago

Most commercial banks in all practical approach at the small branch level shun financing upcoming entrepreneurs without proper security. Even they ask some security for financing under Govt schemes as they fear loss of money despite the fact that subsidy is received from Govt.

MUDRA will wipe out this fear and every small and very small entrepreneur willing to work, will get financial assistance.

Vasant Godse

3 years ago

Writers in Money life know everything about everything. Do we not give some time for an evolving concept? Theoretically time is needed for a system even to fail!Shall we that generous?

Vasant

Vasant Godse

3 years ago

Writers in Money life know everything about everything. Do we not give some time for an evolving concept? Theoretically time is needed for a system even to fail!Shall we that generous?

Vasant

Gopalakrishnan T V

3 years ago

No doubt good Institutions are real strengths for any economy to grow fast, but they cannot remain parasites and turn out to be white elephants in the long run. NABARD and SIDBI were set up with lot of fanfare but a seriuos introspection would reveal that they have not played their role effectively and both agriculture and small Industries have suffered over a period cannot be ignored. NABARD could have done wonders by playing the role of a coordinating agency bringing in the necessary infrastructure to give a boost to agricuture and rural development.Agricultural sector suffers for want of adequate and timely finance, lack of adequate infrastructure like roads, stoarge, transportation , marketuing and exploitation my politicians and middlemen in all possible ways one can imagine. If NABARD had been proactive, agricultural greowth and its share in GDP would not have registered such a steep fall and shamed the nation which is predominantly an agricultural one.The farmers even today suffer for want of irrigation, insurance, timely finance, infrastructure etc which NABARD could have easily taken care of with proper coordination with states agricultural departments, Insurance Companies, marketing and distribution agencies with proper storage facilities and cheap transportation facilities. Instead they concentrated on refinancing ignoring the presnce of Cooperatives, RRBs and other agencies involved in rural development. The fact remains that after creation of NABARD, agriculture and Rural segment has suffered cannot be challneged.Similar is the case with SIDBI. Small Scale sector which is the provider of maximum employment opportunities and which can give a boost to our exports have not been given the required support to grow with all potential it had. Institutions are there to identify the gaps in infrastruture, the potential for growth and provide the required support in terms of finance, professional management for enhanced, productivity with quality and export etc.Hope MUDRA Bank will learn its lessons from the failures of NABARD and SIDBI and will emerge as a unique set up to set up and support new and old micro units. The author has expressed his concern from past experience and seeing perhaps the poor performance of agriculture, Small scale units and micro units with all institutional presence exclusively set up for giving a phillip to the rural segemnt.

Rajan effect: Banks start cutting lending rate by up to 0.25%
It took a push from the RBI governor for banks to start reducing base rate for lending 
 
Following strong push from Dr Raghuram Rajan, the governor of Reserve Bank of India (RBI), several banks have started reducing their base rate for lending by up to 25 basis points or 0.25%. ICICI Bank cut its base rate by 0.25% to 9.75%, while State Bank of India (SBI), the country's largest lender and HDFC Bank reduced their base rate by 15 bps to 9.85%. Private sector lender Axis Bank revised its base rate by 0.2% to 9.95% while Lakshmi Vilas Bank cut the rate by 15 bps to 11.1%.
 
With the two rate cuts of 25 bps each, not being reflected in lower interest rates for lending, RBI governor Dr Rajan said, the central bank has maintained a status quo this time until the monetary transmission takes place or lending rates become sensitive to the policy rates.
 
In a statement, he said, "Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review."
 
Earlier, the RBI announced two rate cuts in January and in March in a hope that it would help reduce lending rate and thus benefit end borrowers. However, it did not materialise. In fact, when there was a status quo maintained by the RBI during 2014, banks were found regularly reducing interest rates on deposits. 
 
In January 2015, RBI, for the first time since May 2013, reduced the repo rate by 25 basis points to 7.75%. The central bank had kept the benchmark interest rate at 8% since January 2014. However, despite huge expectations from borrowers, there was hardly any change in interest charged by lenders.
 
Now look at the other situation. Whenever RBI announces an increase in its monetary policy rates, housing loan-providers, such as banks and finance companies, are quick to hike interest rates. However, these lenders never show the same efficiency, when there is a rate cut by RBI.  
 
This happens because RBI has given banks freedom to set their interest rates. RBI, in its master circular issued on 1 July 2014, has said, “Banks may, with the approval of their Boards, determine the rate of interest, keeping in view the size of accommodation, degree of risk and other relevant considerations.”
 
Banks often cite easy liquidity and slow credit offtake as main reasons for cutting interest rates on deposits. According to media reports, the reduction had been due to deposit growth outpacing credit growth, a drop in the money market rates and aligning with the competition, which had already cut the rates.
 
If at all banks have more liquidity and credit offtake is slower, why the lenders are not lending more or even thinking about reducing interest rate to attract more borrowers? This is not likely to happen. Because, banks, under the leadership of Indian Banks' Association (IBA) appear to be more interested in fleecing customers under different charges. One look at banks’ balance sheet would reveal how much they earning from other and other fee based income, rather than from interest earned.
 
When there is a rate cut in monetary policy, lenders first reduce their interest rates on deposits and, only when their average cost of funding comes down, they reduce their base rate. Another reason for lenders not reducing their base rate is that such action affects a major chunk of their loan portfolio and, thus, their balance sheet (read profit).
 
Coming down heavily on banks for not passing the rate cuts to borrowers, the RBI governor said, the notion that the cost of funds for banks has not fallen is 'nonsense'.  
 
While announcing the monetary policy, Dr Rajan said RBI like to encourage banks to move in a time bound manner to marginal cost of funds base to determine their base rate. The Reserve Bank will issue a guideline soon in this regard. This may have prompted banks to cut lending rates, albeit by a small percentage, compared with their reduction for deposit rates. 
 
With the introduction of the Base Rate on 1 July 2010 banks could set their actual lending rates on loans and advances with reference to the Base Rate. At present, banks are following different methodologies in computing their Base Rate – on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). "Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates," RBI had said. 

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COMMENTS

SuchindranathAiyerS

3 years ago

Raghuram Rajan is as steeped in theory and propaganda as the average member of India's higher judiciary. Market Forces? In a country where Government owns and has fashioned a cartel out of more than 90% of all Banking, exempt from the MRTP Act and subjected to no law unless you want your grand children to continue a typically prejudiced case after your demise? A Banking system festooned with Bad Loans thrust upon it by its constructive owners, The Neta-Babu-Cop-Milard-Crony Kleptocracy of which Both RBI and the top Management of Indian banking are an integral part? Really?

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