10 steps to turn Public Sector Banks around without needing bailouts

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’)

Comments
SIVARAMAPRASAD KAPPAGANTU
7 years ago
Bail out! What exactly it works Sir.

A Bank for decades must have transferred its profits in the form of dividend to its Owner ie. GOI.

Whe its in difficulties, for various reasons, which are debatable, the owner is coming to the rescue of its own organisation giving very negligible amount of profits which were already in the coffers of GOI.
Simple Indian
8 years ago
While all the above points are valid, and would help make our Banking system far more efficient than it is, most of the points need political will for action. Yet, points 1-3 are notable, as Banks themselves could act on these. The RBI has taken a rather regressive step in enabling Banks to levy fees for ATM usage (beyond a mere 3-5 free usage). This will only enable 'better' circulation of cash / black money. In this day & age when most organizations seek to leverage on technology for better customer experience, RBI has empowered Banks to fleece customers, which is sad.
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