Earlier this month, the monetary policy breathed a fresh air and for once customers felt that some comfort existed for them too. Post-liberalisation, banks went on investing in technology and realising the costs of such investments through various types of charges imposed on the customers.
And now, after realising the cost of investment in technologies over the last two decades and more, it is time to pass on the benefits to the customers in whose name they adopted those technologies. Waiver of electronic transaction charges for a year, at least to start with, has been viewed as a big relief. ‘No Frills’ accounts norms also changed. Though interest rate changes disappointed the depositors, borrowers expect some transmission of rate reduction soon.
Prudential norms underwent changes giving comfort to the banks and borrowers alike. Resolution process provided leeway for the corporates running after bankruptcy courts to resolve their debt and start production/services to their full capacities sooner rather than later. The present environment of banking is transiting from dissatisfaction to hope for the better.
But the real challenge still remains: public sector banks realising the raison de ‘etre of their existence: the emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. While retail banking, home loans, real estate and the failed infrastructure loans held sway during the last two decades, change should come about in lending for agriculture, allied activities, micro, small and medium enterprises (MSME) finance and segmentation of retail sector loans to the needy.
Public sector banks (PSBs) heaving a sigh of relief over their bad debt portfolios coming under control, should now be looking for new ways of doing businesses. But do they? The increase in bank frauds reaching more than Rs71,500 crore in 2018-19 is a huge disappointment. Is technology facilitating frauds, coupled with an inability of the banks to supervise the staff and control them? Cultivating the technology to customers requires investment by banks in customer education, both online and offline.
Indian economy targeting a double digit growth has for long had competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Men at counters have now become slaves of the machine instead of being masters.
Apex institutions like the three and half decades’ old National Bank for Agriculture and Rural Development (NABARD) and the almost thirty-year old Small Industries Development Bank of India (SIDBI) are yet to deliver the intended benefits to the sectors they are meant for. Major earnings of these institutions come from treasury business.
Multiple funds held with SIDBI are yet to reach the micro and small enterprises. Both these institutions that have a wealth of knowledge in their human resources need thorough revamp and restructuring. Delaying the process would end up in further wastage of huge organisational resource.
Manufacturing MSMEs are in negative growth for almost a decade and half now. Several NBFCs focused on small business finance but the Infrastructure Leasing & Financial Services (IL&FS) and consequent failure of mutual fund promises, left the sector disappointed. PSBs have the option of exploiting the co-finance window but they are bogged by the mindset of collateralised loans. It is here that they need change.
Interestingly, one of the senior bureaucrats recently rued: ‘when did the banks fall in line with the aspirations and goals of the government – whether differential rate of interest scheme (DRI) loans, the Integrated Rural Development Programme (IRDP) loans, and Scheme for Self-Employment for Educated Unemployed Youth (SEEUY), until they were forced? Now is the time to look at the way to culture the banks into new ways of thinking and acting. This can come off only through change in governance and regulation.
With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion. Banks are yet to treat them as voluntarily favoured agenda. Institutional innovations like the small finance banks, small payment banks, India Post and the likes as also the micro finance Institutions (MFIs) have also proved inadequate to meet the needs of the present, leave alone the future banking needs of the population.
India’s future still lies in the rural areas; agriculture and allied activities and providing value addition to agriculture at the doorstep of the farmer; weaning away unproductive labour from farm sector to non-farm sector; revamping agriculture marketing with infusion of technology so that price recovery takes place at the source of production and building new skills and upscaling skills in farm sector with measurable outputs of such investments.
Government, the owner of over 82 percent of banking, should drive the sector towards this agenda.
The reach of banking should be tested in rural areas. Several PSBs are winding up rural branches. Regional rural banks that are supposed to cross-hold institutional risks with their principals and do social banking are set to merge with their principals. Institutions thus created for the rural areas will soon become extinct.
The big question that RBI should think about is – will double digit growth target of the Indian economy be possible without mainstreaming rural banking efforts? Should there not be a rethinking on maintaining balance between proximate physical banking and digital banking? A committee of either RBI or the union government could look into this aspect and arrive at the future course of action.
The whole incentive system in human resources (HR) in banks should move towards such an agenda. Selection of managing directors and directors on the board should discerningly look at the perceptions of such persons with such an agenda.
Kisan Bank for farmers, allied agriculture and agriculture marketing; Udyog Mitra Bank for lending to micro and small manufacturing enterprises and small business finance, Vanijya Bank for retail banking, home, education and transport loans, Moulika Vitta Vitarana Bank ( revive the development finance institutions for lending to infrastructure) would make banking portfolio banking with capacities to cross-hold inherent risks of lending.
The Union government would do well to have brainstorming sessions on these areas as the sector is trying to breathe fresh air now.
(Dr B Yerram Raju is an economist and risk management specialist. The views expressed are personal.)