In 1999, I wanted to transfer money to my friend in the US; it cost me dear and took seven days to reach. In 2020, it happened in just 24 hours for sending a gift to my daughter in Canada. Local remittance, telegraphic or mail transfer used to take no less than a day and a week, respectively. But today it all happens instantaneously. Technology has changed all. Digitisation helped many less literate people access banking services on their mobile. Banking is in their palm.
The cab driver to wayside worker holds an affordable smart phone and transacts his money transfers with ease.
Suddenly, some of them found that their account balances moved from five digits to four digits and from three to two digits at the end of the year. They realised that the comfort came at a huge cost. The pleasure of this comfort in bank transactions is instantly gone when recognition of customer changed from person behind the counter to machine in front of him.
The customer is damned. Reserve Bank of India (RBI) appointed customer service committees; directed the banks to conduct customer service meetings fortnightly; created internal Ombudsman in the Banks and RBI level to redress the grievances of customers.
Machines have come to see the customers more than the persons manning the counters. Any grievance of the customer is responded to by the machine first with a fixed timeline. Again, at the fixed timeline, the response to the grievance also comes off whether resolved or not. At the bank counters and back offices where the businesses had to happen, there was greedy pursuit of third-party product sale.
The finance minister (FM)’s recent exhortation to banks to care for the customer and not for rating agencies was like music to the ears of citizens in this environment. Will the banks ignoring the instructions of the RBI to hold fortnightly meetings of customers at their branches care for this public call?
RBI governor Shaktikanta Das recently mentioned that “despite the recent decline in impaired assets and a significant improvement in provisioning, profitability of the banking sector remains fragile.”
Post liberalisation, public sector banks (PSBs) turned neither profitable nor social. They have been bleeding incessantly. Capital refurbed for more than 20 years at different levels to different banks with the hope they would revive!
Indian banks in 2020, despite digital disruptions, are very much akin to the banks in the US and Europe in 2008-09 with a fraud ticket in 2019 of Rs1.13 trillion, credit growth despite all the oxygen pumped in by RBI, is at an all-time low of 6% going by the latest CRISIL report.
Banks came to focus more on capital adequacy than responsible credit delivery. They became more inward looking than looking at matters that make good business sense.
Recent unorthodox long-term operations (LTOs) and cushioning cash reserve ratio (CRR) for credit to auto, housing, real estate and micro, small and medium enterprises (MSMEs) to inject liquidity is yet to result in credit flowing to the needy sectors. It is not so much liquidity as the risk aversion that needs tackling.
Can we introspect? Banks’ embrace with technology landed them in somnambulance (sleep walk). Recruitment took a turn to lapping up tech-savvy youth. Post-2010, banks have noticed that there were no mentors. Most seniors happen to be of post-liberalised era where the value systems of banks were in transition. Persons whose commitment to customers is seen through technology window have all today become the top management. Knowledge of banking is less than that of technology.
Direction to the field executives also took a swift turn to more recovery than lending having been saddled with key risks arising from credit origination. Adding to such swifts is the transformation in the economy – a slant to digitisation with services sector seen as the panacea for growth because of its contribution to gross domestic product (GDP) hovering between 8% and 10%.
Private capital started flowing into services sector more than the manufacturing or agriculture sectors because of high annual yields—a near 24% with very little lag. The politics of economics made wrong decisions in allowing loan waiver as a remedy for recovery in farm sector. Corporates were favoured the huge haircuts—whether with or without Insolvency and Bankruptcy Code (IBC)—no less than 60% and even stretching to 72% of the blocked debt. There emerged a scene of competition as it were, in loan waivers or write-off among the productive sectors.
Gigantic institutional frauds like those of Vijay Mallya, Nirav Modi, Punjab National Bank (PNB), Punjab & Maharashtra Co-operative Bank (PMC Bank), have put pressure on the regulator.
Firefighting has become the focus instead of well-lubricated reforms. Financial sector reform became freewheeling in size as the panacea for taking banking to global acceptance. Bank mergers are yet to show up the projected results. Lessons of too-big-to-fail globally did not have impact on Indian policy-makers.
Credit origination risks were at the bottom of the low and sulking growth of banking. Capital adequacy norms of Basel were once the subject matter of discussion in any forum for almost a decade. After the deficient capital arising from inefficient banking has been buffeted by the government in PSBs that ceased to be the concern.
RBI may appoint a committee to recommend ways in which banks can reduce the service costs in the context of increasing transaction volumes and systems established long back with only software costs adding up frequently.
We seem to have reached a blind lane walking with closed eyes and deaf ears. Bad banking and good economy can never travel together. The $5 trillion economy prospect cannot afford the luxury of leisure in tackling this current imbroglio in financial sector.
Customers are waiting for the benefit of technological revolution to result in better experience, risk management and higher return to shareholder. But the corona virus hit globe defies technology.
RBI has been looking at modifications to the supervisory framework—both onsite and offsite. In the context of rising frauds aided by systems, it is worthwhile for the regulator reintroducing branch inspections on one side and more frequent system and forensic audits on the other.
The clarion call is for strong regulation, effective and continuous monitoring and supervision of the RBI that once saved the Indian banking system from the global financial turmoil in 2007, notwithstanding the risks the banking system carried due to the inter-linkages between institutions and markets both in India and abroad.
(The author is an economist and risk management specialist. The views expressed are personal.)