Indian banking scenario and RBI’s new avatar

To an activist like me, the greatest loss is the fall in the quality of banking services to the smaller customers, more particularly the elders, disabled, home maker-women, widows and pensioners

Any right thinking Indian will certainly question the wisdom of the Raghuram Rajan, the newly appointed governor of Reserve Bank of India (RBI) mooting a proposal to allow foreign banks to take over our over century old  domestic banks. The situation is so bad overseas that our veteran bankers can do well to manage over the badly performing foreign banks.

The statement in Washington on unveiling “major banking reforms” that will entail allowing foreign banks to take over domestic banks has rightly raised heckles across the country.  Bharatiya Janata Party (BJP), the main opposition party, has come out with a strong statement to say that this goes contrary to the Centre’s stand that its “policy of nationalisation of banks will not be reversed. Are we importing a financial crisis? The decade-old experience of foreign banks in India is that they only compete with Indian banks in the creamy business segment. Their contribution as far as financial inclusion is concerned is very minimal and below expectations. Even on the concept of new private banks the issue needs to be debated.”

The All-India Bank Employees Association states that they “strongly oppose proposals aimed at take overs as they are against our country’s interest. At present 80% of the banking sector in India is under the public sector, 15% under private sector and only 5% are foreign banks. The foreign banks have never contributed to India’s economic growth and development – they are only interested in profits… Some of these have been involved in various scams in the past and their licences ought to have been cancelled. The experience of the US and other countries shows that liberalised banking has led to crises and collapse of banks. In the US alone hundreds of banks have shut down and the US Government had to bale out the bigger banks.”   

Over the years, our banking has been robust enough to withstand the Great Depression, the Far East crisis, the Mexican crisis, and the 2008 sub-prime meltdown. How much the nationalisation of major banks contributed to this is still a matter of debate, not many are willing to concede that the great state bailout of the US, British and Irish banks is indeed Backdoor Nationalisation, giving rise to the lesson that governments will not let banks die and tax payer’s monies will be used to rescue them from their greed. Comforted by this, banks all over continue to innovate financially  the ways to transform themselves from traditional deposit-taking retail undertaking, solely guided by their responsibility to their main stakeholders, the depositors and as facilitators of credit for trade and industry and underprivileged through inclusive growth, into universal banks.

In the US, Lehman Brothers aggressive loans to sub-prime borrowers became stressed assets and required a massive bailout by the state. JP Morgan agreed to pay the UK and US regulators $920m for the $6.2b ‘London Whale’ trading fraud.  HSBC, Britain’s biggest bank, was accused by the US Senate for abetting money laundering by drug cartels and gun runners running into billions. In 2012, Barclays was fined for LIBOR manipulation and the Swiss UBS was hauled up for tax evasion. The big banks in the UK and Switzerland are mired in major scandals with the US Treasury and regulators imposing massive penalties running into billions and jail terms for violations for offences as bad as cross border money laundering. In the latest money laundering sting operations in India the foreign banks were also caught with their pants down.

A Deutsche Bank staff e-mail in 2007, that is cited in Unitech’s court documents filed in the London court on the first day of appeal hearing where the Indian property firm Unitech Ltd is seeking invalidation of the interest-rate swap manipulation of the benchmark interest rates with Deutsche Bank because of alleged rigging of the LIBOR is quite explosive. A similar case is being heard between Guardian Care Homes filed against Barclays Plc. Both Unitech and Guardian state that would not have signed the swap deals with the banks had they been aware of the LIBOR-related misconduct that became a scandal when the London-based Barclays was fined by the UK and US regulators last year.  The global probes are on into the banks’ attempts at manipulation of the benchmark for profit that resulted into fines and settlements totalling $2.6bn for Barclays, Royal Bank of Scotland Group Plc, UBS AG and ICAP Plc.

The current Indian scenario

Indians, traditionally have inherited a conservative philosophy that is at odds with that propounded by global conglomerates fired by the self-serving urge of super-profits as defining their reasons for existence untouched by the real economic niceties.  Basic regulation is a must to ensure that the system doesn’t collapse—there is fiduciary responsibility.       

The economic media carries lively debates on the issue in their editorial pages. Ashoak Upadhyay writing on In banking, don’t ape the West points out “In its urge to ‘liberate’ the banking sector from government control and throw it to private players, India seems to have forgotten the lessons of 2008 financial met down in the West”.

To an activist like me, the greatest loss presently is the fall in the quality of banking services to the smaller customers, more particularly the elders, disabled, home maker-women, widows and pensioners. In the name of computerisation there are delays in dispensing cash, updating pass books, issuing new cheque books, deleting of names of deceased customers, issuing of certificates and statements of accounts; centralised clearance of cheques in bouncing without the dealing branch being aware are blamed on the ‘back office’ activities. The personal touch of the extremely friendly next door neighbourhood banker is lost for ever with the arrival of these customer un-friendly e-banking processes.

Indians, traditionally, have inherited a conservative philosophy that is at odds with that propounded by global conglomerates fired by the self-serving urge of super-profits as defining their reasons for existence untouched by the real economic niceties.  Basic regulation is a must to ensure that the system doesn’t collapse - there is fiduciary responsibility.       

Increasing the role for the private sector in contemporary banking—pros and cons

Over the years, Indian banking sector has seen Morarjibhai’s Social Control to Indira’s two phases of outright nationalisation of 14+8 banks, later on Narashima Rao’s post-liberalisation partial disinvestment and now the invite into mainstream banking of private players and NBFCs (non-banking finance companies), who are the new kids in the bloc.

Our financial mandrins do not seem to be at a loss on in how they really want to go about major banking sector reforms. At one point in time, P Chidambaram, the finance minister, was seen to be gaga to strongly campaign for the merger of , big and small, to make them global competitive because our biggest banking behemoth SBI still does not stand high in the pecking order of the world’s TOP 25 commercial  banks. Our public sector banks (PSBs), as a group, continue to enjoy a dominant market share of 72%.  The finance minister backed by the prime minister have suddenly started ardently espousing with great gusto plans to set up more private banks by business houses. He has got a very reluctant then RBI Governor to draw up the Guidelines.

This move has not found favour with 30 member multi-party Parliamentary Committee on Finance headed by Yashwant Sinha, a former union finance minister. The panel unanimously adopted the report on September 27, 2013. It now emerges that Rahul Gandhi and six other Congress MPs (Members of Parliament) in the committee have also lent their weight to reverse the government proposal, though in fact they have not appended any note of their dissent. This happened on a day Rahul Gandhi stunned the government by condemning the Ordinance to protect convicted lawmakers from disqualification by coming out with a strong statement - “I tell you my opinion on the Ordinance is: That is complete nonsense. It needs to be torn out and thrown away. It is my opinion.” Perhaps he’ll say the same of the finance minister’s move too!

This Parliamentary Report very rightly urges the government to avoid a recurrence of the pre-nationalisation situation of managements of private banks extending undue favours to their own industry owners – “Given such a background, the committee is apprehensive that industrial/business houses may not be geared to achieve the national objective of financial inclusion and priority sector lending.” It also rightly suggests that industry and banking be kept at arm’s lengths because banking is a highly leveraged business involving public money and public welfare. It also questioned the RBI criteria of ‘sound credentials and integrity’ as being highly ‘subjective, ambiguous and open-ended’. The numbers put out by committee are extremely revealing – Out of the 12 new banks set up after the 1993 and 2001 RBI guidelines  one with serious erosion of net worth had to compulsorily merged with a PSB, two with poor governance amalgamated with other private banks and one started by an individual has survived, albeit with muted growth.  This it ought to raise eyebrows. It is said that only 2,699 or just 17% of the 15,630 of their branches are located in rural areas whereas they are competing cheek-by-jowl with each other in Mumbai, in some cases with more than one branch of the same private within one kilometre radius.

Union Finance Minister P Chidambaram, speaking at a function at Bengaluru on 5 October 2013 said, “Banks are meant to serve largely the poor and middle class individuals who need banks more than the corporates...For long we have harboured the myth that banks are meant to provide money to rich people and to corporates. Nowhere in the world, other than India, do corporates come to banks for working capital…Each of the new banks should aim to serve the people differently and not try to become clones of existing banks.” When we are aping all kinds of Western practices the finance minister should instruct the RBI to instruct banks not to extend working facilities.

Banks cringe on offering higher rate for the hard earned savings of the elders, disabled, widows and charitable trusts; but in trying to woo rich and corporates offer higher rates for what they term as “Bulk deposits” that now Rs1+ crore which was Rs15+ lakh earlier. Will the Ministry of Finance insist that the new banks go by what the finance minister says?  

Not to outdone, the RBI has fielded its executive director, B Mahapatra to argue its stand on allowing private sector operators. He says that the corporates with NBFCs, insurance companies and mutual funds, are already competing with the banks both on the assets and liabilities side. He claims that they have a long history of building and nurturing new businesses in highly regulated sectors like telcom, power, airports, highways, dams and ports. RBI feels that it may not lead to undue concentration of control of banking activities as Indian banking is largely dominated by the PSBs and believes that financial inclusion being the overall objective of the present bank licensing policy that business houses with deep pockets can possibly fill in the gap because financial inclusion is an extremely highly capital and technology project.  RBI further envisages that the new banks will usher newer business models, products, processes, and technologies, higher levels of productivity, efficiency and better customer services. It is expected that the existing banks will re-orient their businesses to withstand competition or risk customers moving over to the new banks.            

Bakhtiar Dadabhoy, in his recently published Barons of Banking (Random House), traces the history of banking in India to the indigenous bankers who created in 1860 the practice of hundis that exist even today. Proper banking began with the Bank of Bombay (1840), Bank of Madras (1843) and Bank of Calcutta (1860) that were amalgamated to become the Imperial Bank of India in 1921; post-independence it became the State bank of India (SBI). Though joint stock banks were first permitted in 1860, many of today’s big banks arrived during 1906-13. The present day Canara Bank and Corporation Bank were incorporated in Mangalore and Udupi respectively, in 1906.

I am indeed privileged to hail from the district of South Kanara, at the southern most tip of the state of Karnataka, which was once considered the most banked district in the country, if not all over the world. This district has been the cradle of four of India’s largest banks in the public sector viz Corporation Bank, Canara Bank, Vijaya Bank and Syndicate Bank; besides at one time also of a plethora of twenty two smaller banks that ultimately merged with their big brothers over a period of time. All told they made for a high network of brick and mortar branches in every hamlet dotting the district spreading banking literacy down the line. None of the founding fathers of these banks were any finance or banking wizards—one was a trader, another a lawyer and the third a medical doctor, all making for very successful bankers. Bankers hailing from this district have also made it from the bottom rising to the very top echelons as chief managing directors (CMDs) of banking hierarchy both in the public and private sectors and the RBI too, even to this day. Benegal Narshing Rao was a RBI governor, Kishori Udeshi and Leedhar were deputy governors.  More are  CMDs of PSBs today.

Banking then

In the good old days, when times were good, banking then was a cakewalk. Both the householders and businessmen wanted someone known to them to take care of their monies and it was a friendly neighbourhood banker who was considered trustworthy to discharge this sacred duty. The hallmark remained the inbuilt safety and security on the credibility of the founders.

The banks began with small capital and collected deposits small and large. Syndicate Bank were pioneers in ‘pygmy deposits’ collected by highly mobile deposit collectors roaming from door to door of individuals and cash counters of Udupi hotels to collect amounts as small as an anna each day. It continues to date! The hallmark remained the inbuilt safety and security on the credibility of the founders.

In those days, funds were available very cheap as the depositors were paid minimal interest at fixed rock bottom rates, because they had nowhere else to go; there was no competition, besides there were no alternative investment opportunities and above all it was convenient for the depositor as the staff attending to them at the branches were invariably friendly neighbourhood faces.

The bankers have now started to take retail depositors for granted and are cold shouldering them by preferring to target the big high net worth individuals—the NRIs and businesses for bulk deposits. The recent electronic media string operations on tape have shown how banks across the both in the public and private sectors, have thrown caution to the winds in trying to mobilise deposits including carrying electronic note counters to depositors’ homes to cart high denomination currency notes for deposits. The RBI has levied massive penalties that each bank coughed up without demur!

Now the depositors have woken up to the fact that they are being taken for a jolly good ride for the perceived ‘safety’ – realizing that deposits don’t offer interest rates that manage to beat inflation. The ‘wise’ from among the depositing turned to seek  better  ‘real’ rates of return by switching to other investment destinations in the form of  investments in shares, debentures, bonds, gold, real estate, chit funds and even Ponzi schemes.

Banking today 

The banks that initially advanced the monies to individuals at much higher market rates, initially to trade and business later graduated to lending to corporates for industrial finance against tangible collaterals. They then moved into higher interest lendings for housing, automobile, education and personal loans.

While the personal loans are generally small in numbers and values, it is the larger trade and industrial borrowers who call the shots when they encounter serious erosion in their debt-servicing capabilities due to down slide in sales, rising input costs, sluggish profits, delayed recoveries, build up of inventories and hiccups in delayed project start-ups—in trying to cut back on debt end up in taking on more loans just to keep going and this result in greater borrowings and interest burdens forcing the lending bankers to jump through the loop just to recover their advances. It is rightly said that if you borrow a few thousands from the bank and fail to repay you are in serious trouble, but if you borrow in crores, the bank comes in trouble, it will then keep chasing you to implore you to settle by agreeing to reschedule your instalments, by deferring payments, waive interest and the like, adopting the choice between devil and the deep sea.

Business Line 2012-13 analysis of 500 leading corporates with leverage, reports that their debts increased by 17% when their net worth grew only by 9% with half seeing their leverage worsening with many sporting debt to Equity ratio of eight as against the accepted/ideal of two. Large borrowers thrive in borrowing more and more believing ‘they are too big to fail’ a la Kingfisher Airlines which has got its debts ‘restructured ‘ on its own terms including  forcing the banks to convert its debts into equity at absurd valuations at high premium even though the company has been in the red from day one! The promoters go on with their high profile life despite defaulting in their dues to employees, vendors, suppliers, bankers and tax authorities.

Our banks today are estimated to be sitting on Rs2.50 lakh crore of restructured loans on top of Rs1,60,000 crore non-performing assets. Distressed accounts are conservatively put at 10% of their advances portfolio.

With the worsening conditions in the West, like the sub-prime crisis and the bankruptcy up of big name banks making it difficult to lend to their domestic borrowers banks there have turned to lending abroad at lower rates. Indians now find it cheaper to raise funds overseas by way of external commercial borrowings (ECBs). But there is the inherent exchange fluctuation risk involved.

RBI‘s new Avatar as the banking regulator 

In the good old days the RBI played the role of a sombre silent ‘Big Daddy’, as a supervisor maintaining monetary oversight by acting as ‘Banker to the Banks’.  It is rightly now said: “If collecting deposits and loaning it to the credit-worthy has become a tricky endeavour, the RBI as regulator has not been making bankers’ lives easier either, it has co-opted the banking system as its unwilling partner in trying to fix everything that is wrong with the Indian economy.”

The RBI ought not to have permitted the commercial banks to hawk third party products like marketing insurance and mutual fund products as well as gold that the banks are simply not sufficiently geared for that and  staff are not qualified to do. RBI by allowing them to move away from their core banking activity of collecting deposits and making advances has compounded the issue. This has brought about a serious fall in monitoring of advances leading to mounting stressed borrowings.

Today, it is noticed that there is a shoddy mix up of RBI’s role with that of the central government in drawing lines as to what is fiscal and what is monetary and who has to do what! In an attempt, to arrest the depreciation of the rupee, believing bank money is fuelling currency fluctuations, RBI sought to squeeze every drop of perceived ‘excess liquidity’ from the banking system bringing about a sudden spurt in overnight rates  to escalate their costs and aggravate the bad loans.

(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)

MG Warrier
9 years ago
A balanced analysis. Even those who may have difference of views on 'opinions' expressed, should ponder over the present crisis of financial sector. The disintegration of established 'Institutions' and migration to the practices the so called developed world is following is doing irreparable damage to Indian Financial System. If one remembers the saying:
(Everything old may not be true and acceptable, all that is new should not be rejected. The wise examines and makes right choices)
good for all.
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