Public sector banks: Three fourths of the staff performance review is on 3rd party products!
A professor who retired from Osmania University a decade back got arrears under the 7th Pay Commission. He went to a manager of a public sector bank (PSB) seeking his advice. The manager promptly advised him to invest in insurance or mutual fund products. When asked, why not in term deposit with banks, the manager had the audacity to reply that bank deposits have less liquidity and security to this 70 year old person!
Enquiries reveal that he is judged by performance not in the banking products of credit and deposits but in cross-sold products. Three fourths of the monthly and annual performance reviews of banks are on third party products and the State Bank of India (SBI) chairman recently listed his priority in such products. Third party products carry fat commissions – only lakhs and crores of rupees per annum. Good banking and safe as well as insurance for sure and in time are the needs of a growing economy; but who cares?
There is a chorus for privatisation of the PSBs, lately joined by the governor, Reserve Bank of India (RBI). If the history of nationalisation were to serve as a backdrop, notwithstanding the then political overtone for such move, and its predecessor, the social banking initiative of the Morarji Desai government, the vast expansion of branches into rural areas, finance to the till then neglected sectors and population and the decline of costly private money lending to around 60% from 90%, cannot be wished away.
Bank chairpersons fancily posed for photographs with farmers and small enterprises in the media for two decades after nationalisation. They competed to project the implementation of the Integrated Rural Development Programme (IRDP) and Self-Employment for Educated Unemployed Youth (SEEUY) among many, cursing the defective identification of beneficiaries for those schemes. Rajiv Gandhi said in Orissa that only 16% of such sponsored schemes reached the intended beneficiaries.
There can be no dispute that the reach of banks to these areas has significantly improved and enabled the government to dovetail many a scheme. State governments vied with each other to create corporations for SC/ST , women, minorities and BCs to reduce their budgetary responsibilities with the support of PSBs.
Post 1992, or post liberalisation, the PSB focus shifted to profits from society benefits. Compulsive targets under priority sector are always shown as achieved. Sector experts on PSB boards became non-entities.
Governance became accountable to the government and not to the society. Due diligence that was banks’ exclusive forte dispersed to elusive sponsors of various credit schemes. PSBs in their urge to compete, aped the western business models. Instead of making technology a servant, banks became servants of technology, ignoring the customers and clients.
Credit risk management has become more regulatory compliance than institutional necessity. The appraisal memoranda of the banks incorporate risk management, but it is just a quote of CRISIL, ICRA etc., and not comprehensive. Policy analysis, sovereign risk analysis and detailed due diligence reports on directors of companies and partners of partnership companies are imperfect, false, or routine.
The department of banking that has limited knowledge of banking supervises the PSBs. Why not the government accept the Narasimham Committee recommendation to wind up the department and reduce its stake to below 50% at least now?
RBI’s regulatory rigour is at best glossed over and at worst uncared for by PSBs, with impunity in the guise of independent micro management. RBI stopped inspecting the sample branches and sample accounts as part of its inspections of banks and confined it only to head offices, corporate offices etc.
The phenomenal surge in frauds in banks during the last ten years mirrors lack of data analytics to take appropriate timely actions. One single giant fraud of PNB led to a series of disclosures from several other PSBs leading to arrest of top management executives. This is the tip of the iceberg.
The villain of the piece is greed generated by sale of third party products in preference to core banking. Infrastructure lending has already proved a bane and real estate lending is the next sector waiting to explode. Both have facilitated arm-chair lending for the banks that operated with least staff. Staff resources are today top heavy and bottom lean.
Coming to privatisation, look at the HDFC Bank whose market share is on the rise continuously. Unlike anywhere in the world of banking, this bank is allowed to have a chairman for 25 years in Aditya Puri. Is this good corporate governance and good regulation? But for KV Kamath finding his place in the newly set up Asia Bank, the story would have repeated in ICICI Bank as well. Is this the type of privatisation the CEA and RBI are targeting? Who knows?
A twenty trillion rupee GDP cannot afford the luxury of bad banking, bad governance and dual regulation. NITI Aayog would do well to set up an independent committee to clean up bank stables.
(Dr B Yerram Raju is an economist and risk management specialist. The views are his own.)