Professional Documents
Culture Documents
Direction
Preface
There have been a lot of speculations and discussions being held in the media, social
networking sites, informal forums and friendship circles regarding the reforms
anticipated and/or required in the banking industry in the near future.
Let us see what they are and also analyse their positive and negative implications for
all stakeholders and the country as a whole.
Government Intervention
Starting with constitution of boards of PSU Banks with the induction of one director
from Ministry of Finance and another Director from RBI, the union government openly
interferes in banking policies and their day to day activities, beyond a point.
Licensing for new branches including upgradation, Directed Lending (Government
Sponsored Programmes), Interest Waivers, Rescheduling of Agricultural and other
Term Loans, huge Loan Waivers/write-off, Financial Inclusion, fixing of Recruitment
and Promotion policies and guidelines, Reservation for OBC/SC/ST, Disciplinary
Matters and finally determining the overall wage structure of bank personnel are
totally controlled by Department of Financial Services, Ministry of Finance, New Delhi.
Many of the areas stated above in private sector banks are also highly influenced by
the union government, through RBI.
All the ruling parties use the banking system to promote their political ambition and
spread their cult and power without any shame. Thus, there is too much of meddling
in the affairs of Indian banking industry. This leads to indecision, corruption,
mismanagement, diversion of funds and lack of accountability at the top
management level. This has an adverse impact on all the stakeholders customers
(depositors/borrowers), staff and the shareholders. To check this phenomenon, the
governments role must be curtailed to the barest minimum and banks must enjoy
full autonomy with suitable checks and controls which I will describe later.
Branch Licensing
Branch Expansion shall be directly linked to the profitability of the bank concerned,
to prevent indiscriminate branch expansion. There is a mad scramble among most of
the banks now to open new branches, without properly studying their viability and
growth in the long run. Haphazard branch expansion greatly affects the manpower
planning too. There is skewed deployment of manpower, creating huge imbalances.
The cost of technology is not gone into before any decision with regard to opening a
new branch is taken. I suggest these measures to reverse this trend.
Banks shall not open branches outside the municipal/corporation limits, but within
the Urban Agglomeration area, by obtaining licence under rural/semi-urban category.
In other words, branches situated within the Urban Agglomeration area will be
classified as Urban or Metropolitan as the case may be.
Number of Extension Counters and Satellite Offices shall not exceed 5% of the
number of full-fledged branches. Mobile Banking may be considered in rural and
semi-urban centres, for extending basic services of opening of accounts, deposits
and withdrawals of cash/cheques and offering ATM, Debit Card and remittance
facilities (DDs, Pay Orders, RTGS and NEFT). All other banking services must be
handled by full-fledged bank branches only. The Banking Correspondents Model and
Banking Facilitators Model are not workable, because they are fraught with risks and
dangers. Even Ultra Small Banks cannot be successful for long. All these will fail, one
after another, causing great financial loss and loss of reputation to the banks. The
basic premise of financial inclusion itself is faulty, as in the absence of Banking
Correspondents, Banking Facilitators and Ultra Small Branches, the financial inclusion
as envisaged now will never happen.
Categorization of Banks
Categorization of banks is done based on certain performance parameters like Net
worth, Ratio of Tier I Capital to Tier II Capital, Aggregate Business, Net Profit, Capital
Adequacy Ratio (CRAR), Net Interest Margin, Earnings Per Share, Current Market Price
of each share vis--vis its Face Value, Price-Earnings Ratio, Quality of Human
Resources as evidenced by Average age of an employee, Average Academic
Qualification of an Employee, Training & Development policies and initiatives,
Aggregate Business per Employee and Net Profit per Employee, Provision Coverage
Ratio, Number of Loss Making Branches (branches which are less than 24 months old
are excluded for this purpose), Incidence of Frauds, their Magnitude and Potential
Losses thereof etc. Besides, geographical area of operations (branch network) also
must be reckoned. Basing on these parameters, banks may be broadly classified into
3 major categories A, B and C. To avoid volatility and distortion, the past 3
years average figures may be taken to arrive at a realistic score.
Autonomy of RBI
RBI shall confine its role to determine the broad policy framework for various banking
functions and shall not poke its nose into the minute details of their implementation.
Thus, RBIs role vis--vis other banks will be restricted to 1. Policy maker, 2.
Regulator, 3. Bankers bank and 4. Lender of the last resort. Currency Issue and
Management will be an additional function of the nations central bank. RBI must
closely monitor banks only in a select, critical areas and stop interfering in other
areas of banking. RBI must determine the range of interest rates i.e. the maximum
and minimum thresholds only. Individual Banks must be given full freedom to fix
their own interest rates and service charges themselves within this range/band in a
transparent manner. But, interest rates must be revised only once a month by the
banks. Service charges will undergo revision once in a quarter. There shall not be any
discrimination between customers who are similarly placed, as far as the banks are
concerned. Between different categories of customers also, for the same product or
service, there shall not be a price difference of more than 15%.
RBI must conduct annual inspection of all banks either by deputing their own officials
or by engaging the services of reputed chartered accountant firms/companies by
rotation. For any supervision failure that results in a big financial loss, RBI must take
responsibility. RBI must conduct open market operations (OMO) to regulate foreign
exchange rates, as is being done now. Similarly, to address short term liquidity
issues faced by commercial banks, the existing tools of Repo, Reverse Repo and
Marginal Standing Facility must be continued. Bank Rate has lost its relevance, after
the introduction of Base Rate system in banks and hence, it may be phased out.
While the money market will remain under the jurisdiction and control of RBI, the
capital market (including mutual funds and debt market) will be regulated by SEBI.
Mergers
Mergers of banks shall be contemplated only when (1) a bank is unable to carry on
its activities on healthy lines (incurring continuous losses or earning only meagre
profits for several years) (2) when there are a spate of serious complaints against a
bank from customers, general public and others, but the bank is not willing
to/capable of resolving such complaints amicably (3) when a bank is unable to
overcome its temporary setbacks and merger is the only way out in the interest of its
customers, staff and the nation and (4) a bank willingly wants to get merged with
another Indian Bank for which consent of staff and shareholders of both the banks,
RBI and the Ministry of Finance is obtained. The Government of India may also order
merger of one bank with another, if the former does not function within the broad
policy framework laid down and is found to have violated many Indian laws, thereby
seriously jeopardizing the nations economy and poses a threat to the sovereignty of
the nation itself.
Loan Appraisal
Proposals involving aggregate limits of Rs.10 crores and above must be
appraised by two parallel teams of staff from two different zones or one by
staff team and another by a chartered accountant firm not connected to
the bank concerned. This cut-off limit may be periodically revised by RBI.
Officers working in credit departments must be compulsorily moved out
after 3 years to other departments of the bank.
Loan Compliance
One or more senior officers from the credit monitoring department of the controlling
office may be designated as Compliance Officers. These officers will have rich
experience in credit, law and branch administration for not less than 10 years. They
will always be on tour and visit the branches where a loan/advance for Rs.1 crore
and above is due for disbursement. They will verify and ensure the correctness of
documentation, charge creation, insurance, borrowers margin and end use of funds.
Only after they certify that all the terms and conditions of sanction have been duly
complied with, disbursement will be allowed.
Charge Creation
Wherever stipulated and taken as securities, immovable properties will be secured
through creation of Mortgage by Conditional Sale. In the event of default, the
sale will become absolute and complete, after 180 days from the date of default.
However, during this period, the owners of the property will have the first right to
repay the advances and claim back their property. Once the loan is fully paid, the
sale as per the terms of the mortgage will automatically become null and void.
To avoid misuse of this provision, the following categories of loans are exempted.
1.
All Education Loans up to Rs.25 lakhs
2.
All Housing Loans up to Rs.10 lakhs
3.
All other loans below Rs.5 lakhs
4.
Where the security is agricultural land measuring less than 5 acres.
5.
Where the repayments made so far have exceeded the principal amount plus
a notional simple interest of 6% p.a. calculated on monthly diminishing balances.
All mortgaged properties will be invariably registered with the Sub-Registrars Office
concerned. For this purpose, the stamp duty payable is 1% of the loan amount,
In Indian society, 90 days is too short a period, for the purpose of defining a
loan/advance as NPA. Therefore, it may be refixed at 6 calendar months, from
the date of default. (Let us not simply copy international norms and procedures
in unwanted areas. We have not implemented labour welfare measures as
practiced by developed nations for bank staff).
2.
In case of Overdraft and Cash Credit accounts, amounts deposited to cover
the interest debited shall not be allowed to be withdrawn again, even if the
liability is within the Limit and Drawing Power. Only credits exceeding interest
debits will be allowed to be withdrawn.
3.
Deposit Loans and Gold Loans must be exempted from the concept of NPAs,
provided the liability is below the value of the security.
4.
All shares, mutual fund units, government securities and LIC policies will be
outside the ambit of NPA, if they are readily marketable and their
redemption/market price is more than the outstanding liability. There will be a
detailed procedure laid down to determine the market price of an asset.
5.
Staff Loans must be exempted from NPAs, if the amount in default can be
recovered from future salaries. However, departmental action may be taken
against such staff members, if the default is intentional and continuing for more
than 3 months.
6.
When the interest is promptly being serviced, even if a few instalments are in
arrears, such loans need not be declared as NPAs. However, if the instalments
are due for more than a year, such loans will be classified as NPAs, to the extent
of the overdue amount only.
7.
Where some aid/subvention/subsidy/incentive is expected from the
Government within the next 6 months, such loans also need not be classified as
NPAs, provided such amount of aid/subvention/subsidy/incentive is adequate to
take care of the unpaid interest and instalments.
8.
As far as income recognition and asset provisioning are concerned, only the
interest on the overdue amount must be reversed, if already taken to Profit &
Loss Account.
9.
Similarly, provisioning must be done only on the overdue amount, not the
whole liability. This is a major departure from the present system. The
underlying logic is all NPAs are not irrecoverable.
10.
Nevertheless, in case of fully unsecured advances, the current system will
continue.
11.
In case of advances secured by tangible assets to the extent of 125% and
above at the time of disbursement of the loans, the income recognition and
asset classification norms will apply on the unsecured portion only. Here, the
current liability is the criterion to determine the extent of security available.
12.
These revised norms with suitable modifications may be implemented within a
year or so.
Corporate Governance
Transparency and Accountability form the bedrock of Corporate Governance. Where
substantial issues of fair banking practices are involved, RTI will cover even
individual matters. Disclosures by banks without being asked or compelled by
anyone will cover more areas. Delays and indecisions must be properly explained for.
Managers of impeccable character and highest degree of honesty and integrity must
be appointed at critical positions. They must be given enough freedom in decisionmaking and extended full support and protection for their actions too.
Hindi heartland will not be affected by this change, because in their case, Hindi will
be the local vernacular language.
HR Issues
All public sector banks will have uniform policy framework with regard to Staff
Wages, Bonus, Pension, Gratuity, Provident Fund, Recruitment, Training, Placement,
Promotion and Transfers, with minor changes here and there. As a first step towards
introduction of 5 day week in banks, second Saturday of every month must be
declared a public holiday for banks.
Business Hours will be reduced to 5 hours a day and banks will handle customers
transactions from 10-00 AM to 01-00 PM and again from 02-00 PM to 03-00 PM on
Week days and on Saturdays, the timings will be from 10-00 AM to 01-00 PM.
Working Hours will be from 10-00 AM to 05-30 PM on Week Days and from 10-00 AM
to 03-00 PM on Saturdays. Lunch time will be from 01-00 PM to 02-00 PM on each
working day. These timings will apply to award staff and officers uniformly.
For officers of public sector banks, Administrative Tribunals and Appellate Tribunals
are to be established at all state capitals. Whistle Blower Act is to be enacted with
necessary seriousness. Separate Vigilance Commission for all banks public or
private is to be constituted. Most of its administrative staff will be drawn from the
banks themselves.
Recruitment to permanent vacancies shall never stop. Outsourcing of routine bank
jobs shall not be allowed in core areas. For instance, in cleaning the branch premises,
outsourcing may be permitted, but in cash remittances, security etc., outsourcing will
only be counter-productive and hence is to be avoided.
Reservation in bank jobs must be restricted to entry level only and in promotions, no
reservations will be entertained. Direct recruitment in bank jobs must be restricted
only up to 20% in Sub-staff to JMGS I, up to 10% in MMGS II and MMGS III and only up
to 5% in SMGS IV. Thereafter, no lateral entry will be permitted.
The number of Grades in Officers cadre must be brought down to 3 from the present
7.
Conclusion
Without simply imitating western economic models, we must evolve a dynamic and
vibrant model suiting the uniqueness of our nation. There shall be a clear path to be
followed by all bankers, irrespective of ones faith and belief. Cost-benefit analysis is
to be done, wherever necessary. While profit is not the only motive of banks, loss
making transactions shall not be taken up. Instead, banks may be encouraged to
expand their activities in the sphere of Corporate Social Responsibility. Banking
shall be strictly confined to core areas of banking. For earning a few crores of rupee
as non-interest income, let us not waste precious human resources who are
invaluable to the nation. We shall be consistent, unswerving and determined in our
approach and action. We will integrate banking will all other fields smoothly and
perfectly, so as to walk towards a better, promising tomorrow.
Date: 02-06-2014
Pannvalan
By