When Mr R.K. Panjwani, a banking colleague of mine for 40 years congratulated me on the occasion of 50 years of Indian banks nationalization, my mind waded back to RBI Governor, Shaktikanta Das, lecture on 16th November 2019 at Amrut Modi School of Management, Ahmedabad University. Yes, it is time to think about the performance of Indian banks during the last 50 years of their existence.
The article follows the pattern observed in his lecture for easy reference and follow up. It basically consisted of following topics:
- 50 years back, frozen in time
- Present turbulent waters
- Future challenges and expected phenomenal growth
50 years back, frozen in time
In his words, RBI governor quoted that in 1967, agriculture constituted 2.2% of total advances of Scheduled Commercial Banks as compared to mighty 64.3% disbursed for industries. 5 cities, namely, Delhi, Chennai, Ahmedabad, Mumbai and Kolkata, accounted for 44% of business with 5000 of Indian villages having the privilege of banking facilities, out of 600,000 villages which existed then.
The obvious choice, an abrupt nationalization of 14 banks, mostly on political consideration with an eye on socialism as panacea for all economic ills, was undertaken. The central government grabbed the pivotal role of managing the boards of all banks, with its political nominees as independent directors, both employees and officers offering their presence on boards and a forceful nomination from RBI and central government. It enabled unlimited access to the whole width and breadth of the nation for the bank’s operation with the establishment of one bank branch at least in each block head quarter but the economic survival of the branch being given no consideration.
Every thing was stage managed by political bosses from Delhi while RBI fine tuned the economic agenda. It was felt that every thing was fine but Indian nation’s IMF aid for a couple of billion US dollars in 1986 down sized the might of the banks to lift the economic veil and show to the world the real balance sheet of the banks. Basel norms made the scene far worse. For the first time, nationalized banks were forced to face the might of private sector banks and the introduction of computers a mighty challenge for nationalized banks.
As a manager of one of the largest nationalized banks, myself, on one fine morning saw the introduction of a box called, a computer and was abruptly told to learn the nuances of the new instrument. Yes, frequent failure of hardware/software and our total ignorance added to the glee of the outward looking clients. True, we got zero training and like an Indian story, we learnt every thing by trial and error method. Banks were forced to provide for non-performing assets by leaps and bounds. Sickness of Indian banks were slowly casting long shadows on Indian economic scene.
Present turbulent waters and the role of exogeneous factors
RBI governor did not delve on the statistical details of the growth of Indian banks which have been retold million times by our political pundits and left leaning economic writers. Neither do I have any inclination in that direction.
The learned Governor, an exemplary bureaucrat also had seen things at the closest quarters. With rare views both as bureaucrat earlier and now as a monetary expert, he dispassionately mentioned the unrelenting efforts of Public sector banks to extend enormous credit to infrastructure which was an unrealistic effort towards credit expansion at the instance of central government. Unfortunately, coupled with abrupt stoppage of environmental clearances and slowdown in the economy, the banks were suddenly saddled with unprecedented non-performing assets in fields like mining, iron steel and payment issues related to DISCOMS. Constant political promises to waive off banking loans also resulted in non- repayment of agricultural advances. This made non disbursement of new agricultural loans by commercial banks in terms of RBI policies. These are some of the current challenges facing the public sector banks.
Corporate Governance
The Governor had mentioned some of the following internal challenges as created by the public sector banks purely on the lack of governance at some of them. Let us identify them:
- Elevated levels of NPAs
- Capital shortfalls
- Frauds and inadequate risk management concept
- Unprepared human resources soaked in past knowledge and unwilling to change to face the future.
- Lack of professional independent directors who could understand emerging business risks.
A bold statement, as claimed by experts, was the declaration by the Governor that the Banks’ Boards lacked transparency and accountability.
Massive frauds in Punjab National Bank which was brought to the surface by a whistle blower (as per yester day’s report in Economic times), notice of PNB/SBI in extending massive credit to fraudulent exporters who had already fled the country, and the failure of all including RBI in identifying frauds at regular intervals at most of the leading public sector banks have attracted the attention of all bewildered customers of banks. It is a common refrain that bankers just collaborated with culprits in looting the banks. Most of the seasoned bankers like ourselves could not explain the genesis of operations. One can only expect wiser counsel would prevail at public sector banks with the lessons learnt of bitter past.
Glorified Private sector banks with dismal records
Indian banking had sunk to lower levels as per the Governor’s views on private sector banks when they gave huge incentive to their top management personnel in reporting unreliable balance sheet vetted by auditors who seemed to be unworthy of their workmanship. Total falsified information containing concocted NPAs attracted again the attention of all due to whistle blower reports. It is sad that many of these private sector banks got their CMDs either dismissed, got arrested or thrown out due to non-extension of their continuation by RBI.
One of the most celebrated CMD is reported to be facing court cases on corrupt behavior. Auditors authenticating false financial reports are also facing the music of regulatory authorities. RBI governor attributed these unsavory developments in private sector banks, due to greed of the top managements to enhance their salary and other income by improper functioning of audit and risk committees.
Resolution of Stressed assets
RBI governor had words of appreciation for government’s efforts in pushing through the Insolvency and Bankruptcy Code, 2016 which had been a game changer during the short span of 2017-2019. Many of the companies which underwent liquidation under the new law faced uncertain future under the earlier notorious Board for Industrial and Financial Reconstruction. Faced with massive misuse of rules and corruption under BIFR, the new Code ushered in a new atmosphere based on transparent rules and excellent execution. The governor observed that some of the criticism facing the Code would vanish over a period of time with timely resolution of the identified industrial units.
RBI’s recent circular dated November 15 2019 containing a framework for resolution of financial service providers attracted the attention of the governor for its new path making trajectory.
Mergers of Public Sector Banks
Yes, the Governor based the mergers of some weak banks with strong ones as moves towards meeting the global challenges of huge credit offtake for Indian industries who would expand their global operations in future. In his view, the newly expanded Indian banks would also face the future with vast resources. In his considered view, they might set new Indian branding exercises. Time will narrate the effects of these mind-boggling changes in public- sector banks.
Urban Co-operative Banks
One is bewildered with daily emerging frauds, lack of internal controls and loss of deposits in urban co-operative banks which corner the news every day. Names of who is who chiseled the history of these institutions are clue less about massive frauds happening every day. None denies the noble role played by them in bringing modern banking at door steps of millions of ordinary banking customers.
To every one’s question as to why RBI failed to stem the rot in these institutions, the governor politely pointed out that certain provisions of Banking Regulation Act, 1949 were not implemented for them to placate the local state governments which took over this task. But in reality, politicians made a mess of the things and internal controls, the modern banking tools to control the financial institutions were not totally applied. The governor gave the reassuring news that RBI is reviewing the existing architecture of regulation and supervision of UCBs.
Coupled with instant competition from Small Finance Banks, Payments banks, NBFCs and Micro-Finance Institutions, with the latest gadgets, the best software and ever energetic young executives who are at door steps physically, contacting every one with all available online means, UCBs will face existential survival in future. As one who witnessed mind boggling changes unheard in the rest of the world of banking, I do pray and hope for miracles that would usher in the most modern banking for rural poor.
Future challenges and expected phenomenal growth
Who else than the present RBI governor who can speak with authority about the forthcoming emerging new banking trends?
He led the audience as under:
- RBI took several steps to encourage greater use of electronic payments to achieve “less cash” society by allowing Payments banks and Small Finance banks. This resulted in digital payments to GDP ratio rising to 8.6% at the end of March 2019 from 6.7% at the end of March, 2016. Per capita transactions took a phenomenal upward journey from 4.6 to 17.6, a feat unheralded by media since it was too late to understand the changes.
- Other changes like crowd funding, peer to peer lending, invoice financing, and digital lending are helping small business men to reduce the costs of funding, easy availability at finger tips, and sachetisation of products and services.
- Reverberations of modern developments like Artificial Intelligence, Machine learning, and Big data would shake banks from their lethargic past and deep slumber. I am shocked to hear a very big nationalized bank to shake off the complaints of fraud and mismanagement of funds of customers in ATM, Credit cards and other simple saving product accounts with open ended replies.
- Areas to widen risk management, regulatory reporting data management, compliance, E-KYC, Anti-money laundering and combating of terrorism need immediate application of modern tools by leading banks.
- “Conventional banking is making way for next-generation banking with focus on digitization and modernization.” Said the Governor. He also assured creation of new departments in RBI to face the new modern techniques.
Conclusion
My observations
RBI has been trying to meet the challenges of modern frauds, diversion of funds, upgrading modern tools of auditing and inspection and above all equipping their employees up to his level with modern technologies. I once heard a CMD of one of the largest nationalized banks who wanted to talk to media about Ind AS for banks in two sentences. Most of the CMDs of banks have average qualifications but mostly general management in description. When a few kids or a jeweler with average crooked mind could shake up modern banking, it is disquieting to know that big Indian public sector banks do not have forensic departments, lack modern tools of accounting/auditing, developed levels of training for their employees in criminology or even their employees/ lawyers shiver about mind boggling frauds shaking the financial foundations of public sector banks.
Public sector banks do not have panels of CAs/CMAs/lawyers who have handled criminal accounting/auditing/forensic accounting or diversion of funds or taxation. History repeats and punishes those who repeat the same mistakes.
The speech from one of the most powerful persons with the best job handling experience of the highest level in Government of India and now RBI governor, has opened up the new channels of thinking for the management kids who are the real future of the nation. My sincere wish is that most of them are recruited as permanent employees and form the base of modern banking.
Reference
Author Bio
Hope RBI Governor will take necessary steps as he is speaking to streamline the RBI and public/private banks to adhere to the new guidelines/suggestions for the betterment of Banking of the day.