Banking
Reforms – The Right Direction
Preface
There
has 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 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 government’s
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-à-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, RBI’s role
vis-à-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 nation’s 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 nation’s economy and poses a
threat to the sovereignty of the nation itself.
Merger of
all RRBs with NABARD
Rural
branches of all public sector banks must be merged with NABARD. Similarly, all RRBs must be merged with
NABARD. For this, the government must
draw a suitable roadmap, so that the entire process is completed within the
next 3 years period. If necessary, the
Government of India must provide additional capital of adequate size to NABARD
for this purpose. In future, no
commercial bank will be compelled to open any branch in rural areas.
Closure of
Bank Branches
Bank
branches may be allowed to be closed down or merged with a nearby branch of the
same bank under the following circumstances.
- The branch is
incurring losses for 5 years in a row (in case of rural/semi-urban
branches) and 3 years in a row (in case of urban/metropolitan branches).
- The branch business
remains stagnant or its average growth during the past 5 years is less
than 6% p.a.
- There is a grave
security threat to the existence of the branch in its current location.
Staff are vulnerable to attacks by violent and radical groups and the
government is unable to guarantee the physical safety of the bank staff
and the customers visiting the premises.
- The branch is
located in a remote place and accessibility to it is very difficult and
because of this, administrative control is weak and ineffective.
- There is another
bank branch functioning within the radius of 3 KMs.
- Consequent on
the merger of two banks, there will be two branches of the same bank in
the post- merger scenario.
- Any other reason
with the consent of RBI and approval of the state government concerned.
Ownership
and Control
No
single individual must hold shares exceeding 1% in any bank. In case of
companies registered in India, this ceiling is 3% per company and 10% for all
companies in the same group, as far as shares in one bank is concerned. However, for financial institutions
registered in India, this ceiling is fixed at 20%. For FIIs, this ceiling is 3% for one single
institution and 15% for all FIIs put together.
FIIs cannot appoint any director on the board of the bank in which they
have shareholdings. No bank in India
shall buy or lend against shares of another bank in India. Any company, trust, fund or financial
institution cannot invest more than 20% of their net worth in bank shares.
As
for voting rights, the ceiling is prescribed as follows.
(a)
Individual
– one vote per equity share subject to a maximum of 1% of the total
shareholding
(b)
Companies
registered in India – one vote per share, subject to a maximum of 5%
(c)
Companies/Institutions
registered abroad – one vote per share, subject to a maximum of 5%
(d)
Financial
Institutions in public sector – one vote per share, subject to a maximum of 15%
(e)
Promoters,
their relatives and friends – one vote per share during the first 5 years and
after 5 years period, there will be a ceiling of 10% for the promoters and
their group (This rule applies to private sector banks and Government as the
promoter of PSBs is not bound by this
rule).
(f)
One
single individual/group/entity cannot have more than 1 Director on the board of
a bank.
(g)
Banks
can have only professionals from the fields of Banking, Economics, Law,
Accountancy, Company Secretaryship, Management and International Business with not less than 10 years experience in
their respective fields, as whole time
Directors.
(h)
Two
thirds of Directors of each bank board must be whole time Directors, as
described above and
Part-time Directors
shall not exceed one third of the
number of Directors on the bank’s board.
(i)
For
big ticket advances, the top management of each bank and their whole time
Directors must be held responsible. ‘Big
ticket advances’ mean any advance exceeding Rs.10 crores per borrower/group and
this limit may be suitably revised by RBI, every 5 years.
Prudential
Lending Policy common to all banks
Once
borrowed money from a bank/financial institution, name, photo and other details
of every borrower must be uploaded in the Central Registry of Borrowers which
can be accessed by all banks and financial institutions in India. As a general rule, an individual cannot
borrow from more than 2 banks at a time. Similarly, a
firm/company/society/trust/association cannot borrow from more than 3 banks at
a time. However, for aggregate limits
exceeding Rs.250 crores (aggregate of funded and non-funded limits), this
number may be raised to 5. For aggregate
limits exceeding Rs.5,000 crores (aggregate of funded and non-funded limits),
this number may be raised to 10 and not more.
Where
one company has invested in its subsidiary company in the form of equity or
inter-corporate deposits or loans and advances, both the holding company and
its subsidiary company must jointly execute all the loan documents. Where more than 2 banks have lent money to a
single company or a group, joint lending agreement/inter se agreement amongst
all the lenders is a must.
No
loan/advance exceeding Rs.2 lakhs shall be given without a third party
guarantee. For any loans above Rs.10 lakhs, collateral security is a must.
Where
the primary security is an immovable property and its market value was more
than 100% of the loan amount at the time of disbursement, the condition for a
collateral security may be waived.
For
agricultural loans above Rs.10 lakhs, a suitable third party guarantee must be
given. For agricultural loans above
Rs.25 lakhs, collateral security is also required in addition and this
collateral security shall be a non-agricultural property like House/Flat,
Factory, Government Securities, Bonds/Debentures (which are listed and
regularly traded), Bank Deposits and Gold (preferably
in demat form).
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, borrower’s
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.
- All Education
Loans up to Rs.25 lakhs
- All Housing
Loans up to Rs.10 lakhs
- All other loans
below Rs.5 lakhs
- Where the
security is agricultural land measuring less than 5 acres.
- 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-Registrar’s
Office concerned. For this purpose, the
stamp duty payable is 1% of the loan amount, subject a maximum of
Rs.5,000. For registration of the
mortgage, a flat registration fee of Rs,1,000 is payable, regardless of the loan amount. This stamp duty and registration
charges will be uniform throughout the country.
Income
Recognition and Asset Provisioning
The
definition of ‘non performing assets’ must undergo drastic changes. I propose the following changes.
- 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).
- 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.
- Deposit Loans
and Gold Loans must be exempted from the concept of NPAs, provided the
liability is below the value of the security.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Nevertheless, in
case of fully unsecured advances, the current system will continue.
- 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.
- These revised
norms with suitable modifications may be implemented within a year or so.
Recovery
Mechanisms and Tools
For
recovery of loans secured by pledge/hypothecation also, public notice through
newspapers is needed, especially when the value of the securities is above
Rs.10 lakhs. However, securities like
bank deposits, government securities, LIC policies, Shares, Bonds and
Debentures (listed and actively traded) and gold ornaments are exempt from this
condition.
Where
the loan/advance amount is not disputed by the borrowers, they must be advised
to deposit 60% of the principal amount in an escrow account with another public
sector bank, before they raise any dispute with regard to interest rate,
calculation of interest etc.
Where
the rate of interest charged by the lender/s is challenged by the borrowers,
they must pay at least 75% of the simple interest at the contracted rate,
before pursuing the matter through Courts/DRT.
The interest serviced will be immediately credited to the respective
loan account and taken to Profit & Loss Account.
However,
the borrower may be granted 3 to 6 months time for payment of the balance
amount. The DRT/ High Court shall decide
the case within 3 months from the date of filing of the suit. The maximum number of sittings for DRT/High
Court will be 5.
In
case of consortium advances, a team of recovery officers drawn from each
lending bank must be constituted.
Where
the loan was sanctioned at the behest of a government department/agency, it is
the primary responsibility of such department/agency to actively participate in
recovery proceedings. Moreover, the
lending bank has every right to stop lending further under the same scheme or
any other government scheme, when the overdues constitute more than 20% of the
aggregate limits sanctioned under government lending programmes. Branches which are less than 5 years old
shall not be compelled to entertain
any proposals under government sponsored schemes.
If
the Union Government or any State Government decides to write off or absorb
interest on any bank loans, first the unpaid interest must be remitted to the
banks upfront. Then only, the banks will
reduce the interest liability in the loans.
In other words, such payments received from the government will be
reflected in the loan account, as and when credits are received from the
government.
The
same principle will apply to whole sale write off of bank debts, upon the
directives of the government. Without
receiving the amount outstanding in the loan accounts in full, such loans
cannot be written off. So, there will be
no loan waivers or en bloc write off of bank loans. This is introduced with a view to insulate
the banks against political decisions which are populist in nature and are aimed
at capturing the vote bank.
Corporate
Debts and Restructuring
No
loans and advances (funded or non-funded) will be granted to any company, in
the absence of the personal guarantee of promoter directors
(professionals/technocrats occupying director posts, by virtue of their
academic qualifications and experience will not come under the definition of
promoter directors, provided they do not own more than 2% of the shares of the
company in their name and in the name of their relatives). All funded limits to a company will be
secured by tangible assets of not less than 60% and non-funded limits secured
by tangible assets of not less than 30%.
Whenever
a proposal comes up for restructuring of advances in the name of a company
(whether under consortium or not), the proposed sacrifice in all forms put
together shall not exceed – (a) 15% of the shadow liability and (b) 20% of the
real liability. Moreover, where
additional limits are sought to be released, upfront payment of reasonable cash
margin must be demanded from the company.
Banks
may take a liberal view in matters of (a) conversion of compound interest into
simple interest (b) reduction of interest rate by 25% and (c) reduction of cash
margin (not total waiver) for non-funded limits of sick companies.
Banks
may at the time of corporate restructuring demand the following –
(a)
Changing
some of the directors on the board of the company or superseding the entire
board of the delinquent company
(b)
Inducting
one or two additional directors as whole time directors
(c)
Conversion
of a portion of the debt/term loans into equity share of the company
(d)
The
directors of the company must bring down their shareholding by a certain
percentage, by offloading their shares in the open market, but not selling to
their own relatives or friends
(e)
Bringing
in new technology or process or both as a pre-requisite for CDR
(f)
The
directors of the sick company must quit the board of all other companies in
which they are whole time or part time directors
(g)
The
directors who had to quit, upon the banks’ advice, must not be reappointed on the board of any company in future
(h)
Nor
any relatives of such persons be appointed the directors of the companies
(i)
The
company is to sell off some idle or superfluous assets like land or building
(Guest House/Residential Building etc.) and reduce the liabilities or repay
some loans in full
Restructuring
of any advance involving aggregate limits of Rs.10 crores and above must be
subjected to CAG audit. Similarly,
writing off bad debts exceeding Rs.50 lakhs and above will be closely
scrutinized by the Comptroller & Auditor General. Further, investments and purchases of large
value made by banks are also to be brought under CAG Audit.
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 decision-making and extended full support and
protection for their actions too.
Two
Language Formula
In
Banks, only two languages must be adopted.
For simple functions like cash/cheque deposit, withdrawal of money
through cheques (or withdrawal forms in case of SB accounts), Demand Draft
applications, SB Account opening etc., the necessary forms must be printed in
the local vernacular language and English.
In all other cases, all forms must be printed only in English, because
English has come to stay as the business language. While customers are not compelled to write in
English, banks need not waste crores and crores of rupees in printing all forms
and registers in Hindi and spending huge amounts by keeping a separate
department for Hindi. People in Hindi
heartland will not be affected by this change, because in their case, Hindi
will be the local vernacular language.
H.R.
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.
Separate
Protection force on the lines of CISF for Banks
A
separate police force named as ‘Banking Protection Force’ is to be raised to
guard and protect all public sector banks’ assets and their staff. However, to prevent the entry of corrupt
elements into such force, necessary precautions have to be taken.
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 one’s 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 BY pannvalan
Well-thougt article. Let us hope good sense will prevail upon government and will be implemented. Thanks for the labour and energy you have given.
ReplyDeletescdhole2008@gmail.com
Really good article
ReplyDeleteWe can only hope for such implementation
merging RRBs with NABARAD can help boosting the Agriculture finance in the country and can also address various issues related to agriculture finance subsidy
ReplyDelete