Bank Union Suggestion On Budget

CIRCULAR NO. 27/67/2014/23 20th June, 2014
TO ALL UNITS & MEMBERS

Dear Comrades,

AIBEA’s SUGGESTIONS TO GOVT. ON BUDGET

Units are aware that the new Government at the Centre is getting ready to present its budget next month. From AIBEA we have sent our submissions and suggestions to the Finance Minister for consideration by the Government. We furnish herein the suggestions given by AIBEA for the information our units and members.
With greetings,
Yours comradely,
C.H. VENKATACHALAM
GENERAL SECRETARY

PRE-BUDGET CONSULTATIONS – AIBEA’s SUGGESTIONS & PROPOSALS :

BANKING SECTOR:

• The Government should decline to accept the adverse recommendations of PJ Nayak Committee which was set up by the Reserve Bank of India.
• All Private Sector Banks should be brought under the Public Sector.
• The Government holding in the Public Sector Banks should not be reduced below 51%, rather the Govt. should hold full control over these banks by 100% equity holding.
• The Governance Board of the Public Sector Banks should be enlarged, strengthened by appointment of professional persons from various fields of interest.
• A CMD should have a minimum tenure of 3 years.
• Willful default of bank loans should be declared as criminal offence through suitable amendment of law.
• Non-Performing Assets of the Banks are rising at an alarming speed. The Government needs to deal strictly with the defaulters.
• The Govt. should set up Fast Track Judicial Courts, exclusively to deal with Debt Recovery cases. Suitable law should be enacted under SARFESI Act for attachment of personal assets of the defaulters.
• Once in six months the defaulters list should be published in public interest.
• Similarly, the loan defaulters’ list in respect of dues to the Public Sector Banks should also be published simultaneously.
• The bank loan defaulters should not be permitted to contest in the election, either to the Legislative Assembly or in the Parliament Elections.
• A system to be evolved to ensure accountability and responsibility on the part of the CMD and Executive Directors of the Public Sector Banks in respect of sanctions of credit etc. which ultimately becomes distressed assets.
• A review should be made to identify the beneficiaries whose debts/loans availed in the banks with interest was written off.
• The RBI should impose a ban on corporate houses to borrow under OCB route as they tend to park the money with domestic banks and earn higher rate of interest, instead of deploying the money for project building.
• Floating ARC as a tool to reduce NPA should be discouraged whereas NPAs should be actually recovered. Auction of NPAs should also be stopped as the same involves huge write offs ultimately resulting in heavy loss to the Banks.
• The Govt. policy should aim at promoting savings and investments by parking the funds in Public Sector Banks. Hence the Govt. should persuade the Public Sector Banks to increase the interest rate on Savings Banks Accounts to 5-1/2%.
• The exemption of tax on interest received from deposits should be increased to Rs. 25,000/- from the present level of Rs. 10,000/-.
• The Reserve Bank Policy to entertain private sector corporate houses to open banks should be discouraged. On tap licencing policy should be discontinued.
• The concept of investment banks, retail banks etc. are not relevant to the Indian Banking system and hence the Government should not entertain such proposals.
• All the Regional Rural Banks should be merged with the sponsored banks.
• The Co-operative Banking Institutions should be adequately strengthened and recapitalised by collective mechanism of funding them by Central & State Governments by implementing the recommendations of Vaidyanathan Committee.
• Profits of Co-op. Banks should be exempt from Income Tax under Sec. 80-P
• Moves at merger of nationalized Banks, merger of Subsidiary Banks with SBI should be totally abandoned. Associate/Subsidiary Banks of SBI should be freed from SBI and made independent Banks.

RURAL SECTOR :

• All villages must be provided with a minimum of civic amenities for a decent and hygienic living.
• As suggested by the former President of India, Shri Abdul Kalam, PURA MODEL should be adopted uniformly.
• Community Public Toilets to be provided for Men & Women separately.
• School Buildings to have minimum of amenities like water supply and exclusive toilets for girls.
AGRICULTURE :
• Future Tradings in all Agricultural commodities must be banned.
• The State must increase investment in infrastructure as well as provide easy Credit to all categories of cultivators to free them from private money lenders.
• No agricultural land should be converted into commercial land.
• Lands acquired by banks in settlement of loans by the small and marginal farmers must be returned to the original owners on repayment of installments on the basis of similar deals in respect of commercial companies.
• No farmer should be forced to surrender his land for the failure to repay the loans.
EDUCATION AND HEALTH :
• The right to health and education should be deemed as fundamental rights.
• Similarly, Health and Medical Services should be run by professionally qualified persons in association with State Agencies on the basis of PPP Model.
• Health should be included in the concurrent list of the Constitution. Adopt a National Health Policy legally binding on the Executive.
• Implement the Rational Drug Policy and Drug Pricing.
• Primary Health Centre should be established in all centres, for every 30,000 population, with 24 hours service.
• The Policy of gradual privatisation of Government Medical Institutions should be stopped forthwith.

PRICES :

• The system of computation of consumer price index should be reviewed as the present index is causing huge financial loss to the workers.
• The APMC Acts should be abolished.
• Farmers should be allowed to sell their products to consumers without the intermediation of wholesale traders.
• The Government should distribute excessive stock of food grains.
• There should be strict laws against hoarding.
• The Government should also consider introducing Windfall Tax to curtail windfall gains by traders and speculators.
LABOUR LAWS :
• Minimum wages linked to consumer price index must be guaranteed to all workers. It should not be less than Rs. 15,000 per month.
• No casual labour for a regular ongoing work in any establishment should be permitted.
• Government should constitute a machinery such as Labour Laws Enforcement Commission with Judicial rights.
• Violation of labour laws should be made a punishable offence.
• The pace of job creation in the manufacturing sector should be accelerated given the challenge of observing the rising supply of potential workers especially females.

TAXATION :

• Income Tax exemption ceiling for salaried persons should be raised to Rs. 5 lakhs p.a. and fringe benefits like Housing, Medical and Educational facilities should be exempted from income tax.
• Income Tax rates for rich individuals is to be raised significantly. For persons with incomes between Rs. 30 lakhs and Rs. 1 crore, the tax rate should be 40% and income of above Rs. 1 crore, it should be 50%.
• Adequate steps to recover the tax due to the Government should be initiated through stringent enforcement of law.
• Meeting fiscal deficit target to please the credit rating agencies abroad should not be priority of the Government.
• Indirect taxes on goods and services must follow the principle of low taxes on mass consumption goods and high taxation on luxuries.
• A transaction tax on all Stock Markets and Future Market’s transaction at least at 0.5% must be collected.

PUBLIC SECTOR UNITS :

• Disinvestment of shares of profit making public sector units should be stopped forthwith. Budgetary support should be given for reviving potentially viable sick CPSUs.
• The public holding in PSU Units should not be increased from the present level of 10% as proposed by SEBI.
• Appointments of Chiefs of Public Sector Units, remaining vacant for a longtime should be expedited.
• The Government holding in Axis Bank, Larson & Tubro as well as in ITC should not be disinvested.
• Disinvestment of Public Sector Units with a view to reduce the fiscal target should not be continued as a policy.
• Concerted efforts are needed to generate employment through massive revival of public sector.
• LIC should remain with Government of India.
FDI :
• All foreign investments should be subject to KYC norms and by proper identification of ultimate beneficiaries.
• All Foreign Trade Agreements (FDAs), Bilateral Investment Treaties (BITs) and Double Taxation Avoidance Agreement (DTAAs) should be reviewed comprehensively in India’s national economic interest.
• Foreign Investment in Service Sectors, LIC, Private Sector Banks should be discouraged.
• The Foreign Investment Promotion Board (FIPB) should be replaced by a Foreign Investment Review Board (FIRB).
• FDI in Retail Sector should not be permitted.

Power To Bank Board

Pratip Kar: Empowering public sector bank boards

The governance structure and boards of PSBs, including State Bank of India and its subsidiaries, are antiquated and no longer conducive to good governance. These must be changed

Pratip Kar 

June 19, 2014

 

In more ways than one, the P J Nayak Committee Report on the governance of bank boards in India is different. Not only are the recommendations refreshingly bold, its findings are stated with unreserved candour. Tucked away as footnote number 41 of the report, is an interesting quotation from Adam Smith's 'An Inquiry into the Nature and Causes of the Wealth of Nations'.

"Frequently, a man of great fortune, sometimes even a man of small fortune, is willing to purchase a thousand pounds share in India stock merely for the influence which he expects to acquire by a vote in the court of proprietors. It gives him a share, though not in the plunder, yet in the appointment of the plunderers of India... Provided he can enjoy the influence for a few years, and thereby provide for a certain number of his friends, he cares little about the dividend, or even the value of the stock upon which his vote is founded."

The quotation is used in the report in the context of the selection of directors on the boards of public sector banks (PSBs). There are various ways of interpreting the quotation. But we must not miss the fundamental point - the power and influence even a man of small fortune acquired among friends and the society by owning a share of East India Company. We shall see how the situation is similar today for seats on PSB boards and the efforts made by aspirants to acquire those seats. Being on the board of a PSB gives an externally appointed director a sphere of influence, which works to the advantage of the director's personal area of work.

The governance structure of PSBs and the State Bank of India (SBI) and its subsidiaries has been frozen in the Bank Nationalisation Acts of 1970 and 1980, and the SBI Act. It is antiquated. These Acts lay down to the last detail the manner in which board positions are to be filled. The table shows that there are eight broad categories of directors. The important point to note from the table is not only the puzzlement of the relevance of many of the categories of directors in today's context, but that the entire board save the directors who are elected by the shareholders, all the other directors are either nominated or appointed by the government and clearly, there is no room for the bank boards or their chairmen to play any role in the selection of a director.

When a board is thrust on a PSB without any consultation with the chairman, the composition of such a board may well follow the given legislative structure, but the probability of that board having an optimal composition, with interests of the directors aligned to that of the bank, would be very low. On top of it, if as the Nayak Committee Report observes "some non-official directors are of poor quality or get on to the board with parallel agendas (as is now commonly alleged) the chairman then begins to view sections of the board as unhelpful to the interests of the bank". The ecology of the board room can then no longer remain pure.

The Acts, while delineating the different classes of directors, lay down the minimum qualification for each class in a very general way, without any reference to quality or competency. For example, the two Nationalisation Acts say that one director should be a qualified chartered accountant. So technically, all chartered accountants would qualify for appointment to a public sector bank. There is a selection process for the directors nominated by the government, but the government guidelines focus on professional qualification and not on competence. The report laments that "Sadly, even the elected shareholder directors generally owe their election to LIC, given LIC's dominance as a shareholder in most banks, and the perception is widespread that LIC's support is best managed through the government". Analysis of the boards of the PSBs shows that there are quite a few directors who have perfected the art of rotating for decades across boards of PSBs as shareholder directors. The motives behind such rotation are hardly altruistic or in the interest of public service. The concept of rotation is absent in private sector banks.

There is, therefore, ample justification for the apprehension expressed in the report that "Suspicion that a large proportion of directors get appointed on the basis of political allegiance also leads to intense scepticism that these banks will ever be run in the taxpayers' interest, with the goal of generating good financial returns". It is in this context that Smith's quotation in 1776 becomes relevant for PSBs in 2014.

Clearly, this situation needs to change. But no change in the composition and the governance structure of PSBs is possible without the repeal of the statutes. Following their repeal, the committee has suggested a three-phase process for the transfer of the government holding in PSBs to a Bank Investment Company (BIC) and the transitioning of powers from the government to the BIC, and then to the bank boards with the intent of fully empowering them. By carrying out this operation in three phases, the government would gradually distance itself from PSBs without losing any control.

The repeal of statutes is not an easy process and there is always an uncertainty on the time line. In the interregnum before these Acts are repealed and the legislation to activate BIC is passed by Parliament, the selection process of directors needs to be professionalise and depoliticised. The committee has suggested the constitution of Bank Boards Bureau (BBB) by a government order to advise on top bank management selection. The BBB should comprise senior or retired commercial bankers of high standing and have led banks, and chosen by the government in consultation with the Reserve Bank of India. As the appointments to the top management of banks will continue to require the concurrence of Appointment Committee of the Cabinet, it is desirable that BBB's recommendations be generally accepted by the government and there should be a public disclosure of all cases of recommendations made that are rejected by the Government.

The setting up of the BBB and BIC, and the necessary repeal of the four-decade old Nationalisation Acts, would need a strong political will and political mindset wedded to good governance. It is important to harken the words of Smith in 'Theory of Moral Sentiments': "The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it."

 

Link Business Standard

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The writer was a member of the P J Nayak Committee and a former executive director of Sebi. These views are personal

Only PS Banks May Face Risk Due To Mismanaged Power Companies

Discoms to keep stoking banks’ NPA worry if finances don’t improve: Moody’s report-Financial Express

The Indian power sector would continue to be a source of asset quality risk for public and private sector banks in India if the poor financial profiles click hee to read more

The Indian power sector would continue to be a source of asset quality risk for public and private sector banks in India if the poor financial profiles of state electricity board distribution companies (discoms) do not improve through further structural reforms, ratings agency Moody's said in a report on Wednesday.

"The poor financial health of discoms in India is one of the key factors weighing on the asset quality of the country's banks," Srikanth Vadlamani, vice-president and senior analyst at Moody's said.
According to Moody's, public sector banks have both direct and indirect credit exposure to discoms; private sector banks have almost no direct exposure, but they are exposed indirectly if problems with discoms affect the credit quality of other borrowers in the electricity supply chain.

It adds that for public sector banks, loans to discoms as a proportion of total loans range from 1% at SBI to 14% at Central Bank of India as of the end of 2013.

“While loans to discoms are a relatively small portion of overall loans, they are a much larger share of many public sector banks’ impaired loans, with impaired loans to discoms comprising more than 10% of total impaired loans at all PSBs except for SBI and reaching levels as high as 46% at OBC and 48% at Central Bank.”

Unlike PSBs, which in many cases effectively had no choice but to provide credit to discoms given government ownership and role in their management, private banks have mostly avoided directly lending to discoms given their weak finances.

Asset quality at banks has deteriorated in the last couple of years; at the end of March 2014, loans of R2,50,715 crore were non-performing, according to Capitaline data.

The Moody's report said that government measures taken in the last two years have only provided temporary relief to the banks exposed to discom loans. The steps included the substitution of impaired loans with government obligations and some operational improvements including tariff hikes.

The discoms' key problems — pricing based on non-commercial considerations and inefficient operations — have not been addressed, and a political consensus to allow discoms to price power based on commercial considerations continues to be lacking, the report added.

http://www.financialexpress.com/news/discoms-to-keep-stoking-banks-npa-worry-if-finances-don-t-improve-moody-s-report/1262142

Private Banks Double Manpower In 5 Years

Private banks double headcount in 5 yrs-Business Standard

Fresh hiring might slow as banks likely to focus on improving efficiencies

 

The headcount in India’s top private banks is on the rise, despite a slowing economy and uncertain business environment. Large private banks in the country appear to be on a hiring spree, with many of them doubling their staff count in the last five years.

ICICI Bank, the largest private sector lender in India, closed last financial year with 72,226 employees compared to 35,256 staff at the end of March 2010. HDFC Bank increased its headcount to 68,165 from 51,888, while Axis Bank almost doubled its number of employees to 42,420 during this period.

Mid-sized private lenders like IndusInd Bank and YES Bank have also been aggressive recruiters with nearly threefold rise in their employee base in last five years.

“A lot of banks have been hiring in anticipation of a revival in economic growth. Some of them were also expanding their size and building infrastructure to grow their businesses. While I expect private banks to remain net recruiters, they might not be hiring at the same pace as before,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.

 

Industry analysts felt that would now been monitoring efficiency parameters (like business per employee and profit per employee) more closely as business growth continues to remain tepid.

Employee productivity, for most private banks, has not seen any significant improvement in the last five years. For instance, ICICI Bank's business per employee during the last financial year was Rs 7.47 crore compared to Rs 10.29 crore in 2009-10.

The private lender has reportedly cut 1,200 jobs - from general managers to junior officers - recently to improve its efficiency parameters. “ICICI Bank periodically reviews its business strategy and aligns its organisation structure to the needs of the business. Such organisation restructuring brings in efficiency and improves productivity, translating into better business results for various stakeholders. The process of restructuring includes review of manpower, supervisory structure, systems and processes, technology intervention and job designs among other things,” a spokesperson of the bank said.

“The bank is taking due care to ensure that the process is handled in a humane and sensitive manner. Employees who need handholding due to special circumstances in the family are being exempted from this process. They include women employees who are on maternity leave, employees who children in the 10th and 12th standard and those who are on long sick leave. Freshers have been completely kept out of this exercise. ICICI Bank is a dynamic and growth-oriented organisation. It will continue to hire in accordance with its business requirements,” the spokesperson added.

 

 

Link Business Standard

 

My Opinion Given sometimes ago

Manpower in Public Sector  Bank

It is reported that banks will open 8000 branches this year. Such reckless expansion of branches by banks proved disastrous in seventies and eighties also when in the name of Service Area Approach, banks were advised to open branches in remote areas. Banks in order to abide by instruction of Ministry of Finance and in order to achieve the set target opened thousands of branches without ensuring adequate infrastructure and without having trained manpower to manage the branches opened in villages.

Very soon management of banks as also government of India realized that profitability of almost all public sector banks was adversely affected due to large scale expansion. Bank staffs who were posted in far flung village areas found it very difficult to survive and their families also felt stranded and isolated from society. As a consequence frustration developed in a large section of employees and their enthusiasm to work for banks got diluted and they became either indifferent to bank’s policy or became corrupt to earn money on every sanction of loan without caring for future of repayment.

Loan sanctioned by bankers in these areas were not monitored properly and a feeling developed in villages that loan given by banks are not to be refunded. Corrupt practice took the root where bankers in nexus with block officials misappropriated bank’s fund or financed to unscrupulous persons or earned huge money in form of commission or bribe .Many officers of bank as also that of state government did not hesitate even in making fake advances to loot the bank by both hands . Unfortunately banks also became sympathetic on such corrupt employees in the name of achievement of target of lending imposed by MOF in the name of social welfare schemes.

 Not only this even business potential of these branches were too low to survive. Advances allowed in these branches by bank officers started going bad and ratio of Non Performing Assets (NPA or Bad debts) went on increasing. After losing a lot, government of India and management of Bank decided to close uneconomical and nonviable branches or to turn them satellite branches or to merge them with nearby bigger branches with a declaration that they will continue to serve the village allotted to such closed or merged branches. Somehow some improvement started taking place in banks and branch expansion was curtailed and controlled for a few years and the era of consolidation started.

After burning fingers in such reckless branch expansion it was thought that banks will not commit such mistake in future. But unfortunately politicians of this country are so much votes oriented that they are least bothered for health of bank, nor for bank staff and neither for villagers who are still exploited by local money lenders or micro finance institute. This is why government of India and Ministry of Finance have again started building pressure on each banks to open branches in all unbanked villages even if they are non viable, even if banks do not have adequate trained manpower to manage these rural branches and even if there is no scope of adequate business potential  in these areas.

In the name of Financial Inclusion, banks are again committing the same blunder of reckless expansion as they did in seventies and eighties in the name of Service Area Approach. ‘’Old wine in new Bottle ‘’ is the fittest proverb to ascribe for banks.

After passage of a decade or so, Politicians come out with different schemes with more or less same ingredients. When they fail in one scheme, they come out with similar other scheme with difference name but the loot continues in the same fashion. Cancer of Corruption does not allow any scheme to get real success. Politicians and banks together damaged banks first in the name of Service Area Approach and now they are damaging in the name of Financial Inclusion. 

So far as poor villagers or poor persons of this country are concerned, they were not happy with the system in the past and they are not happy in the present , though all such attractive polices are framed for them and  meant to serve them only . It is however undeniably true that village level unscrupulous elements in nexus with state government employees and banks are exploiting bank fund for their personal gain in the name of social welfare.

Poor and unemployed youth  were cheated in the name of Antodya Scheme, then in the name of Integrated Rural Development Scheme and now in the name of Financial Inclusion. Similarly unemployed youth were cheated and in turn unemployed youth cheated bank  in implementation of schemes like PMRY, then PMEGP, SGSY etc . Self Help Group Scheme headed by various NGOs are looting banks in the name of creation of employment.

Fifty percent of branches of every bank are having huge small amount Non Performing assets and majority of such branches are running in operation losses. More than Fifty percent of loan accounts are NPA in majority of branches and still management of bank claim to be safe and healthy.

Branches after branches are being opened every year but recruitment of additional manpower matches branch expansion is not ensured. Total manpower in most of the banks is almost the same as it was a decade ago. It means they are adding branches but not adding manpower. They recruit manpower hardly equivalent to number of bank staff retire or resign every year. Due to this unbalanced manpower policy , there is huge work load on all existing employees and this is why bank employees are abused, tortured and forced to work late hours, and work on Sundays and holidays . This is why bank employees are not in a position to properly carry out pre sanction inspection before sanction of new loan, nor they have time to monitor the advances disbursed by them and nor do they have time to follow up defaulting borrowers to ensure timely repayment of loans disbursed by them.

To add fuel to fire management of almost all banks are now suffering scarcity of experienced manpower. They have started therefore to give promotion even in two or three years of service which used to be rare possibility in seventies and eighties or even in nineties. Officers who have got no banking idea and no credit exposure are made branch head and officers who have not served in branches are made Regional Head. 

To make it more worse,Banks have started recruiting  officers directly from campus in higher scales to attract good officers from other banks.  They are not hesitating recruiting their own kith and kin from campuses of their choice , They do not hesitate causing loss to banks by paying higher pay to such newly recruited officers . They have no shame even in creating anomalies of pay of experienced and inexperienced officers.Twenty or Thirty year experienced and performing officers are not getting salary as much as newly recruited or five year experienced officers are getting in the name of so called meritorious or specialist officers.

In the name of merit they are indulged in corrupt practices even in recruitment and promotion of employees. Under such circumstances and in such polluted and corruption inflicted environment, one cannot dream of banks remaining healthy and growing in near future. 

In brief one can say that politicians of this country who are well versed in corruption and well versed in protecting corrupt officers are leaving no stone unturned to make bankers also corrupt and to protect all corrupt bankers by hook or by crook.Clever  Bankers and clever  politicians are serving their personal interest at the cost of villagers , poor citizens of this country and the scarcely available fund of the country.

 

Importance Of ATM Target

18 PSU banks failed to meet target of setting ATMs-The Hindu

As part of the target, a total of 34,668 onsite ATMs were to be installed by PSU banks during the last fiscal.

Eighteen public sector banks, including SBI and PNB, failed to fulfil the target for installing ATMs during 2013-14, leaving more than over 9,300 branches without cash vending machines. As part of the target, a total of 34,668 onsite ATMs were to be installed by PSU banks during the last fiscal.

 

However, they could set up only 25,331 such machines by March 2014, thus falling short by 9,337, as per Finance Ministry data. Installation of Automatic Teller Machines (ATMs), especially by public sector lenders, has been a major priority for the government's efforts to ensure financial inclusion.

 

Pursuant to Budget 2013-14 announcement, public sector banks were required to ensure an onsite ATM in ever branch. As on March 2014, Allahabad Bank was yet to set up 1,950 ATMs, Central Bank of India 1,620, Syndicate Bank 1,085, Bank

of India 7,44, State Bank of India (SBI) 696, Indian Overseas Bank 553 and Punjab National Bank (PNB) 499. On the other hand, Bank of Baroda, Bank of Maharashtra, Canara Bank, IDBI Bank and the four associates of SBI managed to meet the targets given to them.

There are roughly about 1.4 lakh ATMs of public and private sector banks in the country. Financial inclusion aims to extend financial services to the large hitherto un-served population of the country. In addition, it strives towards a more inclusive growth by making financing available to the poor in particular.

Work Culture AT Private Banks And Reputation Risk

‘Private banks must focus on retaining and managing talent’=Hindu Business Line

MUMBAI, JUNE 12:  

The “work culture” in some private sector banks was brought into sharp focus by a top central bank official on Thursday.

According to Harun Rashid Khan, Deputy Governor, RBI, the way the work culture has evolved in some of the private sector banks could lead to reputation risk for them.

Speaking at the ‘Banking, Financial Services and Insurance Conference’ organised by SBICAP Securities, Khan said that banking has become a hated profession among some youngsters. The RBI Deputy Governor’s observations are significant as they come in the backdrop of a large private sector bank reportedly issuing pink slips to about 1,200 employees. Referring to the 4Ps in banking, Khan said if a bank has excellent products, excellent processes and excellent partnerships, but not the people, then all its efforts (to grow business) will fail.

“The age of lifelong loyalty to an institution is gone. So, banks have to constantly churn people…How you retain and manage talent (in terms of compensation and motivation) is something that has to be focussed on by the top management,” said the Deputy Governor.

Bankers say that in the dog-eat-dog world of banking, some private sector banks have set unrealistic targets (related to deposit growth, sourcing loans, bringing fee-based business, and reducing bad loans) for their employees to achieve.

When they fail to meet the management’s expectations on the targets, the employees are coldly weeded out. This could lead to a situation where youngsters will not look at private sector banks as a long-term career option, bankers said

Link Hindu Business LIne

Truth Of PSU Banks

Former World Bank economist Percy Mistry, who authored a widely acclaimed report on making Mumbai an international financial centre, says state-run financial institutions need drastic changes in their working and the government should draw up a strategy to exit these institutions. Edited execrpts from an interview with Dev Chatterjee & Abhijit Lele.

After a lot of time, there is some clarity emerging in policy making under the leadership of the new finance minister… What’s your take on the recent policy changes?

The change in FM was long overdue for policy and GoI/MoF credibility to be restored. India had lost all credibility following prolonged macroeconomic mismanagement between mid-2009 and mid-2012. Thank God PC is back. We seem to be on the right track again. However we are not out of the woods by any means. For example, it was shocking to hear the kind of arguments made during the debate on FDI in retail and on the banking bill. I wonder whether the political class in India at the Centre and in the states is aware of economic realities as they are today.

Somehow the political class in India is still under the impression that they have to indulge in the politics of patronage. There is as yet little debate on the politics of development, governance or the delivery of services. The political class still believes that the Indian electorate comprises a bunch of babies that should be given jalebis at election time. In spite of every election which has shown that the electorate wants development and good governance, over 90 per cent of our political leaders seem proud to remain economic illiterates.

After last year’s anti-investor moves like GAAR, the vendetta conducted against Vodafone, and a series of corruption scams that resulted in reversing many licenses, foreign investors’ confidence and the credibility of the government had been completely eroded. But I have to give credit to the present finance minister and the restored vision of the PM – which seemed absent for too long -- for bringing back investors’ confidence both in India and abroad.

The reality is that without massively increased foreign and domestic investment, both FDI and FII over the next 5-10 years, India will be flirting with another severe economic crisis given trends in our current account and aggregate fiscal deficits. Without such investment growth will remain below 6%. The fragile dynamics of our twin deficits will spiral out of control leading to a debt crisis which will trigger a financial crisis leading to a broader economic crisis.

 People do not realize that we are dancing at the precipice of our own fiscal and CAD cliffs and could tip over the edge quite easily if Parliament does not get its act together and move swiftly ahead with other financial reform bills; especially the pensions and insurance bills that are key to bringing in more FDI and FII with multiplier effects.            

(MY Comment:   After all who are those politicians who may be held responsible for creating such a insurmountable fiscal cliff?---Who are responsible for current fiscal crisis and growing CAD? Who are responsible for abrup rise in bad assets in state run banks?

 It is wrong policies imposed on India in a bid to compete with developed countries without ensuring same level of sound administration, police system , judiciary,infrastructure, education , skill etc as characteristics of developed countries like USA and UK ))

In a few weeks, the government will be coming out with its budget at a time when elections are almost set to be declared. Do you think the finance minister will have enough courage to make bold economic reforms? 

What bothers me is that he seems to have very little room for discretionary budgetary maneuver however hard he tries. And there is no appetite or time for making large and bold changes that we need in tax and expenditure policy. What also worries me is that in spite of a devaluation of rupee from a central level of 45 to 55 against the dollar, it has not had any of the positive impact it was supposed to have on the economy (like increasing exports, a higher level of import substitution and reducing aggregate demand for imports. 

Today India’s imports are still very high and we are still not on track for import substitution. The government should also look at making Gold ETFs more advantageous to small investors. At present there is not much difference on the price between the gold and the ETFs and therefore there is not as much demand for gold ETFs as there should be. 

Clearly we need to do what we can to reduce demand for physical gold and increase demand for paper gold derivatives. Any plans to increase import duties or have quantitative restrictions on gold imports will only encourage smuggling of gold in the country. That will be very difficult to control.

Besides don’t forget the current political scenario. The Congress is on the backfoot on corruption charges and given its performance from 2004-13 it does not really deserve to get re-elected if there is any justice in the real world. The BJP does not have a clear leadership plan and no one knows what it stands for when it comes to economic policy. What we do know it stands for is not very comforting for communal harmony. The third front strategy is not clear at all. Mulayam and Mayawati will always be available to the winning side. But it is almost impossible to see a third front being cobbled together that will have a cohesive and credible national economic policy, foreign policy, defense policy of home policy.

 So I do not see the prospect of the kind of political stability that will provide the kind of comfort that investors (foreign and domestic) need and demand for the next few years… we are heading for either 1986-1991 situation or the 1996-99 situation when politics was so fractured that there was an election every year. I don’t think the finance minister has much space for maneuver in these circumstances. I see all kinds of constraints on him to take big, bold economic reforms measures.

RBI and government are working on giving new banking licenses for bringing more people into banking fold? Does that make sense?

No it does not. The problem in India is not that we do not have a sufficient number of banks. It is that 70% of our banking system is state-owned, inefficient, un-inclusive, and provides the means by which too cosy a nexus between the government and the wrong kind of private industrialists. 

The state-owned banks ( SOBs) and insurance companies (SOIs) together provide the institutional mechanism to foster a dangerous and damaging type of crony capitalism regime in India as well as to indulge in electorally driven loan melas and loan write-offs. . That unfortunate nexus is decidedly kleptocratic in nature when it comes to looting the nation’s natural resources (whether spectrum or mineral or land) through the kind of public-private partnership that India does not need. Moreover the Indian fiscus cannot afford to keep meeting the capital needs of the state-owned banks. And the SOBs certainly do not serve the interests of the poor or the disenfranchised. 

In fact quite the opposite is the case. Any proper cost-benefit study of the performance of state-owned banks would show that the cost of having these SOBs is far higher than the supposed benefits. The same is true of Air India by the way and a jost of other SOEs (or what we call PSUs).

In that context creating new private banks to compete for 30% of the banking pie does not seem to me the answer to the problem of making the banking system more capable, responsible, efficient and inclusive. The answer lies in privatizing the SOBs and SOIs and in giving far more room to foreign banks to enter and serve the Indian market without the extreme restrictions that the RBI imposes on them. Many people will look to the 2008 crisis and say that is exactly the wrong solution for India. They would be wrong and would be looking at the wrong lessons to learn. 

I worry that many of the new licenses will be given to unfit and improper persons that are politically well-connected rather than potential bankers of judgment and probity. Look at the line up (of those interested in opening banks) and you would need to worry about the “fit and proper test”.

The problem is not also with how many banks we have. Many new banks were set up when RBI gave licenses in two rounds. Apart from Axis, ICICI and HDFC, there are no other solid private banks that have emerged as stronger or better.

In my view as long as Indian banking is dominated by SOBs we will not achieve any of the objectives of the banking system reform that we so urgently need.

What about giving licenses to industrialist to open new banks? 

Although many in India regard me as the prime ayatollah of market fundamentalism I do not think large industrial houses should be allowed to run banks. There will be massive scope for malfeasance. It is only in Japan and Korea that industry/trading houses (zaibatsus and chaebols) have got banks under their vast and diversified umbrellas. Japan is still struggling with the two decade old financial crisis. It is when ownership of banks is distinct from that of industry, media and services that the economic and financial systems work best.

Banking space is dominated by state-owned banks in the name of serving public interest? 

We in India refuse to accept that the state-owned banks (SOBs) and SOIs are not our strengths but our greatest weakness. They are transmission mechanisms through which government encourages crony capitalism, and entrenches its economic power. 

If India was transformed after the 1991 reforms -- which in the light of recent history should be more appropriately referred to as the Narasimha Rao reforms than the Manmohan Singh reforms —it was because those reforms put some space and distance between our political system and the economy. 

Where we have malfeasance, corruption and inefficiency it is directly correlated to situations where that space between politics and economic remains too narrow. The SOBs and SOIs bridge that space between politics and economics and diminish India and its prospects by doing so. 

We have 18 public sector banks and one SOB (SBI group) that accounts for 25 per cent of market. Punjab National bank, which should be a pan Indian bank, is only strong in the Northern region. The FM should seriously consider privatizing all the SOBs other than SBI and PNB for the time being and examine the impact of that experiment.

And all the evidence suggests that the one thing that SOBs and SOIs do NOT do is serve the public interest. They serve the interests of their managements, staff, the public sector employees unions and of central and state governments that can exert influence over economic agents through them. SOBs and SOIs are our greatest source of systemic risk.

In India there is a huge hue and cry for financial inclusion? Is that a good thing?

A) That is partly so since state-owned banks are so dysfunctional and they do not work. All this euphemistic talk of expanding financial inclusion in India terrifies me. It is one factor which led to the global financial crisis in 2007-08 when Greenspan thought that the idiotic things that US banks were doing – by lending Mexican gardeners multiple mortgages at 130% of home value and classifying these loans as being made to ‘landscape architects’ -- were great in the name of financial inclusion. Mexican gardeners were being included in the wealth chain of California, Arizona, Colorado and New Mexico. Now we can all see what that led to.

It is not as if we have not tried inclusion before in India. Only then we called it agricultural and rural credit. The banking system has taken massive repeated losses with that type of lending. That has also been the experience of most developing countries around the world. That is not because farmers and rural dwellers are fundamentally untrustworthy. It is because they are poor and exposed to risks they cannot manage.

It is one thing to say we want to introduce more people to the formal payments and settlement system that banks provide. That is all to the good. But, I would be terrified about extending credit through the public banking system to the fundamentally uncreditworthy. It is not that they have bad intentions. They are affected by many vagaries and risks that are out of their control and they do not have the savings or income to manage.

What we need instead of issuing new banking licenses is a clear strategy on how the government exits from state-owned banks. The other institution that I have become very worried about is the Life Insurance Corporation of India (LIC). It is has become the largest institutional investor in the Indian economy and it functions in a manner that is not entirely publicly accountable, transparent or clear. Its investment decisions and their timing are a mystery to me and most others. Sometimes they seem to be driven more by political rather than fundamentally economic or cyclical decisions.

Given the way our state functions, it worries me. For me, real systemic risk in the Indian financial system is probably caused by the LIC and the state-owned banks.

You must have seen in most of the disinvestment program, LIC becomes an unofficial underwriter for the government? 

It is not a disinvestment program. It is simply moving assets of from one side of government ownership to another side. The camouflage fools no one. In my view it is time to end all this nonsensical babble about disinvestment for reasons of political correctness. India does not need to proceed with creeping disinvestment. To secure its economic future it needs to proceed on a large scale with sensibly planned and phased privatization. Frankly I fail to see why anyone wants to buy shares in Indian SOBs or SOEs that are controlled and managed by government ministries and ministers. Time and again political decision-making and social policy intrudes in these organizations in what should be entirely commercial decision-making.

In effect, what you are doing with the failure of our disinvestment policy to attract private investors is shifting responsibility for ensuring good corporate governance, SOE accountability and transparency from the ministry concerned to an institutional investor like the LIC. What does that achieve?

No one is asking questions to LIC? 

A) In that context I think that the IRDA Chairman was absolutely right in opposing lifting the investment ceiling for LIC from 10% to 30% in any single enterprise and the MoF was entirely wrong to ignore his advice and force the issue for the sake of expediency.

Is it transparent enough? 

It is an extremely opaque. In fact, that is true of the entire public sector insurance sector. They are not required to report on actuarial risks by tenure or by sector.

It will be very nice to see if someone poses question to what degree LIC pose systemic risk to Indian financial system.

Supposing, the market for whatever reasons were to fall from current level of 19,500 to 15,000 what kind of hit would LIC take on its capital. What happens to its provision reserves? Would we simply say we will not mark-it-to market, which we always do?

LIC should be privatized. It is not just insurance company but also the largest asset management institution in India. But no-body regulates it properly either as an insurance company or as an AMC. I do not see at all IRDA being able to regulate LIC effectively. It is regulated by MoF under the LIC Act. That creates a distinctly unlevel playing field in the insurance sector.

How can you justify impartial arms-length regulation when you do not have a level playing field. The largest insurance company and asset manager is regulated under its own act. IRDA only regulates only 30 per cent of market (private insurers) and no-body asks serious questions about the other.

That is also true in some senses of banking regulation by the RBI. We have three-tiered regulation there as well. In our regulatory system the SOBs are favoured and protected. The private domestic banks are regulated in more draconian fashion and the foreign banks are throttled not regulated.

http://www.business-standard.com/india/news/new-banking-licences-make-no-sense-percy-mistry/497904/