Public Sector Banks hold a lot of potential and the trust of the countrymen, for the most part; what it needs is diligent monitoring and stricter policies for loan defaulters which will further boost the morale of the hard-working class
The Union Government’s decision to formulate a non-performing asset (NPAs) resolution policy is welcome. Accordingly, a sector specific norm will be devised to deal with bad loans which have increased to Rs 9.64 lakh crore as on December 31, 2016. During the period between April and December 2016, public sector banks (PSBs) have added one lakh crore rupee bad loan. In spite of many measures like recapitalisation, bank mergers, one time settlement, loan re-structuring, loan write off, recapitalisation and formation of asset re-construction companies, the bad loan continues to haunt the banks.
Two to three per cent NPA is good for bank as it shows bank’s ability to take risk. If the NPA growth is above 3.5 per cent of the total loans and advances, it shows banks’ risk appetite is more than what it can chew. PSBs handle around 70 per cent of the total deposit in the entire banking sector. This shows they still win the trust of the majority of people.
PSBs pay four per cent interest on savings bank deposit and zero per cent on current account deposit. Those current account and savings bank deposits are low cost resources for the banks which sustain banking business. Banks also accept different kinds of term deposits and pay higher interest to compete in the market. Besides the banks borrow from different sources and pay interest on the borrowings. Managing funds and reducing risk is a big challenge for banks.
External environment has a positive or negative impact on bank’s business. The Union Government set 40 to 75 per cent priority sector lending target for different banks. If credit absorption capacity is not there in priority sector, more credit flow always ends up in NPA. If a village does not have irrigation facility, a dedicated extension services and a transparent marketing facility, the bank credit will not generate surplus income for people.
Politicians tell banks to lend more to poor people in priority sector and in the same time they declare loan waivers. In fact, loan waiver schemes often create wilful defaulters and demoralise those who sincerely repay bank loan in time. Elected representatives should take the responsibility of improving the banks’ recovery position. They should ensure that the loans and subsidies reach the beneficiaries.
Macro level policy has an impact on bank’s business. If Government gives sops to housing and automobile sectors, more and more people will buy houses and cars even if they have less capacity to repay. The US Government gave sops to housing sector which helped precipitate the subprime crisis whose effect is still there in the global financial sector. Many banks in India, have given huge education loan and do not get back the money, here the Government has to ensure that the educational institutions maintain quality and the children, after completing education should be employable.
Internal efficiency is the key to a bank’s good performance. In PSBs, more than 73 per cent officers, in deputy general managers and general managers ranks are above 55 years and are not first generation computer savvy people.
They have migrated from manual to computer environment in their 40s. Huge data is being uploaded in the banking system every minute in a core banking environment. Senior bankers should be in a position to access account wise and sector wise NPA status instantly from smartphones and issue instruction to the branches from any place on the earth. Monitoring of loan account has become far easier today with innovation in software.
The software should tell which loan account has become dry. The branch manager will get the warning signal immediately and take corrective measures. Senior bankers, who have migrated to computer environment, find it difficult to handle huge data in the system. Though they have experience and knowledge, their slow keyboard speed and inability to work in software environment make their task very difficult.
Even computer savvy people without knowledge on various economic sectors, finance and business are of little use in banks. They should know the various economic activities and have a sound business sense to channel those activities into
business proposition.
India has made rapid progress in satellite technology but it has not made use of it in practical field, like monitoring projects, sanctioned by banks. Today, core banking has made anywhere banking possible.
But, PSBs need hourly monitoring of accounts and dedicated Information system audit as the conventional auditors and inspectors have become redundant in new environment, which demands higher computer skills. If a top banker cannot detect fraud attempt in his bank within seconds there is something wrong in their digital skill. People like Vijay Mallya fraudulently diverted huge bank loans to build assets in foreign countries. There are still many Mallyas in India waiting to dupe banks. PSBs need more innovation and creativity to beat the NPA blue.
(The writer is a freelance commentator)