Given the grim situation of PSBs and rising NPAs in India, development banking gives banks a chance to earn profit on sustainable basis which can strengthen the system
According to a projection made by the Reserve Bank of India in its Financial Stability Report, the gross bad loans in commercial banks could increase to 8.5 per cent of total advances by March 2017, from 7.6 per cent in March 2016. It seems the slew of measures taken to check non-performing asset (NPA) has not tamed the NPA growth. An NPA of 8.5 per cent is alarming for the banking sector. The reasons for NPA growth are that banks are not focused to check NPA. Over decades, the Indian banking sector has not realised the power of development banking and fumble when they appraise loans, examine the loan documents, understand borrowers’ credit history and counter political interference in banking decisions. There is no single forum in public sector banks (PSBs) to voice their concern over political interference. Banking sector chiefs have not explained the repercussion of populist schemes to political leaders before its introduction.
All Governments put pressure on PSBs to serve the social sector, the priority sector and the weaker sections without examining the credit worthiness of the borrowers. While doing social good, as enshrined in the Banking Regulation Act 1949, the PSBs have to necessarily adopt development banking to turn their disadvantage into advantage. The poor can be credit worthy with good infrastructures, transparent market chain, with basic facilities and with good governance. Banking is one of the tools to make people credit worthy.
Development banking creates opportunities for banks to earn profit on a sustainable basis. It is like the Air Force for the Army. It clears ground for the infantry to take control over the land. Development banking makes people credit worthy with multiple approaches like providing training skill, marketing knowledge, teaching repayment ethics and inculcating the habit of savings among people. There is no point in flowing credit to an economic sector whose potential is not scientifically assessed. Steel, infrastructure, coal, aviation, power and realty sector has shaken the banking sector with huge bad loans. Had the bankers used their development banking skill to map the potential of those sectors, there would not have been a rise in NPAs.
Only updating Know Your Customer document will not help. Banks have to collect ground level intelligence about the borrowers and know the loaners’ mind. Whether the borrower has a well-thought out plan to divert the loan; whether he is planning to default the loan or make a documentation fraud. Periodic verification of assets created by the borrowers is essential. Development banking skill can help banks use its credit effectively. It is not the credit but the credit end use that matters. Andhra Bank had more than12 per cent NPAs in power sector during 2015-2016. The bank had not examined the risk factor like availability of coal for power projects in the next five years. The borrowers knew it and defaulted loan saying coal is not available.
Many borrowers actually outsmarted PSBs. More than 200 hydro electric projects were sanctioned in Uttarakhand without examining environmental factors. As a result, hydro projects were washed away in 2013 flood. Development banking is all about continuous intelligence collection on market, borrowers, international financial sector, domestic policies, domestic and international trade. PSBs have to play the role of educator to potential entrepreneurs before financing them. Development bankers are knowledge capital and potential financial consultant within the bank.
Schemes like the Pradhan Mantri Jan-Dhan Yojana, Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana etc can help people in the rural sector. But a majority of people in this sector are exposed to exploitation by agencies like cheat fund, corrupt NGOs, shadow banks and other spurious financial agencies that thrive on people’s anxiety, hope, poverty and illiteracy and ignorance. Here banks have to step in to educate the people, make them credit worthy borrowers and teach them repayment ethics through informal clubs. Doing a bit developmental banking outside the purview of bank will reap benefit for the banks. The credit flow to unorganised sector rolls back to the bank with interest. Here banks have to identify the raw energy, the potential small entrepreneurs who can earn with little investment. Economist CK Prahlad found huge business opportunity at the bottom of the pyramid. But business will happen when people at the bottom of the pyramid become credit worthy and earn surplus from their entrepreneurship. Here PSBs have a big role to play.