By Moin Qazi*
Despite what is being purveyed in the media, banks are keen on venturing into the hinterlands to set up accounts. Getting people on board is a different story. It is true that both government-owned and private sector banks are not getting compensation of any kind for promoting the financial inclusion agenda. In fact, banks are suffering an additional cost burden of 250 rupees to 500 rupees per account annually and can’t expect profits from them for at least two years a majority of bank accounts that were opened over the last few years for the poor are dormant due to inactivity and insufficient fund.
Indeed, the current crisis in the Indian banking sector has led to calls for privatisation of public sector banks (PSB). However, the private sector is no paragon of great virtue. Moreover, the faithful advocates of privatization are ill-informed of the real issues. The huge crowds that throng PSBs and put up with various inconveniences indicate the enormous faith that the public has in these banks. The challenge today does not involve providing ultra-sophisticated banking to the 10% upper crust. Instead, the true challenge is to provide basic financial services to India’s 90%, who may not be the source of great revenue to banks. Did you know that almost all government pensioners bank exclusively with public banks.
We should never forget the role PSBs have played in financial inclusion. These banks have been the backbone of socio-economic agenda for the government. In any particular rural area, the role of a PSB is not confined only to banking. It also encompasses a more holistic developmental agenda. PSBs are the one-stop shop for all financial needs of the local rural populace, including insurance, financial literacy, remittance and receipt of welfare subsidies and grants, amongst others.
The government’s socio-economic programmes have to use the banking conduit for movement of funds. Those who talk of privatisation should visit the remote branches of public banks, where managers live at great risk to personal lives, and are mentoring the local population, not just in financial literacy, but, also technical, business and agricultural literacy.
State-owned banks in developing countries have an important socio-economic objective — to meet the needs of the most vulnerable sections of the economy. Though both state and private sector banks are required to lend 40% of their loanable funds, at a concessional rate, to the priority sector, the main burden of the government’s development policies — from rural lending to infrastructure development — falls on state-run banks; our banking policies allow certain bypass routes for banks to achieve their priority lending targets through investments in bonds which can be classified under priority-sector lending. Most private banks have resorted to investment in these bonds to keep away from lending in mandated sectors.
It was public banks that revolutionised rural India in the social banking era of the 1970s. The expansion of bank branches in rural areas was particularly noteworthy.
It was this emphasis on those excluded from the formal financial stream that led to a slew of measures in the field of finance, and drove so many bankers into the arena of the battle against poverty. It is tragic that even as the country is grappling with massive problems confronting its struggling masses, the ignoble billionaires now have regular rides to the public trough.
Politicians are equally guilty of undermining the integrity of banks. They stacked the decks with populist sops using banks as spigots for burnishing their election credentials. This was apart from the huge loans they have forced banks to shovel to their buddies. In India, the proportion of dodgy loans, involving the borrower not making interest payments or repaying any principal, has surged to the highest level among the world’s largest economies. The question is — why should ordinary people bear the burden of the fat cats? These free loaders are gleefully and remorselessly winnowing scarce bank capital. The government has to goose these banks with spruced up balanced sheets to make them lend again. Ironically, instead of being chastised, they are lauded as captains of the industry and adorn glorious positions in industry associations.
India’s pile of soured loans, whose value degrades like an unstable isotope, is a classic example of how powerful and politically influential tycoons undermine the rules to secure credit and then default on it. The huge losses posted by banks and the desperate attempts by government to detoxify balance sheets show how difficult it is for the rescue plans to deliver. When borrowers become insolvent, their loans are added to an existing mountain of debt. Each time it happens, banks have to make heavy write-downs, ploughing the dud loans like rotten potatoes, ultimately choking the credit line.
To keep these banks going, the government has to regularly keep injecting capital into them. 13 state banks have reported combined losses of $8.6 billion for the year to March — including $6.5 billion in the last quarter — and their non-performing loans have surged nearly a fifth from end-December levels. The world’s great philanthropist and investment leader, Warren Buffett, once said, “It’s only when the tide goes out that you realise who has been swimming naked”. When the banking system hit the rocks and the tide turned, the naked were caught disrobed.
Similarly, sometimes it takes a pitch-black economy to reveal who and what in the financial firmament really shines. It is only when darkness falls that one can see the stars twinkle. The moonlight coming from the otherwise bleak sky of the financial world, has been made possible thanks to honest taxpayers, who are transfusing precious blood to the currently bleeding banks.
Most big defaulters have the money to employ legal experts who can play the judicial system — it is here where the law flounders. India has some of the most draconian laws in books, which are ineffective against powerful dodgers. We keep producing new laws when the existing ones are adequate and just need more teeth to obtain results. We show such promptness in condemning waivers for poor farmers, but, we lack the courage to tame the big fishes because they have enormous clout.
Banks are known to become aggressive in turning mortgage defaulters to the streets. Scores of indebted farmers are tying the noose out of sheer humiliation. Then there is a class of salaried people who rarely default, but, are chased down for their small unpaid debts. The bankers seem to be totally helpless when it comes to malfeasant promoters of big businesses. Scammers and swindlers have outfoxed the system.
The bank’s safeguard systems are buttressed by state institutions, such as regulators, bankruptcy procedures and courts. But what finally underpins the security of the whole ecosystem is trust. The Reserve Bank of India (RBI) now no longer appears to be the financial seer that was lionised for insulating the domestic economy from the financial turmoil of 2008.
Scams are a product of greed and immorality. However, abuse of the financial system has been made possible because of the system’s weaknesses. In an age, which heralds technology as the silver bullet, we should not overlook the most important source of competitive advantage—the people. Compliance and controls are dependent on people running it. A process is only as good as the people managing it. The most agile auditors will also have to struggle to stop managers, who are determined to hide their dirty laundry from view.
The reason for protecting the borrower against the creditor is that the much-reviled moneylender looms large in our collective psyche. The scenario now is totally different. Big borrowers are not like helpless farmers and the lender today is not the cruel sahukar but, the public bank. When these large businessmen default, they rob each one of us taxpayers. In several cases, precious and scarce bank funds are being used to finance the opulent lifestyles of the rich.
The turmoil has prompted calls for improvising risk management models, which seem to have created an illusory sense of security. However, models and machines cannot act as a surrogate for human expertise. Money management is no more a genteel world. Bankers will now have to bring in hard-boiled traders’ instincts to make it safe and secure. In a prophetic warning, way back in 1913, John Maynard Keynes wrote in Indian Currency and Finance: “In a country so dangerous for banking as India, (it) should be conducted on the safest possible principles”. Our departure from the time-honoured metrics has come at a heavy cost.
The Indian financial sector is at crossroads now, and its leaders will now have to use their financial alchemy to overcome its most challenging moment. Perhaps, it is one of those occasions where Rudyard Kipling’s advice can be the best guide: “If you can trust yourself when all men doubt you, but make allowance for their doubting too.” Of course, in the long run, PSBs are not an answer unless there is drastic change in accountability. Otherwise we the people will keep paying for their blunders.
It will not be out of place to quote the former RBI governor Raghuram Rajan, from his Homer Jones Memorial Lecture, delivered at the Federal Reserve Bank of St. Louis, St. Louis, Missouri on April 15, 2009. “A crisis offers us a rare window of opportunity to implement reforms-it is a terrible thing to waste. The temptation will be to overregulate, as we have done in the past. This creates its own perverse dynamic… Perhaps rather than swinging maniacally between too much and too little regulation, it would be better to think of cycle-proof regulation. ”
*Associated with the development sector for almost four decades. Contact: email@example.com