Create right environment to safeguard public sector banks’ credit cycle

By Sudhansu R Das

For decades, Public Sector Banks have generated quality jobs for the educated Indian youth. The State Bank of India and its associate banks used to advertise for more than one lakh probationary officer jobs every year. State Bank of India and other public sector banks together normally advertised nearly 1.3 lakh officer jobs every year. The PSBs also used to recruit a large number of clerks and messengers on a regular basis. Over decades, the banks have invested lakhs of crores of rupees to build their premises across the country. They have established their branches in the remotest corner of India to provide banking services to the general public at an affordable cost.  PSBs have the rural feel and they serve the poor and rural customers well.

The PSBs’ staff go through transparent and tough entrance tests to join banks; they are among the best human resources in public sector organizations. Besides, the banks train them well to handle day to day banking operations. The PSBs pay salary from their own profit; only in extraordinary circumstances like recession or natural calamities when banks face acute recovery problems, the government recapitalizes them. RBI keeps enough reserve as back up to help PSBs tide over difficult times. The PSBs also achieve the government’s social sector credit flow target allotted to them every year. In view of India’s huge population, a large number of low income group people, diverse economic sectors, poverty and backwardness, the PSBs still can serve well. Reforming PSBs needs courage, political will and deep knowledge on the nitty-gritty of banks’ operation. Five simple steps can put the PSBs on track again.

First, all political parties of the country should converge on one single objective of liberating the PSBs from political influence right from the co-operative banks to the PSBs; this will be the biggest banking sector reform in history which will revolutionize financial inclusion in the country.

Second, the government should create the right external environment for a healthy credit cycle for banks. For example, if water, green fodder and cattle feed are available at a reasonable price, a bank credit can earn profit from the dairy sector. The role of the government is to protect the water bodies, control the price of cattle feed and provide quality extension services to the dairy farmers; without which the dairy farmers will find it difficult to repay bank loans.  Today thousands of small dairy farmers with less than 20 animals find it difficult to survive due to disappearance of green fodder, high cost of cattle feed and non availability of quality extension services.

Banks can finance the agriculture sector and earn profit, if villagers start loving physical work and politicians stop giving them free food and freebies. The villagers will be enthused to do farming if ground and surface water are available; if they get a good price for their produce. While promoting cottage industry products the government should import less cottage industry products from other countries. Today many cheap imported products including dandia sticks, kites and kitchen tools are replacing our domestic products. Banks’ loans will end up in NPA if it finances the domestic industries which are struggling to survive amid cheap imports. The small towns and villages should be made livable with quality health centers, good schools and other basic amenities for human survival. All these things indirectly influence the credit performance of the banks.   

Third, an honest and efficient CEO can diversify the loan portfolios and promptly invest the bank’s surplus for profit. It is high time for the banks to appoint efficient CEOs; they can be drawn from top management and finance institutes of India or from the banks’ talent pool in a transparent manner. Close monitoring of credit performance specially the end use of credit will make the PSBs strong. Here, the government should provide adequate security to bankers at the time of physical asset verification of the borrowers as physical asset verification sometimes risks bankers’ life. The Union government should establish an efficient intelligence agency to track willful defaulters and fraudsters; a very strong law should be made to full proof banks from the willful defaulters and frauds.  

Fourth, for better credit performance, the banks need a high level of audit and inspection skill. There is an urgent need to inspect the big loans above Rs 200 crore every year which will give a clear picture of the end use of loans. Accountability should be fixed on the loan sanctioning committee. The performance of the bank’s boards should be thoroughly reviewed by experts. People who are posted as CEOs should have experience in audit and inspection of banks. If they don’t have the experience, they should conduct minimum two bank inspections in the first year; the reports of the inspection should be evaluated by an expert team.

Fifth, quota in appointment should be restricted to entry level only. In many banks, employees are being promoted to the senior level on quota basis; after entry level, banks should promote their staff on merit basis only.  Promotion to higher posts on the basis of regional bias, language bias, external influence and relationship bias etc should be eradicated to build the core strength of the banks. Transparency in promotion is the key to the revival of the banks. 

Sixth, when the corona pandemic rips through the economy, Banks should be in a position to reshuffle their investment in stocks and plans for credit diversification to vibrant unorganized sector and health sector etc.  After the epidemic the economy is bound to be active in a country with 141 crore people and the banks should pre-devise innovative products for the unorganized sector, tourism, agriculture, education, infrastructure, industries and a wide range of natural sectors etc. Private banks should internalize the culture of people friendly approach, rural and small town experience of PSBs before they step into these areas on their own.

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