Economic Highlights

New Delhi, 30 May 2009

Agenda For FM

TIME TO PUT BANKS ON LEASH

By Shivaji Sarkar

The banking sector has come in for severe criticism by the highest authorities – Finance Minister Pranab Mukherjee and Reserve Bank of India. It is not a coincidence that the two were speaking in tandem almost simultaneously.

Mukherjee was concerned that the high-cost of banking has hurt the industry. The RBI in its report of the high-level committee to review the Lead Bank Scheme (LBS) is also critical of the high cost and several other inefficiencies of the banking sector. The report, says Deputy Governor Usha Thorat, deprecates high profit orientation, poor staffing and infrastructural support. The banks even lack telephone connectivity. This has virtually put the 40-year-old concept of lead banking – banking for social purposes and access to all particularly the poor – in jeopardy. The objective of LBS is greater banking and credit penetration for inclusive growth. This has been severely affected.

In the initial years, after 1969, when the LBS was introduced, the expansion of bank branches to unbanked and under-banked areas and credit planning was pursued. Its dilution started with the process of liberalization in 1991. The number of commercial branches was 5175 in June 1969. It rose to 46550 in 1991. Till 2001, only 609 more branches opened taking the tally to 47,159. During the next six years, till 2007, a reversal of the trend was witnessed and 247 branches were shut lowering the total to 46,912. The figures include private sector banks.

The growth of the economy, if it was there, should have been seen in the penetration of the bank branches. Ironically it has just been the opposite. Along with this, banks started resorting to devious and complicated ways to prevent people from opening their accounts. The report is silent on its effect. But over the years it has also seen a rise in micro-finance, in other words penetration of the mahajans. It has made financing costlier for the poor and the unorganised sector.

What the Finance Minister says implies that the banking sector has become less efficient and is not sensitive to the needs of its users. Interest rates are high and difference between the prime lending rate and deposit rates remain wide. This increases the earning of the banks but at a tremendous social cost. It also leads to the belief that the banks are not efficient trustees of public money. The banks have forgotten that the money they lend or take for deposit is not theirs. It comes from the people and has to go back to them.

They have not been able to justify the high charges that they levy on the slightest pretext. And, over the years they have not come out with one plausible explanation for the wide spread that they have in interest rates. Whenever they projected reduction in the interest rates, it resulted in penalizing the depositors not with only lower rates, but in many cases it also meant eating into the deposits as they levied unjustified charges. They have only been penalising the people to cover up their shoddy working ways. Poorer the services have become, the banks have resorted to dumping higher charges. For instance, stopping payment on Rs 100 cheque costs Rs 80 to the issuer.

The banks have shunned from extending the services to the weaker sections even for priority sector lending, meant for the poor. The RBI committee observed that government-sponsored schemes in the total priority sector lending were only 3.88 per cent in terms of number of accounts and 0.43 per cent in terms of amount outstanding. In terms of credit to weaker sections, the share was 7.8 per cent (number of accounts) and 2.73 per cent (outstanding).

The banks have on the contrary often been blaming the priority sector lending for their so called losses. The figures exemplify that the poor have better credit rating but banking service is denied to them. The committee noted that large sections of rural population and urban poor still do not have access to banking facilities.

Another dichotomy is that LBS and banking for the poor has remained the responsibility of the public sector banks. The share of private sector banks have grown since 1991, the committee says, “There is need for them to be more involved in LBS”.

The sheer distance to banks has prevented thousands of households in 158 districts, where programmes for financial inclusion were introduced, from operating their accounts. This factor has also inhibited the use of bank accounts for distribution of government payments, particularly those under the National Employment Guarantee Act (NREGA). It is an indictment and candid admission that the benefit of the scheme is not reaching the rural workforce owing to the casual approach of the banks.

A proposal has been made to organize sensitization workshops for bank managers and staff to train them in credit counseling. The hurdles have also been noticed. The staff earmarked for such work is utilized for carrying out general branch banking activities. In reality, the banks have reduced staff to such an extent that the managers are functioning like clerks reducing the official goals to paper only. Though the Thorat committee has suggested empowering the managers in several ways it is silent on how a manager should   function with inadequate staff.

The committee wants inclusion of IT to expand banking to remote areas and introduce a weekly banking system for villages with a population of 1000. The suggestion is good but the constraint is that the IT system has not penetrated that deep.

Another flaw of the recommendations is that it does not suggest to banks how to reduce their cost burden and improve their branch to staff ratio. While its concerns are well taken, its suggestion of including State governments for extension and implementation of bank services looks less plausible. In theory, this happens, but State governments particularly in States have other concerns motivated by politics, caste and sub-regional manipulations. It needs to ponder whether it would be useful for the purpose.

Besides, the government, which is the owner of the banks, can not move everything through the RBI, which has a mere regulatory role. It has to take tough actions to put the banks on a leash. Profit is fine, but that alone cannot be the basis for functioning of PSU banks. Mukherjee has to play a more active role to bring the PSU banks out of the morass and simultaneously give more social sector responsibility to private banks. He has also to ensure that each time a procedure for streamlining is introduced it has made the banking less efficient and more expensive. The task is not difficult if only the government does not succumb to various lobbies within the system. Since the Finance Minister is well versed with the gravity, he must act fast.--INFA

 (Copyright, India News and Feature Alliance)