Economic Highlights

New Delhi, 10 April 2008

Financial Sector

CRYING FOR REFORMS

By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

With the economy achieving a growth rate of over eight per cent for the past four years, it’s time to complete the financial sector reforms, especially in banking. Whether the Government can gather enough courage to draw a map for such reforms at a time when General elections appear to be looming large, is highly doubtful. But, it must remember that reforms in the industrial sector will remain incomplete without wide-ranging reforms in the financial sector.

In the past few years, both the insurance and banking sectors have been thrown open to the private sector players, but the public sector banks and insurance companies continue to play a dominant role. In fact, the public sector units are responding well to the competition by private players and may just maintain their dominant position. At the same time these banks and insurance companies are also expected to play a major role in sustaining the over eight per cent growth rate.

Following economic liberalization over a decade-and-a-half ago, there has been resistance to reforms from employees in the financial sector. They fear they would soon become redundant as the public sector units would not be able to match competition from foreign firms. However, the reforms that have been initiated till date in this sector have belied all these fears, but opposition from the employees still continues. One may or may not accept it, but the fact is that the era of mega banks and insurance companies is here to stay.  And, the Indian financial sector has to prepare itself to this change.      

The reforms would need to be tackled simultaneously at four levels: one relates to the public regulation of these companies, two, organizational structure within these companies, three, changing the psyche of the employees and lastly technological upgradation. 

While we open up the financial sector to private business, both Indian and foreign, we must ensure that there is a stringent regulatory mechanism in place for all kinds of financial companies such as banks, insurance, chitfunds etc.  A sound regulatory mechanism as well as an early warning system can check any financial fraud at the first stage itself.  Such a regulatory mechanism should have statutory powers to deal with the compliance to financial regulations independent of the Government.  Remember, if the regulatory mechanism were in place the Global Trust Bank, the first private sector bank after the economic reforms, would not have failed a few years ago.  Besides, we also need to guard against sub prime crises of American banks. 

A corollary of stringent regulatory mechanism could be the standardization of accounting practices and single format for preparation of balance sheets, profit and loss account, income and expenditure account, etc. for all financial companies. 

As for the insurance firms, the regulatory authority is already in place and for the banking sector we have the Reserve Bank of India. However, it is more advisable to have a separate cell or body within the RBI with statutory powers to oversee the functioning of the banking sector especially with a view to tackling problems of unpaid loans and financial frauds as in the case of cooperative sector banks. 

The second aspect of financial reforms is the organizational structure. In both the banking and insurance companies this has become outdated. The Government’s hierarchical system has been superimposed on them. Such a system not only adds to the relative service costs but is also responsible for delays in taking appropriate decisions.  As against this, the new banks in the private sector, which came up after the economic reforms, have different organizational structures, which are much leaner and more efficient. 

This holds true for the public sector insurance companies too. Let’s say, the use of computers in keeping policy records of insured persons, has gained currency in big cities, but the bulk of work in small towns and villages continues to be done manually. In most private sector banks almost all the front desk work is now officer-oriented with a limited chain of command between the lowest and the highest ranking officers.  This is something, which our nationalized banks and insurance sector would need to do to survive the competition from private financial companies. 

The third set of reforms relate to the employees’ attitude towards its customers.  Even though there were a large number of banks in the public sector there was never really a competition among them, as they were following the same policies, offering same products and had the same wage/salary structure for the whole of the banking industry.  There was no system of reward or punishment.  And it is perhaps for this reason that bank employees by and large treat their customers with contempt.  This attitude needs to change drastically. Employees must be customer-friendly. While some staff at certain bank and insurance branches has changed attitude towards customers, in most cases they continue to be far from pleasant.  Therefore, in the new environment, there is need to develop a training programme to change staff attitude towards customers if they wish to survive in a highly competitive era.   

The fourth aspect of reforms relates to the technological base of our existing banking and insurance companies, if these are to survive competitive business. Even though a few banks and insurance branches have been computerized in metropolitan cities, technology in our financial companies is still outdated-- most work is still done manually.   It is thus not surprising that there are scams all the time, but are discovered only a year or two later.  It’s not enough to scrutinize bank branches alone. All banking activities must be integrated not only within the bank branch itself but also with other branches, regional offices, head office, insurance companies etc, and ultimately with the RBI.  All this requires a high quality of reliable financial management package for the financial companies. 

Sadly, most of our banks don’t have such packages. While in other countries, one can do all the transactions at one counter, here one has to go to separate counters for each banking transaction. In some cases, the same bank may treat the same customers differently.  For instance, let’s take the case of the State Bank of India.  At the Delhi International Airport foreign exchange counter it takes just a few minutes to change currency -- no forms need to be filled, only give your passport and the foreign currency and get the money changed.  Whereas, at the SBI main branch on Parliament Street, foreigners are asked to fill up forms and write each currency note number on the reverse of the form. A customer has to wait for a good ten to 15 minutes to change currency as all this is done manually! Why different requirements by the same bank? 

In fact, recent technological advances have made a bank branch or an insurance branch meaningless. With integrated financial packages one can process any transaction from anywhere in the city, or country, or even abroad.  Electronic banking has today made the mode of payment through bank draft or cheque simply obsolete – within moments one can make and receive payments. A customer can well sit at home or office and conduct all banking operations including buying and selling of shares, and mutual funds. But all banks are yet to provide such facilities here.  So, in sum we need to speed up financial reforms if we want to help the present growth rate in the economy. ----INFA

(Copyright, India News and Feature Alliance)