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ECONOMIC HIGHLIGHTS
New Delhi, 13 April 2006
Reform Finance Sector
Create Competition Among Banks
By
Dr. Vinod Mehta
The one-week strike by the employees and officers of
the State Bank of India
has once again brought into focus the urgent need for reforms in the financial
sector, especially the banking sector. The banks were nationalized a few
decades ago with a view to divert scarce funds into certain sectors of the
economy. It has served that
purpose. Today when we are moving
towards liberal economy, the assumptions
of yesteryears do not make sense. Apart
from meeting social sector needs the banks have an important role to play in
maintaining a high growth rate. With the changed international economic scenario
and the entry of private sector banks and failure of cooperative banks, a
situation has emerged which calls for consolidation and one way is to merge the
banks to create mega entities. Even this is being opposed by the unions.
Ten years ago, the Economic Survey had clearly stated
that decades of non-commercial orientation, directed lending, loan waivers and
rising (though camouflaged) trend in non-performing assets,
initially made it difficult for banks to adjust to a market environment having
strict prudential norms. The latter
included norms for classification of
assets, income recognition,
provisioning and a stipulated time schedule for attaining capital adequacy, a
greater thrust on prudence and transparency imposed through a reformed system of
regulation and supervision.
The nationalized banks come nowhere closer to
international banks or for that matter foreign banks operating in India. How the India’s
largest bank, the State Bank of India,
would have performed without the Government patronizing it is anybody’s guess. Some of
the new and old banks in the private sector as also the foreign banks appear to
be doing much better that the nationalized banks; they have been able to meet
their deposit and lending targets. Some of the nationalized banks which have
been doing exceptionally well are the State Bank of India and its associates, Punjab National Bank and Bank of Baroda
to name a few. Some like Indian Bank have seen erosion of their capital base
and is looking towards government to bail it out.
The nationalized banks have tried to improve their
functioning but nothing much has happened.
Neither they are thinking in terms of reorganization nor in terms of
retraining their staff etc. And it is in
this context that they may lose their competitiveness
altogether or may be forced to close down or merged with other banks. But both closures and forced mergers have
their own problems as was witnessed
when the loss making New Bank of India was
merged with the profit making Punjab National Bank a few years ago.
The greatest advantage with the new and other private
sector banks is that they can choose the best of available technology, attract
the best talent from the existing banks and train them to use modern technology
to provide a variety of services efficiently to the clients. While the employees of the nationalized banks
had opposed till recently the computerization of banking operations all these
years, the new private sector banks are using computers for all their
activities from the very beginning. Many
of them have even joined the international networks like SWIFT which makes
international transactions and settlements quicker and safer. The speed of computerization of nationalized
banks is very slow. Computerization has
made bank branch redundant. Clients of private and foreign banks can operate
their accounts from any branch now but this is not the case with many of the
nationalized banks.
One of the consequences of nationalization of banks
had been the equalization of emoluments according to the categories of
employees. As a result the efficient
workers lost interest while the inefficient workers never bothered about the
work which really explains the shoddy attitude of bank employees of nationalized
banks to their customers. However, the
new private sector banks are going to have an edge over the nationalized banks
as for as the recruitment of staff is concerned. Since these banks would not be guided by the
policy of salary equalization irrespective of the quality of work of each
individual employee, these banks are able to attract the best of the financial
brains from the nationalized banks by offering them better emoluments.
It is against all working norms that inefficient
employees of perpetually loss making
banks should get the same salaries as those of profit making banks. In such a situation there is no incentive for
the employees of the loss making
banks to improve their functioning; whether the bank is losing or earning,
these employees are getting their salaries equal to those of the employees
working in profit making banks. The
system of rewarding the efficient employees in the new private sector banks
would really make these banks stay ahead of the nationalized banks.
The private sector banks are also quickly carving out
niche market for themselves. Apart from
providing retail banking, some of these banks are going to specialize in
merchant banking, others in fund and non-fund based activities and some others
in export financing and foreign exchange management. The nationalized banks on
the other hand have yet to develop their focus.
Most of them are carrying out routine activities in a
haphazard manner. They have put their
fingers in every pie without ever bothering to achieve excellence and build up
expertise in few selected areas.
Therefore, in order to face competition from new private sector banks,
each of the nationalized bank will have to work out the area in which it would
like to specialize whether in merchant banking. export-import financing,
agricultural financing and so on.
Finally, the nationalized banks will have to retrain
its staff and imbibe in them some of kind of work-ethics. In some of the branches the staff is rude to
the customers and can be seen gossiping
their time away without bothering to attend to the customers during the working
hours. True some of the nationalized banks
have increased their working hours but the work culture has not changed.
In some of the computerized bank branches, there has
been no change in the work organization; computers have only replaced the bound
ledgers. In computerized branches of
nationalized banks, one can still find different counters for current accounts,
savings bank accounts, fixed deposits, issuing
of bank drafts, conversion of foreign currency and so on. As a result some counters are overcrowded
while at others there are hardly any customers.
In foreign countries, there are generally transaction
counters in the banks. As one enters
the bank, one has to tear out a number ticket at the entrance and the number
gets registered in the bank's computer.
And when one’s number comes, the vacant counter would display it. One can then go to the said counter and do
all the transactions in one go. This
means that the work load is equally distributed at the counters and that a
person does not have to run from one counter to the other to finish off his
multiple transactions.
The nationalized banks must understand that
computerization does not mean replacing bound ledgers with computers at
different counters. It also involves
changes in work organization to gain maximums advantage of computer facilities.
Finally, the merger of banks to create mega banks which can withstand
international competition has become important. Mega banks have become order of
the day. The merger of Bank of Tokyo and
the Bank of Mitsubishi in Japan
is one such instance. Relatively strong
nationalized banks may think in terms of mergers to create mega entities. This will help economize on expenses and reap
economies of scale.---INFA
(Copyright,
India News and Feature Alliance)
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