As news reports of scams pour in one after the other, it is becoming clear that credit administration in India’s public sector banks is a near-sham. Recently, when quarterly results were being published, there was a virtual competition among the PSBs in declaring losses, or at least a decline in profits. All banks were unanimous in explaining their losses as additional provisioning for bad loans. It will not be over-stretching things to conclude that bank advances consist of only two components, namely, identified NPAs (Non Performing Assets) and those yet to be identified.
This situation leads us to ask one basic question, whether our PSBs are really equipped to handle advances. Except for some computer program-driven retail loans with factory-type outputs, a majority of the banks today do not venture into MSME or corporate loans. And those that do, burn their fingers. Then there are mandatory farmers’ loans and education loans, which are always under the shadow of a write-off threat. Ingenious banks fill their agricultural loan targets with gold loans.
Why is this the state of affairs? Exposure to working on advances is not an absolute criterion for a bank officer for his or her career advancement. Smart and risk-averse officers skip their assignment in credit-related work at the operational levels and find their way directly up to the top. Thus, knowledge of the business of credit becomes a casualty from top to bottom.
Banks genuinely expect their staff members to be mediocre and obliging rather than skilled and informed. Think of the disparate areas our bank manager is supposed to lay his or her hands on. KYC, insurance, Aadhar, mutual funds, demat, PMJDY, subsidies, financial inclusion, alternate channels, scholarships, pension payments… the list is endless. To cap it all, demonetisation has taken its toll. All these areas come with targets and deadlines.
Items like mutual funds and insurance are lucrative for the staffer as they offer handsome commissions. Of late, top management has started compelling operational staff to concentrate on non-banking areas such as mutual funds and insurance as the commission spread is top-heavy. Offers such as foreign vacations for the top brass of banks are made by some insurance/mutual fund companies in addition to paying commissions. Needless to add, this type of compulsions imposed on operational staff, more often than not lead to mis-selling. Consequently their time is wasted on handling complaints and litigation. It is high time a study is made of the benefits to the bank from such lines of business. Definitely individual benefits to bank staff will outweigh the benefits (even losses) that accrue to the bank.
Back on the subject, the thrust areas of banking — deposits and advances — have been relegated to the back-burner. No effort is made to garner quality advances as there is no incentive to do so. With desk-level officers ill-equipped to handle advances, the genuine customer is driven from pillar to post to get a loan. At last the decision is protruded to such a level that non-sanction will cause complaints. So an unwilling sanction is accorded and the amount is disbursed. From there on, the loan travels its route to becoming an NPA due to lack of follow-up from the banker’s side and the lack of understanding from the borrower’s side. This is the case of small advances.
The story of medium advances (say Rs. 1 crore and above) is no better. It is a peculiar characterstic of PSBs that their internal communication system is one-sided, that is, going from top to bottom. To bring in professionalism and objectivity, many banks have formed credit committees where these loans are discussed. Here, whatever nonsense the senior-most (position-wise) member says will prevail. Junior members never utter a word of dissent. The committee system provides a false sense of security for its members as accountability gets diluted. Prudent and time-tested lending norms are violated in the guise of business considerations. When the sanction letter reaches the branches, they disburse the loan without adhering to sanctioning conditions. With the borrower’s indulgence and the banker’s apathy, sooner or later the loan turns into an NPA.
Those seeking large advances invariably reach the bank with political clout. They corner the banker to get the loans on their own terms and the bankers relent. Ultimately even their own terms are violated.
The factors contributing to the present dilemma are not far to seek. Indiscriminate selection of borrowers, inadequacies in loan processing, flawed follow-up mechanism, auditors’ negligence, the ineffectiveness of the judiciary, political appeasement and, above all, dissolute societal standards, deepen the crisis.
Analysing the reasons for this deep-rooted malaise, one can come to the conclusion that the country has to live with it. But certainly the intensity can be reduced and the damage minimised. Some of the needed measures can be summarised thus:
1. Back to basics: PSBs should shred the idea of becoming financial supermarkets, get away from incentive-centric insurance and mutual fund businesses, and get into the core areas of deposits and advances. Governments also should allow the banks to concentrate on the core business.
2. Specialisation: It should be recognised that handling advances requires specialised skill. Each area of advances, namely, identification, processing, sanction, documentation, disbursement, maintenance, and recovery, should reclaim its sanctity. Loan Processing Cells functioning in some of the banks should be strengthened. Having hands-on experience in credit-handling should be a prerequisite for promotion to top management posts.
3. Credit Committees: Entrusting the sanction of loans to committees is a good idea, but a committee of ‘yes-men’ will defeat the purpose. The composition of credit committees should be reviewed. In a senior-junior combination, the voice of the senior will prevail, even if the junior is right. It is suggested that the credit committee at each centre shall be headed by the seniormost official of the bank at the centre. Other members can be a retired official who had sufficient credit exposure, and a chartered accountant. This will ensure proper vetting of the proposal and an objective and dispassionate evaluation.
4. Role of lawyers: After sanction and documentation, the documents should be vetted by the bank’s panel lawyer, who should certify that all sanctioning conditions have been met and the documents are in order and the loan is ready for disbursement. This should be a precondition for the first disbursement. This measure will check bankers’ tendency to disburse the loan in order to meet their targets. Stringent punishment for violating these norms should be put in place.
5. Early identification of NPAs: It is a reality that banks delay identification of NPAs, as the promotion prospects of the officials concerned are adversely affected. It is the defaulters who take advantage of the situation. The process has to be reversed. Early identification of NPAs and timely and effective initiation of recovery measures should be duly rewarded.
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