Money & Banking
How to redefine and rebuild banks for emerging demands
Banks are basically meant to allocate capital to businesses and consumers efficiently. Post demonetisation, customers feel the pain more than gain in banks. Farmers getting inadequate and untimely credit from banks take to huge private debt, only to commit suicide later. 
 
Manufacturing micro and small enterprises, the seed beds of employment and entrepreneurship, are being shown the door by the banks, notwithstanding the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) guarantee up to Rs2 crore. Banks never went beyond the mandated Rs10 lakh guarantee cover for the medium and small enterprises (MSE). 
 
A large number of customers are slapped with irrational minimum balances in their accounts and levied of penalties at will. The Reserve Bank of India (RBI) is averse to regulate such actions on the excuse that micro-management of banks is not their role.
 
With over 38% of the population illiterate, Jan Dhan and Mudra Yojana, as instruments of financial inclusion, have only become compulsive agenda for the banking sector. Banks, public or private sector, have their eyes set only on profit. Such profits are dwindling with net interest margins declining following the growing non-performing assets (NPAs). 
 
Institutional innovations like the small payment banks, India Post and their likes, as also the micro finance institutes (MFI) have also proved inadequate to meet the banking needs of the population. 
 
Cashless banking leading to poor inflow of deposits during the last four months and cashless automated teller machines (ATM) demonstrate the erosion of faith in banking in India. Bad banking and good economy cannot co-exist and, therefore, it is imperative that innovative institutional solutions should be thought of.
 
The Indian economy, targeting double-digit growth, has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Executives at counters have now become slaves of the machine instead of being masters. Public sector banks (PSB) have long back forgotten their purpose, with their owner proving no better.
 
The emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. In fact, the Narasimhan Committee (1991) suggested consolidation and convergence of the PSBs into six banks to serve the needs of the service sector, to hold government securities and for retail lending; local area banks (LABs) to cater to farmers and small entrepreneurs; an international bank to cater to the needs of exports and imports. Development finance institutions, left untouched, would fund the infrastructure sector. The Financial Sector Legislative Reforms Commission (FSLRC) also echoed the same in its report. This is the time to look at the spirit of such recommendations and rebuild the banks to regain the fast eroding trust in the banking by the large customer base of this country. 
 
Kisan Bank
 
Breaking the nexus between the farmer and politician can happen only when there is mutual trust between the bank and the farmer. The farm sector, consisting of crop farming (organic, precision, and green technologies), dairy farming, shrimp farming, poultry farming, sheep farming and agricultural marketing, by itself is inherently capable of cross-holding risks, save exceptions like the tsunamis, severe drought for long spells and typhoons. It is only in the event of such natural calamities that a Disaster Mitigation Fund should come to the rescue. 
 
The existing commercial banks should shed this portfolio in favour of regional rural banks (RRBs) and merge all the rural branches with the RRBs. RRBs should be redesigned to take to farm lending in a big way – from farm machinery to crop farming and allied sectors -- on a project basis. Insurance plays a vital role in mitigating credit risk and, therefore, the insurance products should be redesigned and modified on the lines of the South Korean model. 
 
All the rural cooperative banks (RCB) could continue their lending to the farm sector, parallel to the RRBs, as the lending requirements are huge and farmers require multiple but dedicated lending institutions. 
 
The RBI has not been comprehensive in regulating the sector. It is better that the National Bank for Agriculture and Rural Development (NABARD) is restructured to play an exclusive refinance and regulatory role over the entire farm and rural lending, consistent with its purpose of formation. Its other functions like the Rural Infrastructure Development Fund (RIDF) can be relegated to a new institution hived off from the NABARD.
 
Udyog Mitra Bank
 
Nurturing entrepreneurship and promoting employment in manufacturing are moving at snail’s space in the Start Up, Stand Up and Make-in-India initiatives. The Prabhat Kumar Committee (2017) called for setting up a National MSME Authority directly under the Prime Minister’s Office (PMO) to correct the milieu. 
 
All the MSEs should be financed by dedicated MSE bank branches. All the existing SME branches should be brought under a new regulatory institution. Small Industries Development Bank of India (SIDBI) has disappointed the sector. It has to first consolidate all its funds into just five: incubation fund; venture capital; equity fund to meet the margin requirements of MSEs when and where required; marketing fund to meet the market promotional requirements; technology fund; and revival and rehabilitation fund. 
 
SIDBI should reshape into refinance and regulatory institution for the MSME sector with focus on manufacturing and manufacturing alone. It should divest its direct lending portfolio to avoid any conflict of interest. Its present lending to real estate and non-manufacturing MSME lending should be transferred to the commercial banks. RBI, which is not currently able to cope with the regulatory burden of this sector, can transfer it to SIDBI,
 
Vaanijya Banks (Commercial Bank)
 
All the existing commercial banks – both in the public and private sector – would do well confining themselves to project finance, lending to real estate, services sector, housing, exports and imports etc. All the banks should constitute, at the board level, a sub-committee on development banking to work on the transition arrangements to the above functionality. 
 
Maulika Vitta Vitarana Sanstha (Infrastructure Bank)
 
Huge NPAs have grown from the practice of lending long with short-term resource base, coupled with lack of experience in assessing the risks in lending for infrastructure projects. ‘All the perfumes of Arabia’ (RBI’s structural debt restructuring solutions) did not cleanse the bloody hands of banks. It is time to revisit the universal banking model and re-establish an Infrastructure Bank to fund the infrastructure projects and logistic parks. 
 
These measures would help achieving growth like never before.
 
RBI and government of India could constitute a high level committee to work on the modalities for transiting to the new structural transformation of the financial sector.
 
(Dr B Yerram Raju is an economist and risk management specialist.

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COMMENTS

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

B. Yerram Raju

7 months ago

The comment below seems to relate to article on AADHAR .

RBI to issue new Rs 5 and Rs 10 coins
Mumbai, The Reserve Bank of India (RBI) on Wednesday said that it will soon issue new Rs 10 and Rs 5 coins in circulation.
 
According to the RBI, the central government has minted new Rs 5 coins to commemorate the "150th Anniversary of Allahabad High Court" and Rs 10 coins on the occasion of "One Hundred Twenty-fifth Year of National Archives of India".
 
Besides, the Reserve Bank said that the existing Rs 5 and Rs 10 coins shall continue to be legal tender even after the issue of new coins.
 
The apex bank said that the reverse side of the Rs 5 coin shall bear the image depicting "Centre facade of Allahabad High Court Building emerging from the book". 
 
"The year 1866-2016 in English numerals shall be written at the bottom of the image," the RBI said in a statement.
 
It said that Rs 10 coins' reverse side shall bear the image of "National Archives Building" in the centre. 
 
"A logo of 125th Anniversary Celebration shall exist at the centre and above the image of 'National Archives Building'. The year 1916 and 2016 in international numerals shall be written respectively on left and right top of the image," the statement said.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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RBI governor suggests merging public sector banks
New York, Reserve Bank Governor Urjit Patel says that merging public sector banks and having fewer of them would be better for the sector and also help deal with problem of non-performing assets (NPA).
 
Do we need so many public sector banks, he asked while delivering the Kotak Family Distinguished Lecture at Columbia University here on Monday. It is better to consolidate them into fewer banks, he said.
 
Some of these banks can be merged in return for government assistance in taking care of the NPA problem and this would also make them more efficient, he said.
 
There was already a trend in that direction, according to him.
 
"The weaker banks are losing market share (and) that is a good thing," Patel said. "The stronger banks are gaining market share, which is a good thing, particularly the private sector banks. In a way it is working; those who need to shrink are shrinking."
 
"Lenders who are stronger are gaining more market share," he added. "I think there is a nice shift happening and we need to work with that to resolve this."
 
The merger of banks would lead to savings through consolidation of bank branches and operations, he said.
 
Some of the employees could be offered buyouts, he said adding that younger, digital-savvy personnel can be hired to further expand digital banking operations.
 
Patel also said that divestment in public sector banks would have a positive role for the sector.
 
"Divestment measures would improve overall banking sector health," he said. 
 
Improved market valuations would create an opportune time for the government to divest some of the ownership in the restructured banks and this would reduce the overall amount that the government needs to inject into them to deal with the NPA problem, he added.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Simple Indian

7 months ago

Yes, I agree that "the merger of banks would lead to savings through consolidation of bank branches and operations" but it will have no impact on current or future NPAs of PSU Banks, as the problem lies not with these Banks in dispensing huge loans to politically well-connected businessmen like Vijay Mallya, but with Finance Ministry, from where these Banks get 'persuasive' phone calls to dispense loans to unscrupulous businessmen like Vijay Mallya. Consolidation of PSU Banks might be a short-term benefit for taxpayers too, as most of these Banks are in the red and are kept afloat with taxpayers' money by the Govt. I disagree with RBI Guv that NPAs will come down when PSU Banks consolidate to a few large ones, for aforesaid reasons, and hence even consolidation will not make these Banks profitable unless they have operational autonomy and insulated from Finance Ministry / Govt interference.

B. Yerram Raju

7 months ago

Instead of merging the weak with the strong it is advisable to close the losing PSBs by amending the Bank Nationalisation Act and Banking Regulations Act and this will improve the credibility of both the Government and the RBI as responsible regulators. Some of the good running accounts of the closing banks can be provided portability as standard assets without having to make increased provisions in the Bank that takes in these accounts. depositors will be too happy to migrate given adequate notice insulating them from any interest loss.

Ramesh Poapt

7 months ago

ms market is rightly smelling the air!!

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