NEW BANKS Free Press Journal N A Majumdar

New banking could use some old time culture

The sting operation conducted by the online portal Cobrapost alleged that three

private sector banks - HDFC, ICICI and Axis Bank - had offered to launder

unaccounted money. Responding to a question regarding this incident, the

governor of RBI, Dr. D Subbarao noted that the operation showed only that the bank

executives were canvassing for illegal transactions and that no such transactions had

actually taken place. But he stated that the RBI had initiated an enquiry into the whole

affair. The concerned banks had suspended their officials and instituted their own

enquiries. Following this incident, the chief executives of ICICI Bank and HDFC Bank are

offering immunity to employees, exposing their colleagues' unfair practices that

compromise compliance standards.

What is important is not that the fraud has actually not taken place but the bank officials'

eagerness to compromise established anti- laundering regulations, which are already in

place.

Public sector banks are not totally free from irregularities in banking practices.

A Comptroller and Auditor General Report tabled in Parliament in March 2013 on

Agricultural Debt Waiver and Debt Relief Scheme of 2008 revealed that 8.5 per cent of

farmers, out of 80,299 accounts audited, were not eligible for debt waiver or debt relief

that they received under the scheme. The amounts involved in the scheme were enormous.

Some 3.73 crore farmers were given debt relief of Rs.

52,260 crore " Overall, the performance audit revealed that 22.32 per cent of 90,576

cases checked, there were lapses or errors, which raised serious concern about the

implementation of the scheme." Some eligible farmers did not get the benefit of the

scheme, while some who were ineligible, reaped the benefits. Some microfinance

institutions were given benefit under the scheme in violation of the guidelines. The finance

minister has assured that action would be taken against the banks involved in the

irregularities. The RBI and NABARD are pursuing the matter. The critical question to pose

here is: Was it a matter of sheer inefficiency or some selfinterest of concerned banks was

involved in the irregularities? These two cases should not be viewed as isolated instances,

but as part of the banking culture we have nurtured over the years. After the global

financial crisis of 2008, banking in the US and Europe has fallen from grace. It is no longer

the noble profession it once used to be. Today, bankers may not be exactly " a despised

breed," as the London Economist once described the chief executives of Enron, Worldcom

or Xerox Corporations of yesteryears: but very few bankers continue to be proud of

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or Xerox Corporations of yesteryears: but very few bankers continue to be proud of

belonging to the profession.

The ugly face of predatory financial capitalism manifested itself in all its rawness in the

global financial crisis of 2008. We are all familiar with the financial meltdown when the

icons of American and European system - commercial banks, investment banks, mortgage

houses and insurance giants collapsed like a pack of cards. The 2008 global financial has

been categorised as a " Great Fraud" because the fraud was systemic and not confined to

any institution or a segment of the financial system. The crisis started as the subprime

mortgage crisis in August 2007.

In simple terms, housing loans were extended aggressively to borrowers who did not have

the capacity to repay. Many subprime mortgage were " Ninja Loans" - standing for no

income, no job and no assets.

Superimposed on this subprime lending was the securitisation of the debt process. The

process has been described as a " package of dodgy debts of some Alabama

unemployed man turned into a high grade structured enhanced leverage fund of a leading

Wall Street firm." When the crunch occurred, these sophisticated structured credit

products proved to be not worthy of the paper they were printed on. Thus, a whole host of

factors were responsible for the culmination of the financial crisis: the feeding of the

speculative bubble in the US mortgage market by the reckless credit expansion, the selling

of large amounts of subprime mortgages, the peculiar securitization of mortgage loans, the

speculative trading of such securities in the global financial markets, the fraudulent ratings

by otherwise respectable credit rating agencies. The fraud was thus systemic. In the

advanced economies ( AEs), understandably, there is widespread public resentment at the

irregularities in the functioning of financial institutions, particularly casino banking, and at

obscenely high levels of remuneration paid to senior management in some cases. The

financial inquiry commission in the US has laid bare for all to see the shameless greed and

moral decadence of the Wall Street banker. The " Occupy Wall Street Movement" reflects

the public resentment over the behaviour of financial actors.

There is now a call for revival of ethical values. The American Economic Association has

mooted the idea of a code of ethics for finance professionals, regulators and academics.

Robert Shiller proposes that the best way to do this is " to build good moral behaviour in to

the culture of Wall Street." Unfortunately, the global crisis seems to have made little impact

ion Indian policy makers entrusted with financial sector reforms. We continue to seek to

mimic Western mainly American or British banking models: we swear by Basle norms and

passionately seek to adopt the " international best practices" of Western financial

institutions. We continue to be intoxicated with the market theology of profit maximisation

for banks and financial institutions. The post- 2008 crisis warrants the need for a different

species of bankers and financial professionals, who could blend profitability criteria with

social banking, as Indian policy makers of the 1970s have successfully demonstrated.

And not those who can sell their souls for a mess of pottage.

Fortunately, Indian public sector bankers are a different lot, completely committed to the

cult of financial inclusion.

This commitment manifested itself in the zeal with which they pursued the extension of

banking throughout the length and breadth of the country in the 1970s. Bringing the rural

sector, which was practically isolated from the rest of the economy, into the mainstream of

modern banking, was a stupendous achievement.

In fact, it formed part of the process of modernisation of the rural economy itself.

The trials and tribulations of bankers involved in this task under the Lead Bank Programme

are well documented in the NIBM publication, " Taking Banking to the People" ( 2001). And

banking professionals at that point of time were not being paid princely sums.

What is required today is the same " small borrower friendly" banking culture, unlike profitmaking

micro finance institutions ( MFIs). Public sector bankers should go beyond profitmaking

and try to upgrade the enterprises to which they lend - may be for farm or nonfarm

enterprises - and catapult the borrower into a higher income trajectory. Mere

tokenism of making banking services physically accessible will not do. Profitability and

social banking need to be blended. Financial inclusion in a meaningful sense thus warrants

the same commitment on the part of the bankers, particularly public sectors bankers, that

they displayed during the Lead Bank Programme.

The Indian Financial system is focused on financial inclusion and this makes the blending of

profitability and social banking imperative. This in turn calls for a new banking culture,

involving a small borrower friendly approach and operating in a broad framework of ethical

values.

THROUGH THE PRISM DR. N. A. MUJUMDAR