The Global ANALYST, October 2015
An edited, improved version of the following article has been published
in The Global ANALYST, October, 2015:
Back to Multi-Agency System, With a
Difference
M G Warrier
The current decade is
going to see a churning of sorts in the Indian banking system, perhaps
unparalleled in the history of the country’s financial intermediation.
Post-independence, simultaneously with the consolidation of hundreds of small
territories governed by the British and local Maharajas, several financial
institutions which called themselves banks also were merged and amalgamated to
form new entities capable of meeting the emerging challenges, under the
visionary leadership of RBI.
In 1991, the Committee on
Financial Sector Reforms (Narasimham Committee)visualised a structure for
Indian banking system with “three or four large banks that could become
international in character, eight to ten banks with a network of branches
throughout the country engaged in ‘universal banking’, local banks whose
operations would be generally confined to a specific region and rural banks
(including Regional Rural Banks-RRBs) whose operations would be confined to the
rural areas and whose business would be predominantly engaged in financing of
agriculture and allied activities”. It was not the Committee’s mandate to make a comprehensive review of the revamp of
the Indian financial sector institutional system which included, besides
commercial banks, cooperatives- a three-tier system comprising state
cooperative banks, district level central cooperative banks and primary
agricultural credit societies-about a lakh of them, of various sizes and
varying levels of financial health- and a multitude of entities which were engaged
in mobilisation of financial resources and were engaged in promoting savings,
engaged in investment and providing credit, many of which came to be known as
Non-Banking Finance Companies and Microfinance Institutions. These were in addition to institutional
financial intermediaries like post offices, insurance companies and government
owned corporations in the business of resources mobilisation and investment in
different ways. In India, there is no institution other than RBI which can have
a ‘holistic’ approach to savings and credit.
Reserve Bank of India,
with the active support of GOI, has been playing a significant role, without
many parallels in the central banking history, in institution-building in the
financial sector. Whatever be the assessment by the international rating
agencies or spokespersons of private sector, during the three decades that
followed independence, the support given to the public sector organisations in
the core sector by GOI and the part played by RBI in reorganisation and
effective supervision of banks in India have prepared the ground for the
post-1990 reforms and the present optimism about India Growth Story which is
being marketed with ease by us.
The period 1950 to 1990
saw in-depth studies like All India Rural Credit Survey, All India Rural Credit
Review, Committee to Review the Arrangements for Institutional Credit for
Agriculture and Rural development (CRAFICARD) and the study by the Agricultural
Credit review Committee. Institutions like SBI, IDBI, NABARD and UTI at
national level came into being with active participation and support from RBI
and GOI during this period. The reorganisation of cooperative credit system and
setting up of 196 Regional Rural banks and massive branch expansion of
commercial banks helped banking penetrate to semi-urban and rural areas in
India. Recalled all these, to emphasise the importance of preserving and
improving the existing outlets of financial intermediation while giving birth
to new institutions in the financial sector. The country with 1.25 billion
people, with majority of its population still fighting hunger and unemployment,
can accommodate any number of new institutions, if they will cater to the real
needs of the people. India can accommodate several Singapores and Hong Kongs
and compete with not just China, but with US also, once the country decides to
use its resources properly.
In the chapter “Governor’
Overview” in RBI’s Annual Report 2014-15, Dr Raghuram Rajan made the following
points:
“In the financial
sector, we need to increase efficiency through greater entry and competition. The
most appropriate institutions will prevail when the competitive arena is level,
so we have to remove regulatory privileges as well as impediments wherever
possible, especially those that are biased towards some form of ownership or some
particular institutional form. We need more participation in our financial
markets to increase their size, depth, and liquidity. Participation is best
enhanced not through subventions and subsidies but by creating supporting
frameworks that improve transparency, contract enforcement, and protections for
market participants against abusive practices.”
Quoted here to
draw attention to the RBI’s vision about the institutional framework for
banking in India that will evolve during the current decade. RBI’s clarity of
purpose is evident from the way in which the central bank is moving forward in
defining the role of financial institutions in economic development. The
signals can be seen in the following decisions, which I interpret here from a
layman’s point of view:
i)
The caution with which RBI approached licensing of
new private sector banks and the selection of two applicants for giving licences.
The ‘voluntary conversion’ of Bandhan from a Microfinance Institution to a
bank, hopefully, will pave the way for several so-called NBFCs to join the
mainstream banking institutions by conversion, merger or amalgamation sooner
than later. On August 23, 2015 Bandhan Bank started with 501 branches in 22
states, 50 ATMs, 1.43 crore accounts and a loan book of Rs10,000 crore brought
forward from its MFI days.
ii)
RBI was more liberal in giving licences to payment
banks. But the selection of candidates in this case is indicative of the
central bank’s concern to bring all those who are actually in the business of
banking (this include post offices) in different ways into the banking
discipline. Discipline and law enforcement are not a bad words as is being made
out by some quarters.
iii)
This article is being written just before the
announcement about small banks. I am optimistic about new entrants into this
sector fulfilling their role expectations in the short and medium term and some
of them growing to compete with their big brothers now worrying about
‘poaching’ and ‘cannibalisation’ when talking about new entrants to banking
sector.
Challenges before RBI
RBI’s
role in the economic growth of the country and in financial inclusion keeps
growing. It has to preserve the strength of the existing institutional system
comprising public sector banks, old and new private sector banks, RRBs,
cooperative banks including over 1000 urban cooperative banks(some of which
want to migrate to the commercial banking sector) and NBFCs while allowing
entry and growth of a new set of entities. Any laxity in management of NPAs or
inadequate credit flow to priority sector or the neglect of deposit insurance
responsibilities (the one lakh limit per account for deposit insurance coverage
was decided ages ago and in the present scenario of many private sector players
and euthanasia being given to banks in the cooperative sector the raising of
this limit should receive immediate attention) is seen as inefficient
supervision by RBI.
Perhaps,
the overburdening of RBI with expanding responsibilities is putting strain on
the central bank which is struggling with finance ministry continuously
breathing over its shoulders. The RBI Annual Report 2014-15 carries much
evidence to prove this and I quote a couple of paragraphs on HR issues
contained in the Governor’s Overview(I invite readers to access the full report
at rbi.org.in):
46. RBI is an efficient
organisation, which has steadily reduced its employee count from 35,500 in 1981
to 16,700 today, even while performing ever increasing quantities of work. The
surplus it generated from its activities this year is `659 billion, which has
been paid out entirely to the Government. There is, of course, always scope for
improvement. For example, to ensure that we meet our commitment to the public,
we have put out on our website timelines within which the public can expect
responses to applications made to RBI. We will monitor those timelines to
ensure our staff delivers as promised.
47. A key factor
in RBI’s success has been a satisfied staff. In the past, RBI used to have no problem
attracting junior officers, losing only an occasional officer who was
successful in the IAS exam. Today, we lose more than we should be comfortable
with. This is why a revamp of the professional challenges we offer our staff is
very much needed, and we hope the changes outlined earlier will help us become
a more attractive employer. In this regard, our review of compensation, as well
as the long-pending improvement in pensions for our retirees also.
I would
like to conclude this article drawing attention to a couple of paragraphs in
the recent RBI report on Trend and Progress of Banking (Chapter on Banking and Other Financial Institutions) which I
quote:
14. RBI has also
stepped away from micromanaging the functioning of the PSB Boards through
regulations, allowing Boards to determine how they will carry out their
responsibilities for strategic planning, risk management, accounting, etc. RBI
has also liberalised the compensation of private bank Board members, while
maintaining some checks, to ensure Board members are properly incentivised.
15. Because PSBs
compete in the same market place for talent as do private sector banks and
foreign banks, and because skill gaps are increasing middle management levels
because of past hiring freezes, they will be unnecessarily hampered if they are
unable to pay appropriate compensation to middle and senior managers, as well
as Board members. Of course, higher pay should come with better accountability
for performance. Given that many PSBs have higher overall costs than private
sector banks performing similar activities, there is some scope for cost rationalisation
even while improving the pattern of compensation. At the same time, we should recognise
that PSBs undertake public interest activities (like the rollout of accounts
under the Pradhan Mantri Jan Dhan Yojana) that are not always fully
compensated. Government should endeavour to keep the competitive playing field level
by fully compensating banks for activities it wants undertaken in the public
interest.
Epilogue
Interesting times are
ahead for the banking sector in India. It has to change a lot in terms of
skill, efficiency and penetration if it has to maintain at least the level of
efficiency the sector displayed during the Lead Bank Scheme days when there was
massive branch expansion to meet the rural and semi-urban credit needs. Today,
the difference is, unlike the money lenders of those days, there is a network
of efficient players in the financial market who are willing to enter the
mainstream banking network, provided banks will accept them with honour.
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(M G
Warrier is Ex-General Manager, RBI and author of the 2014 book “Banking,
Reforms & Corruption: Development Issues in 21st Century India”)
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