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R. N. Bose

A SIGNIFICANT point made by the Reserve Bank of India Deputy Governor, Mr G. P. Muniappan, at a meeting with 30-odd foreign banks in November has gone largely unnoticed. At the meeting, the RBI officials cautioned the banks on the pitfalls of "doorstep banking", where banks make their staff and agents visit the clients' homes to get new business.

The RBI officials were concerned that the practice had increased significantly with growing competition. They felt that it, ostensibly, could undermine the "know your customer" guidelines introduced by the RBI to curb money laundering.

I said `ostensibly' because the RBI's advice, on the face of it, appears to be at odds with the welcome marketing efforts initiated by the commercial banks. The concerns expressed by the RBI also fly in the face of the aggressive marketing and customer service initiatives introduced by the foreign banks, and adopted by the new generation private banks. Was the Deputy Governor setting the clock back, or was he against customer service in its present form?

The RBI guidelines on "know your customer" primarily deal with money laundering. Aggressive marketing for business development should, by all accounts, have no apparent conflict with normal banking practices. Then, why the caution? A brief look at the probable relationship between aggressive marketing, and the high level of non-performing assets (NPA) in the banking sector may help us understand the reasons behind the unstated and unspoken concerns of the RBI. Banks in India, especially the nationalised entities, never considered `marketing' an essential tool for business. It mostly remained the domain of the foreign banks.

The American banks especially thrived on marketing, and made it an art form. It was since 1994, only when the new generation, technology-driven private sector banks came into operation that marketing received a boost. A performance driven approach to the business of banking, the desire to grow at a fast pace, the pressure to grab a market share from the existing players and the urgency to shore up the balance-sheet before a public issue took the battle for business right to the doorstep of the foreign banks.

The war for market share was spearheaded by the new generation bankers recruited from non-banking finance companies (NBFC), foreign banks, broking houses and business schools. The staid, traditional, conservative banker became passé. The demand for front- and back-office staff, apart from those required for marketing or managing `relationships', forced the headhunters and the HR managers to look at unconventional (read non-banking) sources. Inevitably, there had to be some compromises. The recruitment of these `bankers', therefore, came at a price. The personnel recruited were mostly non-bankers. Few realised there was more to banking than what was written in the textbooks, or taught in the classrooms.

The resultant impact was subtle, essentially on the attitude and the approach to handling transactions, but more on business generation. Those in a hurry hardly spared time to know their customers, or build relationships. Coupled with their drive to generate the maximum business in the shortest possible time, these hard-sell bankers also had a different mindset, which was `deal' based, in contrast to that of a conservative, traditional banker.

The `deal' based approach, and aggressive marketing to generate business extended, unfortunately, to loans and advances. Generating fee business (that is, non-fund based business) without offering little or no fund-based facilities is extremely difficult at the best of times.

Fee business, therefore, normally follows fund-based facilities. In order to lure away the top customers (often from foreign banks), increase non-interest income, improve spreads, lower the overall cost of funds and improve profitability, these banks went after selected customers with bouquets of offers, which included fund-based facilities. It goes without saying that in such situations, a banker could hardly impose total and strict financial discipline on his clients — either at the time of the initial assessment or during the life of an advance.

In trying to beat the foreign banks at their own game, the new generation banks burnt their fingers badly. In their zeal they failed to appreciate the fact that the foreign banks had a highly developed system of risk management in place, and that they were quite adept at exiting accounts at the first hint of trouble.

The consequence of the approach should hardly come as a surprise. Some new-generation banks are now going through painful restructuring, primarily provoked by unusually high levels of NPAs accumulated over an unusually short period of time.

In this context, the advice given to bankers in December 1863 by Hugh McCulloch, then Comptroller of the Currency and later the Secretary of the Treasury in the UK, is worth noting. On the subject of credit risk he said: "Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to foster and encourage speculation. Give facilities only to legitimate and prudent transactions. Make your discounts on as short time as the business of your customer will permit, and insist upon the payment of all papers at maturity, no matter whether you need the money or not... In no other way can you properly control your discount line, or make it all times reliable."

His advice on large exposures: "Distribute your loans rather than concentrate them in a few hands. Large loans to a single borrower or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank, and when this is the relation between a bank and its customers, it is not difficult to decide which in the end will suffer..."

The basic principles of sound banking practice have remained unchanged and valid for well over a century. As the custodian of other people's money, a banker must understand and appreciate the significance of these words, and those of the Deputy Governor. Unfortunately, how many of us can sincerely claim to do so?

(The author is a Kolkata-based financial analyst.)

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