The Hindu Business Line : The case for outsourcing banking services

The Reserve Bank of India allows banks to outsource various services, such as identification of borrowers, collection and processing of loan applications, verification of primary information about borrowers, creating awareness about savings products, post-sanction monitoring, overseeing of self-help groups, follow- up on loan recovery, disbursal of small loans and recovery of principal and interest.

Some public sector bank unions have opposed these proposals, saying: "People's money should be utilised for people's welfare and national development."

They fear that outsourcing and privatisation could deny the common man access to banking services. There is the apprehension that outsourcing will give banks the excuse to avoid priority sector lending.

The RBI requires public sector banks to extend 40 per cent of their gross credit to the priority sector. The shortfall has to be deployed in bonds issued by agencies, such as Nabard. According to RBI Annual Reports, the share of priority sector has been only around 32-35 per cent.

The actual situation could be worse because the definition of the sector has been consistently enlarged. Even exports have now been included in the priority sector.

Yet, the share of priority sectors in bank credit is not increasing. Bank managers are not interested in extending loans to the priority sector because of the high administrative costs involved.

For instance, a hundred accounts may have to be opened and, say, Rs 50,000 given to each to achieve a lending of Rs 50 lakh. Then the staff salary; according to the Economic Survey, the average salary of a public sector employee was Rs 2,48,691 per annum in 2003-04.

This works out to more than Rs 20,000 a month. There are also problems of extracting work. All this can be outsourced for about a tenth the cost. This will make it more profitable for banks to give loans to the priority sector.

Security fears

Another objection to outsourcing is that the security of the deposits made by the people will be jeopardised. Is the security provided by the PSBs for real?

A few years ago many PSBs were tottering, and the government had to infuse capital to make them viable. The so-called `security', therefore, arises not from the banking operations but the commitment of the government to provide additional money to the banks to cover their losses. Besides capital infusion by the government, the public pays the cost of PSB mismanagement by bank employees through higher taxation. The solution is better regulation. The RBI can rate the banks. This will enable the people to relocate their deposits according to their needs. Those willing to take the risk of depositing in weak banks to get higher interest rates should have the freedom to do so.

Second, a more effective system of insurance should be put in place. It is not necessary for the government to own the banks to provide security to the depositors.

Mismanagement in the PSBs is possible because they have monopoly over the banking business in the country and can raise user-charges to cover up inefficiencies.

Privatisation will prevent banks from raising charges and force them to become efficient. That would make the people's deposits more secure, not less.

Another demand is that the government declare wilful default of bank loans as a criminal offence and initiate stringent steps to recover such loans. Banks should be empowered to seize private assets of defaulters who have siphoned off loans for personal gains and not used it for the purpose for which the loan was given.

The Supreme Court has instructed the authorities to initiate action against officers responsible for allowing illegal constructions in Delhi.

That same principle should be applied to bank loans. Parallel action should be taken against officers who have extended bad loans.

The banks should not only be allowed to outsource but also allowed to let manage them. Only, the Government must strengthen the regulatory mechanism.

(The author is a freelance writer and can be contacted at bharatj@sancharnet.in)