From priority sector lending target to opening rural branches, the criteria are different for other categories of banks.

Financial inclusion is a major challenge facing banks, particularly for those in the public sector. Financial inclusion basically means bringing the entire population, especially those in rural and semi-urban areas, under the banking fold. Most banks have gone about the task quite seriously and opened several no-frills accounts. These accounts can be opened with zero balance, and no service charges are levied. Banks open such accounts in villages adopted by them. The nomenclature of these accounts has now been changed to ‘Basic Savings Accounts’.

But, unfortunately, most of these accounts remain dormant. Financial inclusion can never be complete without financial literacy. This can be achieved only by making the rural folk aware of all the banking products and how they can benefit by them. Much more needs to be done in the area of inculcating financial literacy if the purpose of financial inclusion is to be served.

Fraud menace

Fraud is another major issue facing banks. Apart from traditional frauds such as shortage of cash in currency chest, fraudulent withdrawals, obtaining loans by producing fake documents, and so on, a new dimension has been added after the recent technological innovations. Not a day passes without hearing about ATM frauds, creation of bogus Web sites to extract password information from customers, and so on. The tragedy is that apart from frauds committed by outsiders, many are committed with the connivance of staff or by the staff themselves. This can be directly attributed to human resource issues.

There has been no recruitment, especially in public sector banks, during the last two decades as a result of which much of the staff are middle age or above with little or no exposure to computers or other technological advancements. Instances abound when bank staff, including those in the managerial cadre, talk of ‘system failure’ when all that has happened is a minor loose contact.

In every branch, there would be some staff member with knowledge of technology and the branch manager is entirely dependent on him/her for problem solving.

If he chooses to be dishonest, he can very easily siphon off large amounts by manipulating the system. This has been happening with disturbing regularity.

With the introduction of core banking, it is easy to tinker with the accounts in any branch of the bank. One hopes that with the ongoing recruitment of tech savvy youngsters this issue will be sorted out soon.

HR issues

Connected with this is the looming HR issues facing banks, especially in the public sector. It is reported that a lot of top and middle level staff will be superannuating during the next 2-3 years, and it will be difficult to replace this talent in the short run.

Another offshoot of the increased use of technology in banks is the increased use of 24-hour automated help-lines to deal with customer complaints, thus drastically reducing direct interaction with the customer thus making for faceless banking.

While public sector banks still encourage direct interaction with customers, the new generation private sector banks and foreign banks deal with complaints mainly through the 24-hour helpline which is not always very helpful.

Asset-liability mismatch

Another major area of concern to banks is asset-liability management. Gone are the days when people used to deposit their surplus funds in long-term deposits of, say, five years and above tenures. With frequent changes in interest rates, depositors do not want to lock their funds in long-term deposits.

The average tenure of deposits has come down from 5-7 years to less than two years. At the same time, the proportion of term loans in the banking system, especially to infrastructure projects, has increased manifold.

Unlike working capital finance such as cash credit and bill finance which are self-liquidating in nature, term loans to infrastructure projects are long-term commitments, at times extending even beyond 20 years. The implementation of the infrastructure projects face several bottlenecks, because of which the repayment also gets delayed, thus adding to the asset-liability mismatch.

No level-playing field

In this context, it is worthwhile to examine whether banks in India are operating in a level-playing field. Banks in India can broadly be divided into four categories — public sector banks, including State Bank of India, old private sector banks, new generation private sector banks and foreign banks. While on paper, they are all functioning autonomously, the ground level reality is somewhat different.

Recently, Secretary, Financial Services has issued 32 directives purportedly to jolt state-owned banks out of their lazy banking habits and force them to lend more to small enterprises and agriculture. The same directives are not applicable to the other three categories of banks.

In fact, the target for priority sector lending for other banks is lesser. Also, the new generation private sector banks and foreign banks have been given the option of depositing the shortfall in priority sector lending with Nabard or SIDBI at a lesser rate of interest. But they are not faced with the prospect of potential NPAs (non-performing assets) as PSBs do.

Similarly, the criteria for opening rural branches are different. Also, while public sector banks are largely into mass banking, the other categories focus on commercial or class banking.

Basel-III norms

The RBI has come out with detailed guidelines on the implementation of Basel-III norms, and has estimated that PSBs will require capital infusion of Rs 1.65/1.75-lakh crore to achieve the capital adequacy ratio. Normally, this accretion to capital should come from internal accruals, but in the current situation this appears almost impossible for PSBs.

Ultimately, the Government may have to infuse the required funds as it has been doing for the last few years. From one point of view, it is fair that the Government pays for the banks run on non-commercial lines as per its dictates. At the same time, it is heart wrenching that taxpayers’ money is thrown away to encourage non-commercial banking

(The author is a retired DGM of SBM and SBT.)

(This article was published on October 21, 2012)
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