Banking, Uncategorized

Role of Development Finance Institutions

Financing of long gestation projects is very different from short and medium term lending that a commercial bank is best suited for and each calls for very different skill sets to manage and operate. This was the logic behind India setting up development finance institutions (DFIs) like Industrial Credit & investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI) and Industrial Finance Corporation of India (IFCI). Each of them had well-defined and slightly different goals and each of them targeted a different clientele.

When in 1994 and soon after, ICICI and IDBI both promoted commercial banks, they kept the distinction between project financing and commercial banking separate. The ICICI Bank and IDBI Bank both recruited and staffed themselves with experienced commercial bankers, with a lot of hard core banking background, and they both succeeded in establishing themselves.

With different profiles and skills needed for each of these organisations, it became logical to recruit Engineer MBAs in DFIs as they seemed to have the required skills to appraise long gestation, large capital projects and monitor lending to such projects effectively. The commercial banks however needed those with entirely different skillsets – graduates and post-graduates in commerce or similar backgrounds who could be recruited and trained.

ICICI and IDBI meanwhile continued their project financing activity but they were facing tremendous pressure – political and otherwise – to keep lending to manufacturing and infrastructure projects which were facing problems. Asset provisioning norms were far more lax at that time, and taking advantage of that, DFIs went on lending to projects that were in trouble under the mistaken hope that they could be revived. For sure, some projects were revived and did well, many others did not.

ICICI and IDBI were also facing scarcity of resources as repayments were not coming in on time. ICICI had been permitted to float tax-savings bonds on which interest they paid was almost equal to that paid by commercial banks on their term deposits. Commercial banks on the other hand, had access to low cost demand deposits. Discussions were therefore floated to merge the two DFIs and their respective commercial banks. This per se would not have been a problem if, after the merger, the basic difference between project finance and its management, was kept separate from commercial short and meium term lending. Also it was necessary to keep the skill sets separate and maintain that distinction in the merged entities. This did not happen in practice.

Once the mergers actually happened, the MBAs who came from the DFI with a larger asset base were placed in positions of authority over the experienced commercial bankers and began to interfere in their domain. This obviously led to severe HR issues and the experienced bankers started to leave their organisations and look for other opportunities. The MBAs obviously had no clue as to how a commercial bank was to be run and tried to implement processes and ways of doing business more attuned to project financing leading to complete confusion.

Meanwhile with the distinction between project lending by DFIs and commercial lending by banks no longer there, other commercial banks also started to get requests from their clients for project lending, something they were not really competent to properly appraise and monitor. With the freeze on hiring, and inability to pay market related salaries, PSBs were constrained from recruiting the right staff who may have better been capable of appraising larger projects In a holistic way.

The blurring of roles made a mess of the asset quality of both the newly merged ICICI Bank and IDBI Bank, as well as the larger PSBs. The experienced commercial bankers who were first recruited into ICICI Bank when it was first set up, and formed the bedrock of its successful foray into commercial banking, started to get side-lined, and quit in droves through sheer disgust. The few who remained were treated as people of no consequence and obviously felt no compulsion to contribute much more than just what they needed to survive. IDBI Bank, being in the public-sector, treated their experienced bankers far better, and therefore they are in a much better position in terms of banking talent, although they have other problems like corruption and below par efficiency to contend with.

If this situation is to be rectified, there is an urgent need to go back to the original position of maintaining a separation between project lending and commercial banking. While a de-merger of the erstwhile DFIs in not an option, what can be done is to reinstate separate divisions in IDBI Bank and ICICI Bank which will focus on their role as project financing specialists. The PSBs and the rest of ICICI/IDBI Banks can then go back to what they do best, that is commercial banking.

The bad loans relating to project lending should also be assigned to the project finance divisions to manage. This includes bad loans related to project lending by PSBs. It is time to recognise that each bad loan needs to be looked at separately and distinctly, if any serious attempt is to be made to recover then. Setting up a general bad bank will not solve the problem, and it is good to see that this proposal seems to be no longer on the table.

Banking, Uncategorized

ATMs and Demonetisation

With the Reserve Bank of India (RBI) restoring currency notes supply to banks to around 80-85% of pre-demonetisation levels, most if not all ATMs should have their normal supply of cash.  Agencies handling ATM replenishment have also by and large confirmed normal levels. Yet many ATMs still show inadequate levels, and where available, dispense only Rs. 2,000 notes. This obviously means people are withdrawing more than they need and many are hoarding notes of small denomination notes as a panic reaction to the previous temporary shortage.

Senior citizens are by nature wary about using debit or credit cards, ATMs or any other online modes of payment. They also hold a certain level of currency at home to meet unforeseen medical and other emergencies. However, they did this even prior to demonetisation so all they did is to deposit the banned notes they had with them and withdraw almost the same level of new notes. Overall this would not affect the stock of currency at ATMs.

What has therefore altered at least for the time being is behaviour of younger bank customers. For no apparent reason, many are reacting in panic and hoarding currency particularly in smaller denominations. Given that many have now started to rely almost entirely on cards and online payments, the demand for currency should by now have gone down considerably. This is also what the RBI has planned for, and therefore if withdrawal from ATMs remains more than needed, other customers, who as a result have to return empty-handed, get affected badly.

Prior to demonetisation, most smaller retail outlets like grocers, vegetable and fruit vendors, gas agencies, smaller hospital, pharmacies, laundries and many others dealt almost entirely in cash. After banks and the government introduced several alternatives, many of them have since shifted to accepting, wherever possible, cashless payments. However some others adamantly refuse to do this. Habitually most retail outlets, small and some larger ones too, rely on cash transactions to hide their actual turnover enabling them to pay less in taxes and levies like sales tax, VAT etc. Many customers have also become accustomed to getting better deals and more discounts if they agree not to insist on bills.  Retailers also tend to get better deals from their suppliers if they too deal in cash and do not insist on tax invoices. It is a cosy arrangement in which well-placed bribes to tax and excise officials get them to look the other way. The government ends up losing much needed revenue and they have been trying in various ways to get people to change their habits. Introducing cashless modes of payment is a step in that direction and it is heartening that some retailers and customer, both have fallen in line.

However we are still a long way off from reaching levels of compliance considered normal in advanced economies. Not that people in such advanced countries are doing this very voluntarily, there are just more checks and balances in their system because of more data being collected and analysed. In India too, data analysis is fast catching up. During the demonetisation exercise, many holders of unaccounted banned currencies resorted to several underhand methods to convert their ill-gotten gains. Aided actively by a set of corrupt bank officials, they used fake IDs, fake/shell company bank accounts, dormant accounts etc. to exchange their currency notes. They also got their employees, associates and hired help to put funds into their accounts and then withdraw new notes. These abnormal withdrawals are another reason for shortage of currency in ATMs. Government and RBI are well aware of these methods and with enhanced data analytical tools at their disposal tax authorities have gone after the black money holders as well as rotten bank officials. This is an ongoing process which will take some time as more than 18 lakh accounts are reportedly being investigated. For sure, many of these account-holders will have legitimate explanations, and these accounts will naturally be eliminated from the list in due course. However is widely expected that many others will be caught. In fact banks have taken action to suspend some officials already.

No one suggests that the steps taken so far will stop black money. While some black money holders will be caught in the ongoing process, many others will go free. The practice of bribery has not stopped and will continue at least for the present. Political spending all in black money has to be tackled and that in itself is a mammoth task. However a serious beginning has been made, and the anger in some quarters at steps taken so far does show that it has made quite a significant impact.

Banking, Uncategorized

Banks and Demonetisation

The recent demonetisation period from November 11. 2016 to December 30, 2016 prescribed for exchange/deposit of the now banned Rs. 500/1000 notes has clearly exposed the extent for everyone to see the rot and greed in some banking officials. Given this, it is shocking to read that the Ministry of Finance has put out a figure of just Rs. 71.5 crores as the amount wherein bank officials have colluded to fraudulently exchange these banned notes. This is obviously a grossly underestimated figure.

As we are now aware, bank officials have used various methods to assist black money hoarders to exchange their ill-gotten gains and sabotage the good intentions of the government –

  • Accounts which have not been operated for a year or more were identified by crooked branch officials and these accounts were allowed to be used by black money holders to deposit their hoard of banned notes withdrawing new notes to replace that.
  • In the initial days when multiple exchanges of Rs. 4,000 worth of banned notes were allowed, bank officials facilitated photocopies being taken of already submitted photo IDs, without the knowledge of the original ID holder. These photocopies were then put together and used for facilitating bulk exchange of black money.
  • Jan Dhan accounts were allowed to be misused to deposit amounts over Rs. 50,000 without any KYC stipulations, often without the knowledge of the account holders. These accounts were used to deposit black money banned notes and withdrawal of new notes.
  • Multiple new accounts using the same set of identity documents were facilitated to be opened at branches and these accounts were used to launder black money.

These are just some ways by which the system was misused in collusion with bank branch officials, and even a few RBI officials. Apart from this black money hoarders have also made use of their employees and even random persons who were ready to help them by standing in line for a commission.

All of these methods were widely written about in the press and in social media and banks should have taken note of them and initiated remedial measures as the misuse was happening. Quite obviously RBI was aware given some measures they introduce to stop multiple attempts at exchange and so on.

Banks on their own should have by now come up with what they have done to detect wrongdoing and the action taken. If they haven’t it is either that they are lethargic and uninterested in properly supporting the governments steps to curb black money or they are aiding or protecting their customer and staff, in the bargain facilitating a build-up of black funds again.

Every bank, including cooperative banks, is not fully computerised and has a central database. It is quite easy to get their IT department to run queries on the database to identify not just the accounts and identities that have been misused but also to trace out the particular branch officials who put through the transaction. Based on this information the banks should have already taken action against erring officials. If they have not done this, it is now upto the RBI and Finance Ministry to push them into doing this. A clean up of the banking system is long overdue and the demonetisation exercise gives the government a great opportunity to do this

I am not suggesting that all that is rotten in banks and the banking system will suddenly come to the fore and be eliminated, but a significant part of the rot can be corrected if the government acts quickly now.

Banking, Uncategorized

Banks and Demonetisation

An unfortunate consequence of this increasingly ugly political slugfest that any “discussion” on demonetisation has become is the dragging of an upright, well-respected RBI Governor into unnecessary controversy. A man too decent to counter all the moronic comments.

There is every indication that all due process was followed before this important decision was announced. The RBI discussed it and made a recommendation. Once the government accepted it, and decided on November 8, 2016 to announce it, approval was taken first from the RBI Central Board and then the Union Cabinet, both of which approved it. The President was also duly informed by the PM before he made his address to the nation.

There would be well be differences on whether the demonetisation was needed, and if there were shortcomings in implementation, however there was no slip-up in procedures. In any case, this issue of constitutional validity of the decision is already being considered by Supreme Court.

To therefore try to use the RBI Governor to score political points is extremely unfortunate. The present Governor, like most of his predecessors, understandably keeps a low profile, speaking when necessary. It is neither necessary, nor in fact advisable, for a Central Bank Governor to fashion himself as a Page 3 celebrity making controversial statements everyday as “evidence” of his independence.

Corruption in the banking sector over the years has been no secret. It is impossible for this sector to remain immune when general values in society were eroding. However, even people like me who have been associated with this sector for years, have I am sure been quite shocked at the extent of rot and greed in banking employees. For sure, the actual number of such black sheep is quite small from all indications, as compared to the total number of employees, and most of the employees have acquitted themselves very well during trying times.

As such feedback of wrongdoing came in, RBI was forced to react and issue some clarifications and make some modification in their notifications. This has understandably led to some confusion in the minds of the public. In hindsight that process could have been handled a lot better but given that an exercise of this size and scale has never been attempted before it was natural that there would be some leaning and correction as they went along.

In the coming days, we might well see many more officials getting caught and the law in that regard will take its course. Enough data and information has been collected by agencies for this to happen. However, it would certainly be prudent to ensure that reputation of banks in general and the RBI is not unduly affected. Banks will remain and will continue to play the role they are expected to in society and in the growth of the economy.