Debashis Basu: Mudra Bank - new regime, old philosophy-Business Standard
Debashis Basu
April 5, 2015
For some strange reason, every new government wants to launch a new bank, or a major financial institution and multiple financial products. Previous governments have been responsible for superfluous organisations like IDFC with headquarters in Chennai, the Bharatiya Mahila Bank in 2013, the Rajiv Gandhi Equity Scheme, etc.
The Narendra Modi government, following the same path, may well outdo previous governments, because Mr Modi, like Indira Gandhi, believes the government alone can "fix" the many problems India has. In just 10 months, the government has launched Jan Dhan Yojana with a lot of fanfare and a financial product called the Sukanya Samriddhi Scheme in January this year. On April 8, probably with as much fanfare and full-page ads in newspapers, the government will announce the launch of the Micro Units Development and Refinance Agency (Mudra) Bank.
Is there a need for Mudra Bank? Well, arguments can always be cooked up to support a direct government intervention to solve any one of our many chronic problems. One such problem is inequitable availability of finance. Too much of capital goes to large companies and too little to small businessmen. This is unfortunate because study after study has proved that not only are smaller borrowers more honest in repaying debt, but collectively they have a huge economic impact.
To believers of state intervention, like Mr Modi, the answer to this is a strong government initiative. How else can you break the stranglehold of "greedy" moneylenders and "lazy" bankers to provide money to the small guy? This sounds "equitable" in theory and, therefore, an irresistible as a policy action. Except that whatever Mr Modi is trying today, has been tried before and has failed miserably.
Remember, it is this same desire to ensure equity through determined government action that drove the socialist Indira Gandhi to nationalise banks and force them to lend to "priority sectors" that include small businesses and micro units. Not only did such "directed credit" not work, but government control over banks led to large-scale corruption and repeated recapitalisation through taxpayers' money. This further reduced the money available for small businesses. It is a bizarre irony that 35 years later, Mr Modi, the darling of the Indian right, is responding to the same chronic problem with the same failed socialist solution of Indira Gandhi: a government bank for the small borrowers with a breathtakingly large remit.
Mudra Bank will be a Rs 20,000-crore institution, which would "primarily be responsible for refinancing all micro-finance institutions which are in the business of lending to micro and small business entities". It will be supported by an additional Rs 3,000 crore from the Budget to create a credit guarantee corpus to guaranteeing loans being provided to the micro enterprises. It would partner with state-/regional-level coordinators to provide finance to the "last-mile financier" of small and micro business enterprises. Not to forget that it will "primarily be responsible for laying down policy guidelines for micro/small enterprise financing business; registration, regulation and accreditation/rating of MFI entities; laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery".
It would also be "responsible for the development of a standardised set of covenants governing last-mile lending to micro/small enterprises; promoting right technology solutions for the last mile; formulating and running a credit guarantee scheme and creating a good architecture of last-mile credit delivery to micro businesses under the scheme of Pradhan Mantri Mudra Yojana."
Click Here To Read My Views Why lowering Of Interest Rate Is Not a Proper Medicine To Cure Sick PS Banks
Phew! So Mudra Bank will be a lender, consultant, regulator, think tank and an agent of social change, all rolled in one. Unfortunately, if this is what Mudra Bank is supposed to be, it will suffer from a congenital defect at birth: too many conflicting objectives - something that beset Unit Trust of India earlier and still affects government-controlled banks and insurance companies. This is how all public sector units used to be conceived. Clearly, the babus who have drawn up the Mudra Bank seem to belong to the 1970s, too, not just the idea.
But wait a minute. What can Mudra Bank do that can't be done now with some tweaking of the existing system? I dug around a bit and discovered, to my horror, that successive governments have focused on microlending for decades. As a result, the Modi government has already inherited a massive bureaucracy and welfare system meant for small businessmen. This includes:
Small Industries Development Bank of India
National Small Industries Corporation
National Bank for Agriculture and Rural Development
Credit Guarantee Scheme
Priority sector lending by all banks
Regional rural banks
Bharatiya Mahila Bank
National Scheduled Castes Finance and Development Corporation
National Scheduled Tribes Finance and Development Corporation
National Backward Classes Finance and Development Corporation
18 State Financial Corporations
25 State Industrial Development Corporations
Microfinance programmes
Assistance to Entrepreneurship Development Institutes
National Innovation Foundation
A Rs 10,000-crore fund announced in the 2014 Budget for promoting entreprneurship.
Mudra Bank will be backed by a Rs 3,000-crore credit guarantee scheme. But a credit guarantee scheme is already functioning for the past decade. Till August 31, 2014, cumulatively 1,599,128 proposals from micro and small enterprises have been approved for guarantee cover for aggregate credit of Rs 79,647.15 crore.
There are at least three ministries now involved in helping small business in some way or the other: finance; micro, small and medium enterprises; and a new ministry of skill development and entrepreneurship; apart from ministries like tribal affairs and social justice running their own sectarian schemes for tribals and scheduled castes, respectively. I may have missed a few more organisations and the many departmental schemes that try to put money extorted from taxpayers, into the pockets of chosen people.
This array of government companies, schemes and initiatives overseen by a vast bureaucracy, based on some warped but failed notion of government-delivered equity, was not enough for Mr Modi. He had to set up a new bank, another new bureaucracy, borrowing ideas of the 1970s, even as there is no accountability for taxpayers' money already wasted on numerous initiatives to "support" small businesses of various kinds. And this from a regime that had promised minimum government. What a shame!
Was RBI right in pushing banks into rate cuts?
RBI on Tuesday decided to wear its hat as a banking regulator more than a monetary authority
-LIVEMINT By Ira Dugal
The Reserve Bank of India (RBI) on Tuesday decided to wear its hat as a banking regulator more than a monetary authority. Although in this case, the two are inextricably linked. Having faced intense pressure over the last six months from the government and industry to reduce rates, the central bank had cut rates by half a percentage point in the March quarter.
The only problem was that banks were refusing to play ball and pass on the cuts. So the RBI stepped in, this time with a stick rather than a carrot. RBI governor Raghuram Rajan has often spoken of using the carrot and stick approach in issues ranging from bad loans to the creation of local subsidiaries for foreign banks.
The stick worked far better than the carrot. Less than 24 hours after the governor said the key argument being touted by bankers for not reducing rates — that cost of funds has not fallen — is nonsense, rates have come down.
State Bank of India, the country’s largest lender, and HDFC Bank Ltd cut within minutes of each other on Tuesday evening by a similar 15 basis points to 9.85%. ICICI Bank Ltd threw in a little extra and cut rates by 25 basis points to 9.75%. Others have followed this morning. One basis point is one-hundredth of a percentage point.
Was the RBI justified in pushing banks to cut lending rates? Does this hint at an element of excessive cooperation (collusion is too strong a term) among the top lenders?
Let’s consider the first question.
The regulator is not meant to micro-manage banks. The RBI has been publicly saying it does not want to do so. It can then be easily argued that the RBI should have waited for competitive pressures to play out, except that there was no sign that banks were yielding to these pressures. Companies had already started to shift some of their borrowings to the markets where rates had adjusted lower due to the RBI’s rate cuts, but given that banks are more focused on retail lending, they felt little pressure to cut rates.
That’s market dynamics at play, one may argue. True. But, is there also some amount of market engineering at play here? In that case, the regulator would be well within its right to point out unfair practices at play and find a way to correct them.
That brings us to the second question. Are India’s lenders a bit too cooperative with each other? There is no doubt that the largest banks do tend to act together. Rarely one moves in a way that is disruptive.
Take for instance the time when the savings rate was deregulated in October 2011. Until then, all banks had to pay a flat 4% on savings deposits. It was a decision of enormous significance. Banks would be able to compete for the so-called low-cost deposit pie if they chose to. Larger banks, which already had a significant portion of current account and savings account (CASA) deposits, had argued against this move. But the RBI, led by then governor D. Subbarao, went ahead with the deregulation. A few small banks moved but none of the larger banks did. So 4% remains the norm for savings accounts irrespective of liquidity conditions.
With no re-pricing of CASA deposits, the top banks have managed to maintain their net interest margins (NIMs), or the difference between interest on deposits and that earned on loans, in a steady range. As an aside, it’s worth mentioning here that some India banks have often been criticized for their high NIMs, which are among the highest globally.
If we hark back to the experience of 2011 and add in the cohesion with which the top three lenders acted on Tuesday, we can’t help but wonder whether the regulator was justified in getting tough on the country’s banks
http://www.business-standard.com/article/opinion/debashis-basu-mudra-bank-new-regime-old-philosophy-115040500634_1.html
RBI Instructs Banks to Restructure Farm Loans-NDTV
The Reserve Bank today said it has instructed banks to restructure loans of farmers whose crops have been damaged by the recent unseasonal rains and hailstorms.
"We have given instruction to banks to restructure farm loans," RBI Governor Raghuram Rajan told reporters here.
Unseasonal rains and hailstorms in northern and central parts of India last month have damaged rabi (winter-sown) crops in about 113 lakh hectares.
Earlier today, Prime Minister Narendra Modi announced higher compensation for farmers whose crop have been damaged by unseasonal rains and also asked banks to ease criteria for them to avail government support.
Mr Modi also asked insurance companies to be "proactive" in settling claims of farmers.
He said the criteria of 50 per cent crop damage for providing compensation to affected farmers has been reduced to 33 per cent, which will help more farmers to get compensation for their crop loss.
"Second important decision we have taken is to raise the parameters for helping him (farmers). The amount of compensation has been increased to 1.5 times. If earlier, he was getting Rs 100 as compensation, now he will get Rs 150, if it was Rs 1 lakh, he will get Rs 1.5 lakh... a 50 per cent increase," Mr Modi added.
In its monetary policy yesterday, the RBI said that the adverse impact of unseasonal rains and hailstorms in March is still unfolding.
"Initial estimates indicate that as much as 17 per cent of the sown area under the rabi crop may have been affected though the precise extent of the damage remains to be determined," said the policy document.
RBI policy decision: Unless banks listen to Rajan, industrial growth is at risk-First Post
The Reserve Bank Of India’s governor followed a well laid down script, and most central bank watchers should pay credence to it. The Governor does not believe in making any rate cuts in the monetary policy. This time as always there is no justification given for not reducing the rates in the policy document.
There are concerns as usual on the domestic economy and more on the global front. The RBI is concerned about the slow recovery in US, and very concerned about what is happening with the economy in China.
The assessment by Raghuram Rajan says, “Growth continues to slow in China amidst financial fragilities and macroeconomic imbalances. This will have regional and global ramifications, although the softness in international commodity prices is providing some offset for net importers while adversely impacting net exporters.” A slowdown in growth in China has ramifications for the global economy, though how much is Indian economy now coupled with the Chinese economy it does not specify.
RBI puts onus on banks
Policy transmission through fiat may be regressive--Business Standard-09.04.2015
Living up to widespread expectations, the Reserve Bank of India (RBI) maintained the status quo on the repo rate. There were greater expectations of a cut in the cash reserve ratio (CRR) and perhaps that the statutory liquidity ratio (SLR) would be reduced, but those were not fulfilled. The main reason that there were such low expectations about a repo rate cut was the anticipated impact of adverse weather conditions on the rabi crop. While wheat prices are manageable through open market sales from the government’s stock, other crops, particularly vegetables, are likely to see prices rise, even if temporarily. Whether monetary policy should respond to such transitory shocks is a debate in itself; but, as it happened, the primary rationale provided by the RBI for maintaining the status quo was not the threat of food prices surging. Rather, it was the recalcitrance on the part of banks against passing on the two recent policy rate cuts by lowering their lending rates.
This lack of transmission has been widely commented on in recent days. The chairperson of the State Bank of India attributed this to a higher average cost of funds as depositors switched funds from savings accounts to term deposits in order to protect themselves from falling interest rates. It appears that monetary policy is caught in a chicken-and-egg trap. Banks won’t lower lending rates because their cost of funds is not going down; in fact, it is increasing in response to the RBI rate cuts, because of substitution. And now, the RBI will not lower rates until it sees banks doing so. So what will break this logjam?
In the short term, there is cause for concern. Most leading banks have already cut their base rates. It is reasonable to presume that the RBI’s stance on the matter has persuaded the banks to overcome their reluctance to cut rates. The finance ministry has also been known to pressure public sector banks into lowering lending rates even when the RBI was moving in the opposite direction. What could have stopped it from doing so now, particularly when the RBI also wants this to happen? Effectively, monetary policy transmission may move from market forces to fiat — which would be regressive.
And if good governance prevails and the ministry restrains itself, there is no stimulus to growth coming from monetary policy. In the longer term, the policy itself proposes two substantial remedies to this problem. Based on the premise that banks that price their loans on the basis of marginal rather than average cost of funds will be more responsive to policy rate changes, the RBI is encouraging banks to amend their pricing formulae to reflect marginal costs. More fundamentally, the establishment of a new entity, Financial Benchmarks of India, which will develop and monitor market-based benchmarks, will allow banks to transit from cost-based pricing to external benchmark-based pricing, which will contribute to competitive efficiency. Both these are promising developments in the effort to improve monetary transmission.
Tuesday’s policy announcement also had a regulatory and development component. Two initiatives deserve mention. One, along with a rejig of priority sector norms, the concept of priority sector lending certificates, proposed almost a decade ago by the Committee on Financial Sector Reforms – led by the current governor – has been resuscitated. Properly designed and implemented, this should incentivise more lending to these sectors. Two, new and presumably more pragmatic guidelines are being framed for compensation to non-executive directors of banks. Better governance should ensue.
Modi assures bankers of zero interference-The Hindu-3rd Jan 2015
Urging Indian banks to match global banking standards, Prime Minister Narendra Modi on Saturday assured the banking fraternity of zero political interference in their functioning on part of his government.
“Banks should be run professionally, and there will be no political interference. But accountability is essential,” said the Prime Minister at the conclusion of the two-day “Gyan Sangam” retreat of top bankers, remarking that public sector banks could derive strength from the fact that the government had no vested interest.
“The Prime Minister has urged establishment of global quality banks while stating that the government has no wish to impose itself on the working of banks,” said Financial Services Secretary Hasmukh Adhiya, briefing reporters here.
He mooted a five-strategy plan to improve the working of public sector banks (PSBs), but said it would be up to the banks to decide upon key issues like consolidation without interference from the Finance Ministry.
“Mr. Modi was very clear that the Finance Ministry would not tell banks what to do,” Mr. Adhiya said, remarking that it was left to bank boards to judge how far consolidation would benefit them. The Prime Minister clarified that the “Gyan Sangam” retreat was only to “sensitise banks” to the prospects of consolidation.
“The novel meet was a step towards catalysing transformation and to develop solutions to problems,” Mr. Modi said. He urged the PSBs to prioritise lending to companies that generated jobs and play a protective role in safeguarding the interests of the common man.
“There should be an end to lazy banking,” said Mr. Modi.
An important business opportunity for banks to seize, according to him, was financing nearly 11 crore homes which were expected to come up by 2022.
Mr. Modi further suggested joint branding campaigns by PSBs, while recommending resource sharing in terms of digitisation to enhance their functioning. Mr. Modi also suggested developing dedicated teams to combat cyber crime.
Meanwhile, Mr. Adhiya confirmed that the government was considering setting up a bank boards’ bureau as recommended by the RBI Committee headed by Dr. P. J. Nayak (the former Chairman of Axis Bank) in order to improve the performance of PSBs.
“The bankers at the meet have decided to set up a Bank Investment Company (BIC) in the short run in which the government will transfer its holdings in banks.”
My Comments are as follows:----
Gyan Sangam which remained for two days in Delhi on 2nd and 3rd of this month ended and the outcome which emerged is that banks need more freedom and Government of India will not interfere in functioning of banks . Mr. Finance Minister and Mr. Prime Minister both have assured Chiefs of banks which participated in the said conglomerate, that they will not interfere in banks' working and they want the bank to become socially useful and commercially viable. On the other hand Chiefs of banks might have also promised as usual to fulfil the agenda of the Government. Gyan Sangam ended with note of flattery from both side and promise from each side to look into other's grievance as use to happen in the past too.
I don't know it is a win-win or loss-loss game for both. But I am unable to understand what strategy they have planned to achieve the goal of social objective and that of profit aspiration of bank ,other than focusing on their own ideas and ending without reconciliation in the larger interest of people of India for which banks were nationalised. It is not clear what motive banks like to fulfil, They want to serve common men or to earn profit and exploit common men like their counterparts in private sector.
I simply ask following questions to top officials of banks who are asking for free Hand to combat menace of bad debts and to earn more profit .
Recruitment:
Management of public sector bank was free to recruit employees in all cadres as per whims and fancies of top officials of the bank. Bank staff are recruited through IBPS which is manned by retired bankers only . Top Officials of each bank even recruited thousands of officers from campuses to please sons and daughters of their friends and relatives and to please college managements which were associated with top officials of the bank.
Now What more freedom They need to make banks safer and growing?
They were completely free to recruit talented staff as per their need for last a decade and more and undoubtedly they recruited as per their sweet will only. Still they failed to protect banks from losses arising out of rising bad debts and frauds. Only last year Supreme Court stopped them when some one filed PIL in court and the court found campus recruitment against the spirit of the Constitution.
What more additional power and absolute freedom Chiefs of bank management mean now?
Promotions:
Bank management use to promote officers from one scale to other absolutely as per their sweet will. They never cared the reports written or marks given to any officer in Annual Performance Appraisal Report (APAR). Members of Interview Panel used to give higher marks ( 25 out of 25 ) to officers who were close to them or who were recommended by some Very Important Person.
This manipulation in marks is done by promotion board not only in case of junior officers , but Even in selection of ED or CMD we have seen how officers like S K JAIN was given higher marks in Interview though his rating AAPR was poor. Every bank officer knows very well that an officer may be inefficient, corrupt, negligent, bribe earner, unskilled for post and cadre , but if he has close relation with any senior officer or his immediate boss , he may be promoted. In addition ,Management of each bank has absolute power to transfer any officer from one corner to other without any restraint from GOI or RBI. Officers who do not act yes Perfect YESMAN of his or her bosses are posted at remote , critical and rural centres. This is why culture of flattery is more prevalent than culture of performance in banks.
Management ,after enjoying such devious power of promotion and added by monstrous power of transfers, What more power top officials of public sector banks need to cure sick banks?
How much power and freedom they need to continue their arbitrary rule and to become wealthy figure in society making their banks poorer and sick?
When top officials of a bank are unable to read , assess and ascertain the real quality of an officer working under them for 10 to 30 years of his or her service , what quality they may assess and ascertain in two or three minutes of Interview they conduct for promotion of such officers is another pertinent question which every fan of Modi Government or protagonist of merit oriented promotion policy or supporter and seekers of freedom for top officials of banks have to ponder over and answer to field level bank staff .
People should know, bank staff should know and Government of India who even after burning entire body of bank only due to misuse of power by top officials should know and make it clear what additional freedom they suggest for public sector banks to make banks socially useful and commercially viable.?
Why GOI, RBI and Chiefs of PS banks demand absolute and greater freedom for bank management and what is the broad idea of such freedom should be brought in public domain.
Sanction of loans:
Management of banks have enough powers to sanction loans strictly as per their sweet will. Branch head of each branch can sanction loan to small loan seekers and higher offices can sanction loan to bigger business men and big corporate houses without any restraints from GOI.
Is there any interference in sanction of loan from the government?
Branch Head and Regional Head should enlighten government and people of India what type of interference they face at branches in loaning process.
There is system of Credit Approval Committee in all administrative offices of all banks , but even today, majority of loans are sanctioned as per sweet will of the Branch Head or Regional Head or Zonal Head or Chief of Bank Head called as CMD or ED. High value loans are sanctioned by Board of Directors represented by GOI, RBI and Chiefs of Bank. And ninety per cent of stressed assets are those assets which have been sanctioned by top officials only and that too after due diligence made by various committees and many professionals like valuers, Chartered accountants, advocates etc.
Is there any top official in any bank who may say boldly that he or she had or has enough courage to deny sanction of any loan proposal against the will of the boss or against the will of de-facto head of such committees?
Can any officer sitting at any branch or any office have courage to move against his or her boss even though everyone officer is free to voice his unwillingness to sanction any loan due to inherent weakness in the proposal?
It is true that politicians also build pressure on them to sanction loans as per their choice and to their close relatives, friends, corporates etc..,. But do any officer at any branch or at administrative office has courage to decline loan cases recommended by such corrupt politicians ?
Government ask for financing to any particular sector or to any particular scheme formulated by them and this will continue in future too.
Has any officer of the bank courage to oppose it?
Or is it desirable for government to allow PS banks to neglect national priorities for the sake of earning profits only?
or I can ask in different way , whether government , the owner of the bank do not have power to frame policy of credit delivery as per national priority and urgency?
Investment:
Management of each bank is free to park surplus fund of the bank in any mutual fund or SLR linked fund even if banks have to incur interest loss . Banks are supposed to achieve target fixed for lending in priority sector , for lending in agriculture and for weaker section of society or minority communities. When they fail to do so even by manipulating datas of other sector lending towards preferred lending, they think it wise to park fund equivalent to gap of actual with target in government prescribed low interest yielding fund even though it causes loss to bank. These banks prefer parking idle fund in mutual fund even though it causes loss to bank indirectly.
What more freedom they visualise and what more freedom they demand now?
Interest Rate and concessions:
Banks are free to decide their base rate or Prime Lending rate keeping in view cost of deposit and expenses and they have been enjoying this freedom for last two decades. They are free to give concession in interest rate, processing charges and what not to any borrower as per their whims and fancies, not as per the merit or demerit of the case .
Even after giving all concessions , they are unable to safeguard banks fund and they are unable to increase profit of the bank whereas private banks are using their freedom for the growth of banks credit and bank's profit. On the contrary top officials of public sector banks use power of interest concessions to please the borrower who can please senior bosses by gifts in cash or in kind.
It will not be an exaggeration and incorrect to say that majority of borrowers who are given various concessions at the cost of bank's interest are now considered as Non Performers and loans given to such borrowers has gone bad or are in category of stressed assets
I dare ask top officials of bank what more freedom they seek from GOI and I ask RBI and Finance Minister too ,what more freedom they are likely to give bankers in fixing of interest rate structure to make banks economically viable and socially useful as prescribed and desired by Mr. Jayant Sinha, learned Deputy Finance Minister.
Write Off and compromise settlement:
Management of each bank have full freedom to frame their recovery policy and decide their terms of compromise settlement with loan defaulters and conditions for writing off a bad loan. They are free to restructure any good or bad loan to hide stressed assets and to avoid legal actin against any borrower they like .They have written off bad loans and sacrificed banks good money amount to Rs.1.65 lac crore during last five years. Huge drainage of money in writing off of loan or sacrificing of principle and interest amount from loan defaulters .
Now Chiefs of banks should make it clear what more freedom they aspire to stop pilferage and drainage of banks good money ?
What more power they need to increase in loss to banks by writing off loan and by sacrificing bank's interest in compromise settlement?
Do they have any plan and idea to stop such losses which deprive stakeholders of dividends ?
Do they have any idea to stop such losses so that they may earn higher profit and they may stop begging capital infusion in future?
Branch Expansion:
During last ten years every bank has undertaken rapid branch expansion. Banks are now free to open branch in any corner of the country as per their suitability . Interference of RBI has been reduced to minimum. Bank can open as many branch as they like to enhance profit prospect . They can install an number of ATM to improve customer service.
What more freedom management of bank seek from GOI in this aspect?
It is not an exaggeration to say lastly that it is the unbridled freedom given to bank ED and CMD by UPA government in lending and in writing off of bad loans , in recruitment and in promotion that has resulted in critical sickness in banks. FM and PM used to give oral instructions to CMD and ED and in turn bank officials used to run pillar to post to abide by his verbal orders , even if they were sure that bank will have to suffer loss in long run. All instructions to chiefs of banks given by VIPs, and Ministers to bank to help friends, relatives, political associates by loan or by write off are invariably given on phone or in meetings .
Present government has promised banks that thy will not interfere in functioning of banks . This is for the sake of circular only and such circulars have been issued in the past also . But such circulars are never put in force in true spirit . Misuse of power cannot be stopped until we end flattery of all types.