Well laid out rules and procedures are meant for the
mediocre, and the brilliant ones are to find a way out of them for the good of
the organisation. But as it happens, the mediocre flout the rules with a view
to disruption, for personal gain or in ignorance, and the brilliant ones (so
labelled or assumed) quote and stick to them. A really brilliant one is she who
can work with the mediocre and bring out above par results.
I have seen executives, who have been brilliant, but
unreasonably expected that others must scale up to them. They judged the
organisation from such exceptional standards and their criticism and stance
happened to be unpractical and unhelpful. An organisation is built around its
strengths, which of course must be built step by step during its continuance,
not on some text book standards. We cannot read an expert and compare our
organisation on those values. No organisation can have all values, some of
which will be mutually exclusive also.
An organisation that survives for long must have some
values. It cannot be fortuitous on a continuous basis unless it is nurtured on
public funds overtly (public sector) or by fraud (Sayam Computers an instance
of so many).
NPAs - 1
NPAs do not mark a bank as bad.
A Bad Bank for only NPAs is a different issue. NPAs are what ageing is to a
living organism, wear and tear to a machine, obsolescence for a technology. The
point is to keep them under the thumb, to learn from mistakes, scale up and
have an exit policy and route. It is Utopian perhaps, but is a job to be done.
The question is why have NPAs
spiralled out of control?
The first reason is the
eco-system.
Banks are vital and their
failure will drag down the economy. We have heard ‘too big to fail.’ PSBs are
guaranteed against failure thanks to tax payers, who have no say in the end use
of fund, ominously like the banks themselves. Security is a warm feeling, but a
slow killer.
Somewhere we latched on to the
idea that profit is a dirty word and looking for security for an advance is a
negative attitude. Interestingly, Tandon Committee, which brought about a
refreshing concept of lending, commented that security will be a secondary, but
necessary condition. A banker perhaps evolved from a pawn broker and it is
against his grain to lend without security. Security is not merely a document
but a matter of constant scrutiny and monitoring. This area fell into disuse
for many reasons.
Govt. control, which some still
favour, meant dilution of responsibility for management. Opening the doors of
banking to private sector weakened PSBs and the unions, who oppose
privatization, either do not appreciate or wear blinkers wantonly, and do not
see this insidious threat to the health of PSBs.
‘Directed lending’, a coinage
for development banking, took sinister meaning. Even if the govt. does not
pinpoint a borrower-to-be, it goads the banks to lend in the fond hope that it
will trigger economic activity and save it politically. It is not a safe
assumption and experience has endorsed theory.
There has been a constant and
haphazard churn internally in banks and the morale, wherewithal and skills of
employees and the professionalism of executives have been blunted.
Thus we have a primordial soup
that is not creative but disruptive.
NPAs – 2
When I was in
charge of Advisory Services in SBICAPS, an IIT-IIM graduate observed, ‘We do
different assignments each time and we have to invest in learning. The payoff
will be there only if we get repeat assignments.’ That is true for general
banking too. Banks lend to a wide gamut of industries. Trade also involves
niceties of procurement, storage and marketing, but that is less taxing. For a
long time, banks lent to trade where the age old practice of margin, security
by way of actual pledge and forced sale valuation were found to serve the need.
Industrial
finance introduced greater areas of darkness. Banks had to gain experience.
Those who argue that banks lend on financials miss the point and the bus.
Appraisal based on some arithmetic with figures which are often mental
constructs is a shoddy exercise. We must get to know the business as much as
possible. We go on a learning curve. We gain experience and we are able to
assess the risk a little more wisely.
Banks have
followed the practice of having advance specialists for several dominant
industries and that was sensible. They have also industry-specific approaches
formalized, like for tea, sugar, jute, diamond, etc. When software was coming
up, SBI set up a committee and issued guidelines. The approach was sensible.
The difficulty is the time taken and the quality of the guidelines.
The Study Team
on Rehabilitation comprising top executives of State Bank of India observed in
its report, “The need for understanding the nuances of borrowers’ operations
cannot be overemphasized. .. Efforts to keep tab on the health of a unit through
on-site studies and development of industry knowledge have to be redoubled to
prevent sickness.”
When we lend
to a new line like software, airline or infrastructure, we are blindfolded. When
we are not able to see we tread carefully. There are those that think that we
must court risk for reward. That is a half-truth. Banker is by definition
conservative, said Mr. N S Kulkarni, a senior executive of SBI.
Risk must be
understood and managed. Banking is neither charity nor a gamble. One of the
ills of nationalization is that the powers that be thought that bank money is
meant for evening out social disparities. That is not banking. We must lend to
all who have a viable plan, the key word is viable, small or big, a basket
maker or a high flier.
Incidence of
NPAs is naturally bound to be high where we lend to industries which we do not
know how to assess (infrastructure is a case in point).
NPAs- 3
When I was a
junior officer in seventies and eighties, we had ‘go to’ men for advice in
specialized areas like advances and foreign exchange. It is not always
circulars and instructions that can inform us. We need staff who have practical
knowledge to guide others that are on learning curve.
In late
nineties when I was heading a branch, I found that people with such nuanced
knowledge were a rarity. Banks have invested in process and procedure more than
in people, it would appear.
In a meeting,
the MD of SBI commented, ‘In our time, seniors used to take interest in juniors
and groom. That tradition seems to have disappeared.’
The
development of a banker does not happen by theoretical inputs. It happens by
field experience, by doing and learning, often by mistakes in much the same way
as organisms evolve. With mistakes being watched ‘vigilantly’ and risk being
avoided at every rung of the hierarchy, the development has been stunted
perhaps. It is not for me to comment on the skill levels of present staff,
being out of action long enough, but the impression lingers that this is an
area of weakness.
A curious
situation is that while the spectre of staff accountability haunts the staff,
there is no realistic accountability for decisions and action on an advance.
Accountability
has taken a sinister connotation, that someone or other must be fixed.
Accountability is fixed when a loss looms or has crystallised. It is seen in
isolation, not in totality. Mala fide and failure to secure the interests of
the bank will justify action in individual cases, but even here (not mala fide)
the workload and the grooming given will have to be taken into account in
respect of failure to do what is laid down.
Accountability
is a healthy concept for improving the pool of informed credit analysts and
taking systemic corrective measures, not for punitive dispensation, which does
not result in better credit portfolio or refined decision making.
I read in a
book about the system to rate the credit acumen of the dealing officials by
tracking the performance of the assets in question. I read that if an official
had no bad debts, his rating would be lower because he would be risk averse.
The point is that there was a system.
We have
nothing comparable in PSBs at least. The responsibility is diffused with layers,
and rollover of dealing officials ostensibly for prevention of fraud and
ensuring broad-basing of skills. The only offshoot of such a personnel policy
has been blunting the skills and diluting responsibility.
Now, the
various aspects of an advance like appraisal, day-to-day conduct, inspection
and monitoring are fragmented and no one may have a total view and no one the
wiser for it. Individual memory has been obviated and corporate memory in terms
of database and tracking by system seems to be absent.
When the bank
staff have lost the feel of an advance, the borrower has a minefield.
Given this
scenario, is it reasonable to expect that NPAs are a thing of the past?
Double Finance
Mr. S
Padmanabhan, who was DMD of SBI and became CMD of IOB, wrote a brilliant
article on double finance. He was a member of Tandon Committee (TC) and is credited
with drafting TC report.
The common
misconception is that a borrower has obtained certain goods on credit and shows
the same in stock statement and obtains bank finance, thus leading to ‘double
finance’.
The concept of
finance by commercial banks has been clarified by TC. Banks finance working
capital which is synonymous with current assets. They finance the entire
current assets not just stocks and receivables, called chargeable current
assets (CCA), against which DP and drawings are regulated.
In the
assessment, three streams of finance are there for current assets, excess of
long term sources over long term uses (called net working capital or NWC),
sundry creditors for goods and expenses, and bank borrowings (BB). Thus the
margin for BB comes not just from NWC, but also from sundry credits. The
margins are not correlated to the NWC. (NWC is 25%, while margin may be higher
and as said earlier there are other forms of current assets not reckoned for DP.)
The only fact
that there are goods on credit may not imply excess borrowings (not double
finance). One has to look at the composition of the entire current assets and
liabilities vis-a-vis assessment. TC suggested quarterly information flow to
facilitate monitoring, but the borrowers operate the levers and have succeeded
in scuttling it.
In State Bank
of India, a conscious decision was taken that credit on goods must not be
deducted for DP, based on a scientific rationale.
Borrower – a rambling
blog
Like
‘politician’, ‘borrower’ is a whipping boy. Both are incorrigibly evil and a
blight on society. That is the quintessential wisdom. If that were true,
democracy is ill-conceived and ill-founded, and banks are a bad business.
Someone asked me to write about Bad Bank. But, all are Bad Banks!
One of the
earliest to warn us about borrowers was Shakespeare who let Polonius rant:
‘Neither a borrower nor a lender be.’ When in early seventies, chances came for
buying some plot or flat, I had no money and did not want to borrow, as
Polonius was still exerting his influence. I would have been wiser if I had
forgotten him.
When we were
discussing choice of premises for a commercial branch, the difficulty of access
and lack of parking was pointed out to a premises. A senior executive remarked,
‘Why bother? Even if it is in Timbuktu, they will come running.’ This
condescending attitude to borrowers is somewhat ubiquitous. They are looked at
as sinners and as someone obliged to the bank and the loan staff.
We invited the
judge of DRT for dinner. During the chat, he said, ‘In Hyderabad, they come to
borrow with the avowed intention of not repaying.’ Not that ..bad perhaps!
There was one
brilliant executive who would sanction an advance and return the note with the
oral comment ‘eLLu’. (It means ‘sesame’ which is used in offerings to the
manes.)
We have this
dictum – distrust the borrower.
Was it
McGregor who propounded the theory that people behave exactly the way you
expect them to behave?
If borrowers
are bad as a class, how do banks survive? Are they balloons that will burst at
a prick? Many have burst of course.
Mistake me not
– I am solidly in the company of the suspicious.
That takes me
to an anecdote narrated by Prof. Sampat Singh (he has authored a book on
credit). “A committee was examining the problems faced by borrowers and met
various groups to get to know their views. When the turn of the borrowers came,
a member told them ‘Take it easy. The banks have already stated your case. You
may not be able to add to it.’”
Work and Pay
The issue of linkage of work and pay is a
complex one. Of course, costing and pricing are serious topics of study in
economics. I have not cared to go through it. Ignorance is a good basis for
voicing opinions. The more you know the more restrained you will be.
An old Tamizh poem says:
தம்மின் மெலியாரை நோக்கித் தமதுடைமை
அம்மா பெரிதென் றகமகிழ்க - தம்மினுங்
கற்றாரை நோக்கிக் கருத்தழிக கற்றதெல்லாம்
எற்றே இவர்க்குநாம் என்று
(Looking at
those poorer than you, feel pleased how your possessions are great; looking at
those who are more learned, feel humble how your learning pales before theirs.)
That is
idealist and is impractical at least post-Marx.
There are
certain ‘extraneous’ factors that have a disproportionate say in the matter –
political, bargaining and competitive pressures. In my opinion, they only
vitiate the concept of adequate and just compensation. We are looking for
fundamental determinants, a system of quantifying contribution and compensation
across all workers and factors.
I do not agree
with remuneration being commensurate with growth and profit, the essence of
capitalism. More has to be looked at. Sustainability and sharability must be in
the reckoning. We see executives pocket huge sums and companies tottering after
a while. The glamour we associate with success and some passing achievement is
detrimental to social well-being. I saw a news item in TOI - you can also
become a Pitchai. Really? The P.O. ad said that we could become chairman of the
bank. As we gain experience, we know that not only it is an odd chance, but
there is more to it than your own effort. I am an anti-communist, but I am
against the multani mindset - i want my money, I do not care if you go to ruin.
I am highly sceptical that higher pay produces greater corporate good, or that
it will reduce corruption. Our legislators take a huge chunk of the poor man's
money, have they become clean - other than to avoid chinavirus? The babus have
an attractive pay and pension, how incorruptible are they? The bank staff get
much more than half a century ago, how good is service and bank health? Money
is a measure of worth, but a poor one.
The concept of
society is akin to insurance. Some complain that the return in insurance is
poor. The primary purpose of insurance is cover for an unfortunate contingency.
When that contingency is low, the insurer rakes in better returns and as an
incentive he shares part of it.
The organized
society is what enables anyone to profit. The organized govt. lays down roads
and provides amenities. Such organisations – society at large or the businesses
and institutions – need be kept in funds and healthy. That must be the basic
consideration because without such organized effort, the individuals cannot
benefit.
We have grown
into a mindset why pay tax or so much tax, why petrol costs so much, and so on.
The idea that we must have more and more is a pernicious one.
But, the world
ticks by a conflict of interests and an irrational excess; it is fixated on the
western model inextricably; the pressures that dictate pay will continue
unchecked.
When I was in an interview panel, I asked a
girl questions on the subject she studied for graduation. She could not answer.
She said that she prepared for questions on banking. I told her, ‘If you do not
know the subject you studied for three years, how can you answer from a short
preparation?’ I asked her, ‘OK, tell me how the word bank came.’ She did not
know of course. Many of us also may not.
In my induction programme, an instructor said
that it came from ‘banco’, Italian for bench. Banking came principally from
Italy and the money lenders used to sit on a bench and conduct their business.
I remembered this when I was reading history by
Will Durant.
Excerpts:
“It was the Italians who developed banking to
unprecedented heights in the thirteenth century. .. The North called the
Italian bankers, ‘Lombards’. .. When their tide ebbed they left some of their
terms – Banco, credito, debito, cassa (money box, cash),, conto, disconto,
conto corrente, netto, bilanca, banca rotta (bank broken, bankruptcy) – in almost
all European languages.”
Tax
If there is one thing that most people agree on, it is that tax is sinfully bad. It depletes our purse and depresses our mind. You can understand why the expression ‘It is taxing’ has come about.
Writes Will Durant, “The simple paid tribute to the clever; this is a custom with a venerable past and a promising future.” Just substitute ‘hapless commoners’ for ‘simple’, ‘tax’ for ‘tribute’, and ‘govt.’ for ‘clever’. (The last may be controversial as govt. has many fools.)
The poor cannot pay and the rich won’t! The poor complain that tax cuts into their meagre income and we agree. The rich crib that tax kills the incentive to get rich. We are aghast. We (the writer and the reader) are poor of course!
So far so good. One may agree, have a chuckle or pass it as chaff.
I cannot rest with such a tame ending. I must ruffle the feathers or throw a stone in the pond and cause ripples. Tsunami is beyond me! (Some modesty at last!)
Good or bad, a govt. needs money, at least, to keep the various bloated limbs functional. In the historic days, kings used to wage war, annex territories and rob the conquered people. Read European history of the last few centuries if you doubt my hypothesis. For now, China is trying the game, not others really.
We Indians were magnanimous. We did not try such tricks; we were willing givers of territory and the riches. When I read Will Durant in Greek history, ‘The natives, weakened by agriculture and peace, were in obvious need of masters,’ I remembered India. Incidentally, look at the cleverness of Durant.
Am I taxing you by the digressions? Just padding up.
How does the govt. earn revenue? It has to pay not only the staff, it has to cater to defence needs, shore up the balance sheets of enterprises that bleed, give doles, create and maintain infrastructure, and a host of the things that one familiar with public finance can visualize. (Normally, I found that bank employees failed in public finance. Now they seem to fail in private finance also as indicated by NPAs.)
No state govt. is willing to add more avenues of taxation while announcing freebies at every election. They want the centre to bail them out. Everyone thinks that the central govt is a Kamadhenu or a Kalpakavriksham.
Another digression. Rajaji likened govt. to a thief in an election speech. He said ‘A good thief would take just what he needed whereas a bad one would take everything. A good govt. would tax the least whereas a bad one would tax to the hilt.’ When he was in govt., he brought in sales tax to compensate loss of revenue on account of prohibition. A relative of mine who was working in a French trading firm recalled how the business community met Rajaji and pleaded for not going ahead with one more tax, but Rajaji, as is his wont, would not yield. He replied, “Why do you bother? The buyer will pay.’
We have numerous demands. Do not tax pension, abolish income tax, spare the salaried, why so much tax on gas and gasoline, etc. The demands for no tax and more pay and concessions are a long list like Hanuman’s tail.
OK. All these granted. What should the govt. tax to make up for the lost revenue? Cigarettes and liquor? A nice idea. Convert the country to one of drunkards and chain smokers. People will be doubly happy. They will pay less tax, and drink and smoke away their life to glory!
Tax is a necessary evil like govt. We cannot think of lower taxes unless we have benign neighbours, abundant natural resources esp. petroleum and coal, and an industrious nation that doubles up the GDP raking in indirect taxes in such measure that rates can be slashed. We are decades away from such a prosperous state.
Meanwhile, we will chant, ‘Tax, tax, down, down’!
Banking
I take things seriously. So told a customer to me.
I think I did. After joining the bank I read the Book of
Instructions (BOI), a distinguishing feature of State Bank of India. I came in
it for the first time the expression, ‘moral turpitude.’ Law students and
brighter ones with good general knowledge (I do not claim any particular
knowledge either) would not have been new to it.
I realised that experience rather than books or dictionary
is a better teacher. I also realised that ‘moral turpitude’ classified as gross
misconduct by the short-sighted Scotsmen (who started the Imperial Bank and
produced the BOI) is often a qualification for career prospects. I also see
that it is a distinguishing trait of many who hold high office or parade in
public glare.**
A staff to whom I was attached for understudy taught me
that law and practice of banking are two different things and that is why
Tannan titled his book as ‘Law and Practice of Banking.’ Possibly, the long
time courts took to decide whether a cheque drawn in favour of SBI could be
credited to Harshad Mehta’s account was because of such dichotomy.
(Pl do not take me seriously!)
Banking as I understood
Banks raise money from the public and lend to the public,
an intermediation that builds on trust at the bank by people who may not come
together on their own. Banks create convenience of the economic principle of
money as storage of value, free from theft and with some cushion against the
deterioration in its value by inflation.
Banks cost their services historically, heuristically and
of late using quantitative methods of science and models. Interest on deposits
and advances are the major costs, but not the only ones. The return to
depositors by banks is not simply interest paid but also satety, transactional
facility and some status.
Banks have for a long time distinguished between demand
deposits (current account and savings bank deposits) and time deposits (term
deposits). Banks lend long intrinsically though on paper the advances are
repayable on demand by and large. They must have a sufficient corpus of time
deposits for liquidity match (an important parameter to monitor). Though they
do lend out of float funds (the core of demand deposits and funds that lurk
because of slacks in the system), it cannot be the main source. The interest
paid by banks differentiate between withdrawable (unstable) deposits and fixed deposits.
That paid on demand deposits is zero in current account and low for savings
bank deposits. The interest paid on savings bank deposits is more to encourage
savings by individuals, an important aspect in the economy of a country. This
practice has been universal and was followed even when interest rates were
regulated.
In the deregulated environment, how much interest should
banks pay on SB deposits? The consideration cannot change. The rate they charge
on advances cannot be cited and a demand made that they pay more on SB
accounts. Even on term deposits, banks must follow a practical and prudent
policy.
Advances age and collapse, and banks must take in their
stride loan failures in the normal course. It becomes a cost legitimately.
Inefficiencies of the system as a whole (political, legal and regulatory) and
of a bank also become a cost. Is it just to penalize the depositors? That is a
philosophical question that can have a simple answer in Utopia.
Often contradictory expectations are placed on banks, to
reduce rates from users and to increase it from providers of funds. ‘Good’
borrowers question why they should subsidise the concessions to sick units and
priority sector and compensate loan losses.
None of these is a new issue and I do not think that there
are satisfactory answers.
But, banks have a duty to manage in the best interests of
themselves and the customers on a scientific study of costs and efficient cost
administration. What these are is to be decided by those who are in service.
Criticisms are valid but are not holistic always.
Stopping free markets and inflow of talent from all
over the world will make USA lose its pre-eminence; doing away with religious,
linguistic and cultural diversity will disintegrate India; mindless technology
that supplants human effort and initiative and fouls up ecology will make Homo
sapiens extinct as a species.
*
“The model we follow of free market wherein high
pay, inhuman workload and unconscionable executive compensation have become the
features cannot sustain itself for long.”
I wrote this long back and wanted to develop it providing
necessary meat and beefing it up to something that might pass muster. But, the
Chinese developed the deadly virus in the meantime (or, to mollify the
Sinophiles, a deadly virus developed in China), which has spread like forest
fire and knocked the bottom out of free market, as it were.
Some thirty years ago communism collapsed with the symbolic
demolition of Berlin wall. Now, communist China has sounded the death knell in
retaliation, so to speak, for capitalism.
Hopefully, a safe and sensible future will be founded on
humanism that takes into account the humble place humans occupy in the cosmic
scheme, abandoning grandiose visions fostered by either dogmas or linear
scientific forecasts.
Dr. Susan Blackmore (before chinavirus breakout):
“Civilisation – the modern, greedy, destructive way of life
that so many of us enjoy right now – will not last another 50 years.”
I want to raise a controversial point about promotion.
Does one earn promotion because one is doing well in his
current assignment? I think that if one does well in the present assignment, it
only means that he is suited for it. He may deserve a reward; it can just be
monetary. To be in the reckoning for a higher grade, his suitability for that
grade must be assessed in a fair and systematic manner. His current performance
will be a positive, but not decisive.
It is like balance sheet analysis for sanctioning a loan.
The loan is for future whereas the balance sheet is a partial, if not tutored,
record of the past.
The bureaucratised system whereby thrice the number of
vacancies candidates are called and the required number picked from those
called is not well reasoned. It presumes that the process picks the best for
the job whereas it just picks the best of the lot. The assumption that an enterprise
has all the necessary talent in-house may be unsafe. Where necessary, one may
have to go to the market.
Business
A commercial organisation has its roots outside it – the
market and customers are its foundation. Many employees look at an executive
from what it means to their comfort. An executive is judged from how he treats
the employees and what good he does to them. That is natural and inevitable,
but may weaken an organisation.
An executive must aim at expanding customer base and
enhancing customer satisfaction. For this to happen, he must motivate the staff
by appropriate HR practices. HR is not the main objective of an executive
except to a faculty or dept. handling HR. A good executive must have his way
for the good of the organisation, not bow to pressures that thwart his main
purpose.
A top musician said, ‘I do not sing to their demand, but
sing what I want to their liking.’ That is professionalism. An executive must
do what he has to do convincing the employees. HR will be in being pleasant,
caring and doing within the general rules what is helpful.
One union general secretary told me of a DGM who increased the business like no other has done. That was a refreshing appreciation. Evidently, the DGM had practised HR, but had his focus on business. An organisation which is inward looking and employee-focused cannot be healthy.
*
SBI
Promotions
We had disaster in Goipuria and Bengalism in Ghosh. Fair selection is what is needed. The entire promotion and appointment system in the bank is wrong-headed. Seniority, nothing against (clean record, that only meant nothing to write home about), choosing those who do not cross the path of the union, etc. have been the criteria. Performance mattered for promotion, but the figures used were not what obtained in real world. Still, SBI stood aloft, I do not know whether that distinction still holds or just as wages, the quality (we never had smiling service which some other PSB banks could boast of) has been brought on par with PSB.
Credit
In SBSC, Hyderabad, a guest lecturer spoke on charges on goods. He was an eloquent communicator. I remember after 48 years what he said on ascertained and unascertained goods.
A man goes to a fruit shop and sees a variety of fruits on display. The fruits are unascertained. He decides after survey to buy a dozen each of apples, oranges and bananas. They are now ascertained goods. A charge on unascertained goods is hypothecation and that on ascertained goods is pledge. I have not verified from text and if I am wrong, I have got it wrong.
Anyway, we no longer take pledge except on occasions like vigilance week when we take it that we will be cent per cent upright, which is rather a hypothecation!
Banks, credit and bad loans
It would be a surprise if banks had a clean loan book today, with no appreciable bad loans. In fact, we must wait and watch if the situation does not turn even uglier.
The cornerstone of business is taking and managing risk. The principal risk is people on either side. While banks have put in place a theoretically sound risk management system, the people at the rudder cannot be said to be alert. Just as in the case of KYC, where documents fill the place of scrutiny and personal knowledge, so in loan management, procedural correctness seems to masquerade as risk management. It is an outside view as in the ten years since I left, things might have shaped up, but the results are not backing such a pleasant inference.
The theme of this piece is on people.
In the Book of Instructions of SBI, the Agents (designation changed to Branch Manager later) were enjoined to keep tab on the lifestyle of the subordinates. That was a prudent Scottish management lesson which has become blurred both because of the explosive expansion of branches and drastic change in general lifestyle itself. But, some shrewd observation of the lifestyle is warranted. Of course, there are instructions to scrutinise accounts, but that is barely enough. I feel that we need to watch the lifestyle of the borrowers also and find a way to use it to judge their integrity.
A leading banker said, "Do not just look at what the books tell, look at the people who are responsible for it." When I attended a training programme in credit, Sri Nambiar, ex-chairman, addressed us briefly and the point he made was, "You are now taught advanced techniques of lending. In our days, we were told to look at the promoters. The seriousness of that advice is undiminished even today."
We used to have a system of compiling the total means and worth of the borrowers while taking a decision to lend and at periodic intervals during the currency of the loan. The head cashiers were supposed to be the antennae to gather market intelligence on the borrowers. The agents were encouraged to move in elite circles, not for entertainment but for getting to know more of the people in the locality and about their customers. The job of the head cashier was shifted to field officers and diligent field officers served the purpose, but post-BPR and mindless reorganisations, where the focus seems to have shifted away from the customer to the ease of moving papers and organisational structure, I wonder whether anyone is supposed to know even by design the total state of affairs of an advance. Who is monitoring the integrity of the borrowers from his actions? If a loan is in order (as judged technically), the staff leave it alone and get into the problems as they present everyday, which is never in short supply.
Even the identity of the borrowers is a problem in mass loans. There was this joke I heard while in service. A field officer went to a village and was trying to meet a borrower whom he had not met before. He asked the first person he met for the borrower in question. The stranger pointed in a direction. When he met the secone person and asked the question, he said, 'The one you spoke to a little ago is the one.'
In the seventies, there was a system of orderly relief of staff holding important positions (regulation 59 and 60). We used to follow up handing over and taking over certificates religiously and file them. Just as with mass loans, so with massive branch and staff expansion, there is a common date of relief for all. They have to drop everything and run.
The prudent system that we inherited from the Scottish bankers has been overthrown. Surely, change in scale and complexity has made the earlier system untenable, but the basics of banking do not change with scale; there can be no substitute for knowledge of borrowers. It must have still been possible to ensure that vital aspect. Risk management system is incomplete without personal knowledge of the borrowers.
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Developmental Banking (DB) was the hallmark of SBI for a long time. Sri RKT was instrumental in steering it. Sri P R Bagchi once remarked, ‘But for DB, so many of us could not have come up in the bank.’ Whether it helped the society or not, it has helped the staff, so to say. I am not belittling the role the bank played in reaching out to society. As one who started with SSI financing, I can vouch for the satisfaction it gave to assist SSI. SSI continues to be the backbone of manufacture and export even today. But the sympathetic approach (liberalised finance) is perhaps missing.
I am not sure that we made a similar impact in agriculture. There was a sharp divide between the mindset of staff, largely of urban upbringing, and the ethos of mostly illiterate farmers. Posting to rural centres was considered a bane and was made mandatory for promotion. Staff used to pass the time as vanavasa. To be sure, it was unenviable. Even today, the moneylender is the first choice for farmers. The whole field is vitiated by political meddling, and one does not see the silver lining.
The bank had to do organisational restructuring to cope with increased scale of operations and rising complexity. The first one under RKT was by indigenous consultants (IIM, Ahmedabad). There was deep involvement by the bank officers and the recommendation was sensible. Customer as the core of business was highlighted and the difference in expectations of different segments of customers led to market segmentation. There was continuity with due emphasis on the need for appropriate approach to each segment. It was owned up by the staff in quick time.
That cannot be said of the next rounds where we had global consultants, who appeared to sell their ware rather than what we needed. The focus shifted to process from customer, in a way. The staff who did the work were from Indians but have been sufficiently brainwashed on western practices which were offloaded on to our shoulders with very little in the environment that was western as to business practice. There was resistance from many levels but there was no looking back. The borrower was an indirect beneficiary as no one in the bank knew the borrower and his business as one piece. The results are there to see.
The basic question about what the priority of the bank is cannot admit of divergence of response. Doing banking on a conservative basis with returns to stakeholders is the honed wisdom. Anything else we do must be subservient to it. But, it gives tremendous scope to be socially responsive without diluting the standards of banking. The villain of the piece was not that banks were expected to do something different from normal banking, but that the beneficiaries were sought to be identified by outside interference, or hastily to fulfil targets set by some lottery.
The pathetic situation is not that the banks have forgotten social responsibility to potential customers, but are indifferent to their responsibility to the existing customers. Unions have over the years been truculent and managements timid. They bought peace by collusion by keeping the customer in tenterhooks. Some who tried to call the bluff did succeed at various levels. At senior levels, Sri A P Matthai in Coimbatore as AGM, and Sri K D Nayyar as CGM of Madras Circle put the union in place, but it did not become organisational culture.
We are today in the crossroads, with substandard customer service, inadequate levels of competence, scanty attention to appraisal and follow-up, and a pile of unpaid debts with the legal system extending ample amnesty to defaulters.
The govt. knows not what it is doing and like a petulant child would not let go of what is hurting.
Banks cry, 'Eli, Eli, lama sabachthani?'
Jun 2022
I saw a
headline that post-1991 reforms, inequality has gone up. It looks to me to be a
waste of effort.
Economic
inequality started when property right was instituted. It exacerbated when
money was invented and later bank lending. This is in the judgment of an
expert.
Free market
allows untrammeled opportunity for people to compete and augment the income.
Those who are smart and capable will earn and accumulate. No surprise can be
expected here. Communism as a dampener of this trend was flawed in theory and
failed on the field.
What should we
assess? Has the income level gone up across the board and has standard of
living improved? Is ease of living better? Are standard goods and quality
service available at affordable cost? If these are achieved, the difference in
the levels should not worry an average person except if he desires to pile
misery on himself.
There is a
proviso. The govt. has a regulatory role, not to cut the wealth of individuals,
as is generally sought by govts., but by ensuring that the wealth is not used
for criminal and socially detrimental activities. The govts fail here because
they are lured by chances for personal or political gains and collude with the
wealthy for anti-social activities or connive at them for a consideration.
An individual
is better off being engaged in positive pursuits to steady his life and enjoy a
reasonable quality of life.
Balance sheet, bank analysts, computer and credit
Balance sheet is one day position and half fiction. A full fiction goes to a producer and director, and may rake money at the box office. BS does it at times in the hands of the bank anaysts and sanctioning authority.
Once I went to attend a consortium meeting about a sick account. The director of that company joined a software firm and is a leading figure now. When we entered the meeting room, a bold statement on the blackboard stared at us:
ASSET IS A FICTION, LIABILITY A FACT.
We knew it any way the hard way, i.e. hard for the bank. We get our salary and pension anyway.
We must know that balance sheet has a huge subjective factor. The valuation of stocks, their quality and the realisablitiy of receivables are all not as black and white like the figures appearing in print. The auditors qualify the statements as ‘value as declared by management’.
Even a stock audit can fool us. A unit had stacked firewood in the place of sandalwood for which we had financed. The stock auditor did not find it out for whatever reason. An uncle of mine was working in a sick jute mill. He mentioned how the company stacked the jute bags in rows and columms, inside being hollow, and the bank official (yes, one of our own brethren), would count the rows and columns, multiply and satisfy himself. Full marks to him. Most officials do not do even that. The larger the unit, the lesser the inspection. We need other follow-up measures. We will not go into it.
That was a digression. Coming to analysis, what the computer does is what was manually done before, like what core banking is doing for accounting in the bank. The inputs are by an official and subject to a check. It is possible to make use of computer for a deeper analysis picking up trends, market factors, industry trends, and so on, but to my knowledge, that is not in vogue. The output generated by computer has still to be studied, validated and inferences drawn for assessing creditworthiness and quantum of credit. The Tandon committee approach (said to be the brainchild of Mr. S Padmanabhan, a redoubtable banker) will hold as it is based on robust fundamentals of banking. It is not correct to say that the credit officials have no role (it is a different matter if they are negligent) or to call it garbage. Yes, it is garbage to the extent the figures are garbage. Our grievance is that officials, seniors at that, do not understand that garbage.
We must also understand that credit is at times dictated by competitive pressure.
There are companies who avail of credit limit for a contingency (they shift the onus of managing uncertainty to the bank which is too willing to shoulder it).
We financed Dynavision which was a leading TV manufacturer in the seventies and eighties. They used to discount bills and the money would be in deposit. CC will be in credit. We could not have afforded to curtail their borrowing limit. We would have lost the discount income and the deposit business. It is sad that years later the company was wound up because they did not catch up with the changes.
The proper method is funds flow analysis which will bring in sharp focus the need for the limit. Once I questioned the rationale for enhancement based on funds flow, but I was overruled because the firm was doing well and we did not want to lose the account. I was junior and did not understand the market dynamics.
Finance and knowledge of finance is necessary, but it is only one chapter of the story, not even a core chapter. We must know the industry, the owners, the market appetite for the company’s business, and the competition in the line. We must know how to provide more than one recourse in case of downturn. We must know to monitor the advance on a continuous basis. My grievance is that BPR has diluted this aspect. No one has complete picture of an advance, with each process being given to different officials or outfits.
