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BW Businessworld

‘Banks Need Autonomy’

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Subir Gokarn, former deputy governor of the Reserve Bank of India (RBI), in a conversation with Anjuli Bhargava, calls for the phasing out of SLR to free up public sector banks’ funds

What would you like the next government’s priorities on banking and financial sector reforms to be?
The issues dogging the sector relate to access, stability and efficiency. It’s clear that the banking system, despite being dominated by the public sector for the past 45 years, has not been able to fulfil the social mandate of providing as many people as possible access to it.
Why do you think it has not happened?
There is a disconnect between the structure of banks — the targets that were set, the incentives they were given and the way the targets were pursued — and what people, especially in rural areas, need from banks.

I used to go on outreach programmes to villages when I was with RBI. There I realised that banks did not have a cost-effective solution to providing the products they wanted.

The last-mile delivery process needs to be built with an entirely different cost structure than what the banking system offers. We’ve tried business correspondents and Grameen banks. These did not really work, but we did have partial success. We need to find the right mode of delivery and the right product.

On the stability part, the issue is asset quality. If we are looking at any kind of recovery, we are going to be bogged down with asset problems on the banks’ side and with leverage problems on the corporate side. Company balance sheets are heavily leveraged and banks have a large number of non-performing assets (NPA). There has to be some explicit strategy to deal with these; a time frame to either revive or write off these assets.

What kind of urgency is there at the government or central bank level in dealing with this problem?
The numbers are significant warning signs of NPAs and restructured assets. There is, of course, an opportunity for restructured assets to be revived.

The third issue facing the banking sector is inefficiency. I see a huge opportunity here. The public sector banks (PSB) will see their workforce shrink over the next five years. A large number of employees are retiring. The number of people available to do certain jobs — at the middle and senior management levels — is going to be far less. So, there is a huge opportunity to bring in technology in a massive way to totally restructure their operations and change the way they work.  Information technology (IT) has taken banks to a level where they can reduce their workforce quite dramatically.

Of course, this will require significant political will and backing.

A lot of Indian PSBs have not really imbibed or adopted technology…
Yes, and it is a vicious circle. You cannot bring in technology because people are resisting it. But when you have less people, you may have to bring in new technology to run your operations without those people.

The fourth issue is this whole problem of statutory liquidity ratio (SLR), an onerous requirement for banks. To meet the SLR requirements, they have to buy government securities. There is, however, no incentive to trade in government securities. But if banks don’t start trading in government securities, the markets will never do it because the banks are the largest holders. For this, SLR may even need to be eliminated over time.

Is there any unanimity on this?
The governor talked about ending pre-emptions in his inaugural speech. The Urjit Patel Committee report also talks about doing away with SLR in a phased manner. If you do it too quickly, there will be a dent in the balance sheets of banks.

Are you in favour of new private banks? What impact will their entry have on the system?
I am always in favour of fresh entrants. It’s important to allow the private sector to explore new ways of banking and reach newer segments. However, along with licences, there has to be a significant revamp in supervision.

But considering the trust deficit…
The supervisor has to be able to ensure credibility. RBI’s capacity to supervise  has to be notched up. In the 1990s, when corporates looked for banking licences, they were told they could take up other financial businesses, not banking. Some of the largest NBFCs today were set up by corporate entities. They have done well; they have shown growth, profitability and good asset quality. So, you can’t tell them that while you have a successful track record of managing a financial business for the past 20 years, we cannot trust you with banking. I do not think it’s fair. They have proved their capability to run financial businesses.

Let’s talk about the NPA problem. What can be done to avoid it?
Strengthen due diligence and make sure banks take decisions based on business considerations only and not extraneous reasons. The current problem is the culmination of several factors; while some are one-off and will fade over time, others are more serious. Among the one-offs is the restructuring opportunity provided in 2008 during the crisis. A lot of fundamentally bad businesses were given the benefit of doubt. The asset quality problem was pushed back, and it is now coming home to roost.

How does one make the loan sanctioning authority more accountable? Also, how does one insulate the process from political pressures?
You need to appoint public sector chiefs more objectively. Someone from outside the system could help. If you are getting new people, don’t get them under the old contractual framework. All of this will only help; none of them is the solution. There has to be a change in culture and thinking at the government level. Banks are not captive sources of funds. They need to function independently. You can’t solve the banking problem unless you look at it structurally. 

(This story was published in BW | Businessworld Issue Dated 24-03-2014)

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