Shiban Khaibri
Since we are living in an era where inter dependence of countries dictated by economic interests, trade, commerce, banking and allied issues play a prominent role, it is but natural that we keep ourselves attuned to and try to acclimatize with the latest developments and changes that continue to take place on the international scene. Gone are the days when Banks in India had a limited role mainly confined to accepting deposits and lending money. Globally, host of changes, reforms and innovative improvements have been taking place in the Banking system and India, as a fastest developing country, can never afford to remain untouched or unimpressed by these changes without paying a price which, therefore, leaves the only option of following the suit.
The concept and the conventional methods of profit earnings, cardinal to the very survival of Banks, too underwent a sea change and the move towards greater consistency and transparency in the published annual accounts has been stressed upon by government policies through the Reserve Bank of India. Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to advances in consonance with the International norms, brought a sea change in the entire banking system in India following Basel Committee recommendations. India is one of the members on this prestigious Committee on Banking supervision from mid 90s .In fact, introduction of those norms as the thumb rule brought in greater transparency in the Banking system in knowing the exact financial and performing health of a particular Bank leaving as it does, with absolutely nil scope for any window dressing and projecting of a cosy picture of its annual financial accounts declared and published by it. Income is booked only when it is actually received and not from non performing assets on accrual basis.
The shift from subjective considerations in the policy of income recognition to objective ones, based on actual recovery brought the entire Banking system in India on the international pedestal of parity and uniformity in this critical area. In the same way, classifications of assets of Banks done on the objective criteria mean uniform and consistent application of the norms. The period for which an asset remains non performing, a provisioning has to be made on the basis of classification and the availability of the security and more importantly its realisable value.
Had the realisable value of the security, prime and collateral in respect of the massive advances made by the Punjab National Bank by issuing Letters of Undertaking (LOUs) or Bank Guarantees to foreign branches of Indian lenders on behalf of one Nirav Modi and his firms, a scam and the resultant loss of nearly Rs.11400 crore would have been avoided. These LOUs, in fact, wanted the other lenders to lend money to Nirav and his firms to pay for imports and meaning that if Nirav failed to repay, the PNB would pay. If a suitable security would have been asked for by the PNB like getting a charge on unencumbered properties in the name of the borrower or fixed deposits or any other realisable collateral, the loss would have been marginal or never taken place at all.
In the same way, liquor baron Vijay Mallia and his business concerns managed to take Rs. 9000 crores of Banks which he has not repaid and instead, ran away from the country .He is, however, the first person to be booked under the Fugitive Economic Offenders Act . Under this Act, economic offenders like him cannot evade the law by remaining outside the jurisdiction of Indian courts. This Act will take “due care” of economic offenders like Lalit Modi, Nirav Modi , Vijay Mallia , Choksi and others. The Enforcement Directorate has already attached assets of Vijay Mallia to the tune of Rs.6000 crore. Frauds and scams of the nature under reference and of other types take place only on account of considerations extraneous to the basic Banking norms operating in the system. Any political or “other considerations”, pressures, manipulations and accommodations compromise with the basics of Banking as in the instant cases, resulting in the financial catastrophes.
Now an important question arises as to what role have prudential norms of Assets classification and income recognition etc and other recommendations of Basel Committee played in pre-empting , at the first instance, the occurrence of the financial irregularities and frauds of very serious nature. The simple answer is that it is assumed that any considerations extraneous to simple and net Banking norms would not operate at all. Frauds and scams, otherwise, can take place in any manner in spite of laws if basics are wilfully violated or else ,those assets would have not been under the category of “loss assets” and a direct drain on and a huge blow of whooping amounts to the earnings of the respective Banks. That issue having other multiple contributory factors of cause and effect, however, has jolted the entire banking industry in India to the extent of the affected loaner Banks needing additional resources or capital to strengthen their financial base. Realistic repayment schedules in relation to cash flows and actual receivables with the borrowers to ensure prompt repayment and thus improve the percentage of recovery in advances have got to be pruned, verified and weighed.
Now the question is whether merger or amalgamation was any solid step towards bringing in more reforms and changes in our Banking system. We have seen very recently Vijay Bank and Dena Bank having been merged with a top strong Bank of Baroda. Earlier, State Bank of India’s merger with its five associate Banks like State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Raipur, State Bank of Travancore and State Bank of Hyderabad took place in 2017. Another Bank which was established with Rs.1000 crore as initial capital , just for scoring some brownie political points by the Congress led UPA government known as The Bharti Mahila Bank, was exclusively “meant for women” but later had to “accept deposits from men also” for survival. It had no spread in the rural belt where, perhaps, it could have some relevance which exposes many tall claims to serve “Grameen Mahilayen”. By establishment of a Bank of this type, Congress government made India to stand with Pakistan and Tanzania where “this type of facility” exists in the entire world. The concept had inherent contradictions as it was more of a political biz rather than a dire requirement.
The need of the hour is to have more Bank mergers which would bring in more savings on operational costs and thus lead to added profits. Cutting down too many branches in urban areas which prior to merger, in most of the cases, were immediate neighbours would result in reducing expenditures and overheads. Operational efficiency and focussed attention towards bettering customers’ services will take place with introduction of newer financial and banking products and facilities. Combined number of branches of the bigger Bank goes up with the merger thus having more geographical spread. Merger will increase capital efficiency too along with more ability to recover bad loans and risk management practices would be strengthened. Asset liability mismatch of erstwhile smaller Banks can be addressed in a better way on merger. It will not be any overstatement that smaller Banks and their employees’ interests are bound to be fairly addressed at the consolidated levels.
Merger of many different Banks into two or three bigger Banks would eliminate unhealthy competition to raise the levels of business and more importantly, borrowers of doubtful integrity would find it difficult to get advances facilities from more than one Bank branch even against the same security. Inquiries and market reports in respect of individuals, firms and other business concerns seeking limits and facilities of bigger amounts shall become not only easier to obtain but shall be more reliable.
However, undoubtedly the mergers pose short term difficulties but are sure to be beneficial over a longer term. There is the apprehension of increase in slippages and spurt in bad loans which definitely are going to put drain on incomes due to provisioning but with dedicated efforts for recoveries and realising the collaterals , the position of Banks was bound to ease followed by a smooth “back in business” like profits earning entities. We know, one single Banking Corporation for the entire country was not immediately possible but having only three big Banks could go a long way in resulting in a turnaround of our Banking sector.
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