Useful and correct as these measures are, they may not be able to get the banks to deliver in crucial areas. Banks have long passed the stage where they were not lending more as they had less. The crisis in the banks is much more deep-rooted. Banks have learned to be much more mindful of asset quality. Simultaneously, a serious inertia has overtaken commercial lending, making bankers unduly cautious in sanctioning loans.
The accumulated impact is being felt only now. A peculiarly wooden, non-commercial culture of vigilance has overtaken banks, to the extent that only a fool would stick his neck out and lend or recommend a loan. Bank officials have sailed through assignments involving sizable credit responsibilities without lifting a finger to get a loan proposal through. This has not affected their careers. On the other hand, the banking world is replete with stories of how an official is harassed years after he left a post for some discretionary act on an account that has gone sour long after his departure.
This sterile culture has dug roots under an equally non-businesslike approach of bank administrations. People get to the top simply by becoming senior and currying favour with the political and bureaucratic masters. Penalising a junior, instead of standing up for him, is the order of the day. This is of a piece with the attitude of bank managements to the recommendations (thats what they are, not mandatory directives) for punishment and prosecution by the Central Vigilance Commission. Bank managements over time have entirely fallen in line with the CVCs recommendations, never daring to reject them. In contrast, top civil servants often turn down CVC recommendations for those under them. The bottomline is that the men of straw who lead banks have done their best to ruin any commercial culture that may have existed earlier.
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The system of enquiry into loans turned bad promotes this non-commercial culture. These enquiries set out to fix personal responsibility, whereas a loan can go bad for a number of reasons, like an industry or a region falling upon hard times or a promoter going wayward. The right way would be to see how much an officer has sanctioned or recommended in a given period and how much of it has turned doubtful because of actions attributable to him. An officer who has no portfolio should get a severely negative rating and one whose entire portfolio is successful should be suspected of being overcautious and thus deprived the bank of good potential business.
Today, not only do careers not suffer because of not taking loan decisions, no top bank management has lost its sleep over the spectre of profits going down because commercial loans to small and medium enterprises is not growing as they should. This is the crux of what is wrong with banks and which the credit policy is incapable of addressing. The last few days have seen some aggressive rate cutting but again, this affects only the best companies like the top hundred.
The story of reform has been the story of restructuring. First, it was the government that severely cut its fiscal deficit. Now has come the turn of the corporate sector to restructure. With extreme pain and at great personal cost, businessmen are learning to be more efficient and cost-effective. If the banking sector does not follow suite it will either become a white elephant which will have to be left by the wayside or, more likely, handicap the entire system with its inefficiency. The issue is more serious than the technical matter of banks NPA. No economy can grow and prosper if small and medium business is denied bank credit, its major source of funds. These sectors are the backbone of successful western economies. Only the Japanese have a different system of organisation with the kiretsu agglomerates taking care of the smaller enterprises which depend on the bigger ones for their survival.
The key to changing the way Indian banks run lies in distancing them from their political ownership. For nearly three decades, the RBI and the finance ministry have held the banking industrys hand and led it into sickness. The regulator has to cease to be the credit director and detailed rule maker and become the enforcer of prudential norms and effective supervision. The banking department has to disband itself if the banks are not to plunge into greater ill health. Its last act must be to devise the strategy by which banks can be taken down the road to autonomy and privatisation.
Unfortunately, the finance ministry is yet to show any sign that it is keen to give greater autonomy to even better run banks that have made successful public issues. The ministry can argue that all the controls on banks come from the RBI. The banking department only pushes files for senior appointments, blesses industry-wide wage negotiations and, of course, answers parliamentary questions. Indian Bank provides the most glaring example of how politically directed senior appointments can ruin a bank. Abolishing the banking department will not only help Mr Chidambaram reduce the fiscal deficit, it will also rid the industry of the absurdity of weak and strong banks paying the same wage.