BANKS - NEED FOR BETTER FUNCTIONING
The issues of proper Financial Management and Corporate Governance have taken a centre
stage. The Public Sector Banks as well as Private Sector Banks are witnessing acute rise in non-
performing assets, moving up to 4.6% in March, 2015, whereas stressed advances have increased
to 11.1% of the total advance, from 8% about 2 year ago. The major reasons as per a research of a large sample are as follows:
There could be number of other factors resulting in increase in non-performing assets. The public sector banks had hived off a big portion of their non-performing assets to Assets Reconstruction Companies in the past. Due to several complaints of mismanagement, serving only promoter interest and alleged frauds, the banks have now become cautious. Public sector banks NPA include government led programmes, sovereign issues like 2G, Coal Scam cases and the like. Apprehension of CBI and Vigilance Commission is another cause of inability to play real developmental role and timely support. Private Sector Banks as well as Public Sector Banks can now be accountable with level playing field.The private sector banks NPA levels are a little low comparatively, as the Private banks have either hived off or compromised or otherwise settled bad loans, with structured informal arrangements with the buyer of loans. Private sector banks do not have any development mandate and primarily extended loans with high yield, retail, secured,large creamy borrowers and non-fund based business, Private sector has neither funded infrastructure, agriculture, crops, nor participated in Jandhan Yojna or other Government scheme. Even the priority sector lending, by private sector banks as well as foreign banks are mainly structured advances.Banking Sector including private sector banks is having very good earning level. The interest rates spread (gap between lending and deposit rate) is the highest in India. Internationally the interest spread range from 0.5% to 3%, and whereas in India the spread is between 2% to 12%. The banks have grown manifold in terms of size of loans and deposits in last 2 decades.The working inefficiency and lack of competition have kept most of the banks relax. The banking sector as a whole is not very competitive in India. The Banks incur heavy cost on salaries(Salary levels of public sector and private sector are having very wide gap.), perquisites, luxurious offices, huge overheads. The banks still make very good profit because of lack of competition. The new bank licenses are being extended mainly to foreign owned promoters. Indian promoters are left high and dry for being "selective". All banks need to be monitored to serve the purpose of financial inclusion.It is further noted that in spite of serious efforts of the government and initiative at the end of Reserve Bank of India, the banks in India have not reduced their interest rates. The message is loud and clear that the regulator is not able to bring in adequate competition among the banks and the interest rates being very high, the industry and businesses are suffering. It is very important to allow Indian domestic promoters to promote large number of banks. The regulator need to give reasonable freedom to banks and promote adequate competition to not only reduce the interest rate but also bring in low cost high quality services to the common and poor man, small and mid- size businesses and are able to provide highly efficient and cost effective solution to large businesses.The banking sector severely suffers with lack of knowledge of accounting and fundamental principles of financial management. Most of the banking sector employees do not have even the basic understanding of accounting standards, corporate laws, taxation and regulatory framework in India. A comprehensive training of existing employees as well as a strategic decision about employing only those who understand financial services, accounting, taxation, corporate laws and regulatory framework, is very important. The current practice of audits and inspection have brought in multiple Audits for example inspection audit, revenue audit, stock audit, credit monitoring audit, RBI inspection, concurrent audit and many other. This actually result into losing the real focus. It is important to have only 2 types of audit i.e. statutory audit and internal audit.The scope of statutory audit is required to be enlarged significantly and it is important that the statutory auditor is appointed for a period of 3 to 5 years for a branch, region, zone and the head office separately. The Institute and the Reserve Bank of India and government may consider extending the scope of statutory audit to include not only accounting, book keeping and internal control but also to undertake review of borrower to check the diversion of funds, fraud by the borrower, adequate due diligence of the borrower, post disbursement monitoring and other important aspects. There could be specialized statutory auditors to look into specific industry borrowers and sectors specific borrowers including agriculture, non-corporate, small industries and businesses, mid segment and of course large complex corporate advances. The statutory auditors, who are highly specialized, may undertake monitoring of group exposure, structured advances, check window dressing by the borrower and to undertake a deep review to ensure early warning signal including suggesting curative actions. The scope of internal audit, need to concentrate primarily on requirement of internal control system, transparent reporting, checks and balances, operational and proprietary audit. Internal Auditor should be independent of the bank management and should report directly to the Board on major operational and inefficiency issues.The regulatory compliances, including compliance of all RBI guidelines and directions and circulars should be the responsibility of the internal auditor at various levels of the branch, region, zone, back office, treasury and various departments of the head office. The banking sector needs a big push to gain momentum to not only provide very low borrowing cost and competition. The banks should also be able to provide highly cost effective, most modern and latest banking products and services with the support of latest technology. This is a big task and requires a detailed fact finding research and an open debate towards strategic action and solution. The banks need to ensure that their charges for various services are reasonable so as to attract large number of Indians to regularly use the banking services with modern working and local Indian touch.
stage. The Public Sector Banks as well as Private Sector Banks are witnessing acute rise in non-
performing assets, moving up to 4.6% in March, 2015, whereas stressed advances have increased
to 11.1% of the total advance, from 8% about 2 year ago. The major reasons as per a research of a large sample are as follows:
- Diversion of Funds to unrelated business or fraud 27% cases
- Lapses in initial borrower due diligence 34% cases
- Post disbursement monitoring being inefficient 54% cases
- High leverage - debt equity ratio 25% case
- High Interest Burden making the unit enviable 35% cases
- Adverse Trade Cycle, Management inefficiency, and other External reasons 20% case
- Untimely financial support, delay in financial closure 10% cases
There could be number of other factors resulting in increase in non-performing assets. The public sector banks had hived off a big portion of their non-performing assets to Assets Reconstruction Companies in the past. Due to several complaints of mismanagement, serving only promoter interest and alleged frauds, the banks have now become cautious. Public sector banks NPA include government led programmes, sovereign issues like 2G, Coal Scam cases and the like. Apprehension of CBI and Vigilance Commission is another cause of inability to play real developmental role and timely support. Private Sector Banks as well as Public Sector Banks can now be accountable with level playing field.The private sector banks NPA levels are a little low comparatively, as the Private banks have either hived off or compromised or otherwise settled bad loans, with structured informal arrangements with the buyer of loans. Private sector banks do not have any development mandate and primarily extended loans with high yield, retail, secured,large creamy borrowers and non-fund based business, Private sector has neither funded infrastructure, agriculture, crops, nor participated in Jandhan Yojna or other Government scheme. Even the priority sector lending, by private sector banks as well as foreign banks are mainly structured advances.Banking Sector including private sector banks is having very good earning level. The interest rates spread (gap between lending and deposit rate) is the highest in India. Internationally the interest spread range from 0.5% to 3%, and whereas in India the spread is between 2% to 12%. The banks have grown manifold in terms of size of loans and deposits in last 2 decades.The working inefficiency and lack of competition have kept most of the banks relax. The banking sector as a whole is not very competitive in India. The Banks incur heavy cost on salaries(Salary levels of public sector and private sector are having very wide gap.), perquisites, luxurious offices, huge overheads. The banks still make very good profit because of lack of competition. The new bank licenses are being extended mainly to foreign owned promoters. Indian promoters are left high and dry for being "selective". All banks need to be monitored to serve the purpose of financial inclusion.It is further noted that in spite of serious efforts of the government and initiative at the end of Reserve Bank of India, the banks in India have not reduced their interest rates. The message is loud and clear that the regulator is not able to bring in adequate competition among the banks and the interest rates being very high, the industry and businesses are suffering. It is very important to allow Indian domestic promoters to promote large number of banks. The regulator need to give reasonable freedom to banks and promote adequate competition to not only reduce the interest rate but also bring in low cost high quality services to the common and poor man, small and mid- size businesses and are able to provide highly efficient and cost effective solution to large businesses.The banking sector severely suffers with lack of knowledge of accounting and fundamental principles of financial management. Most of the banking sector employees do not have even the basic understanding of accounting standards, corporate laws, taxation and regulatory framework in India. A comprehensive training of existing employees as well as a strategic decision about employing only those who understand financial services, accounting, taxation, corporate laws and regulatory framework, is very important. The current practice of audits and inspection have brought in multiple Audits for example inspection audit, revenue audit, stock audit, credit monitoring audit, RBI inspection, concurrent audit and many other. This actually result into losing the real focus. It is important to have only 2 types of audit i.e. statutory audit and internal audit.The scope of statutory audit is required to be enlarged significantly and it is important that the statutory auditor is appointed for a period of 3 to 5 years for a branch, region, zone and the head office separately. The Institute and the Reserve Bank of India and government may consider extending the scope of statutory audit to include not only accounting, book keeping and internal control but also to undertake review of borrower to check the diversion of funds, fraud by the borrower, adequate due diligence of the borrower, post disbursement monitoring and other important aspects. There could be specialized statutory auditors to look into specific industry borrowers and sectors specific borrowers including agriculture, non-corporate, small industries and businesses, mid segment and of course large complex corporate advances. The statutory auditors, who are highly specialized, may undertake monitoring of group exposure, structured advances, check window dressing by the borrower and to undertake a deep review to ensure early warning signal including suggesting curative actions. The scope of internal audit, need to concentrate primarily on requirement of internal control system, transparent reporting, checks and balances, operational and proprietary audit. Internal Auditor should be independent of the bank management and should report directly to the Board on major operational and inefficiency issues.The regulatory compliances, including compliance of all RBI guidelines and directions and circulars should be the responsibility of the internal auditor at various levels of the branch, region, zone, back office, treasury and various departments of the head office. The banking sector needs a big push to gain momentum to not only provide very low borrowing cost and competition. The banks should also be able to provide highly cost effective, most modern and latest banking products and services with the support of latest technology. This is a big task and requires a detailed fact finding research and an open debate towards strategic action and solution. The banks need to ensure that their charges for various services are reasonable so as to attract large number of Indians to regularly use the banking services with modern working and local Indian touch.
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