Monday, January 5, 2015

Danger Of Full Autonomy To Banks

 Government assures non-interference in bank decisions, transfers and postings-Money Life  (my comments given below)

While assuring freedom of non-interference in matters of commercial decisions, transfers, and postings to chiefs of banks, FIs and insurance companies, the Ministry also warned to hold them accountable for favouring somebody
Perhaps, for the first time, the Department of Financial Services under the Finance Ministry has issued a circular to chiefs of banks, financial institutions and insurance companies assuring them of freedom of non-interference in matters of commercial decisions, transfers, and postings.
The circular issued by Manish Kumar, under secretary, on 5th January, following the Gyan Sangam held last week at Pune, says, "It is trusted that the freedom given to Banks/FIs by assurance of non-interference will be used in the most objective manner. However, if any complaint comes to this Department from anybody informing that exceptions were made in certain cases without any objective basis, and in order to favour somebody, the person taking such decision would be accountable."
Here are the points mentioned in the circular...
1. The Banks and FIs should take all commercial decisions in the best interest of the organization without any fear or favour. All decisions should be taken based on facts of the case and objectivity. No such decision should be taken out of any other extraneous considerations such as the influence or the position that the borrower is holding."
2. Each Bank/FI should have their own objective, well laid out transfer and posting rules, which should be followed strictly. No exception should be made in such rules at the behest of any recommendation given by anyone including anybody from the Ministry of Finance. If, for genuine reasons, any exception to the rule is made, it should be done only by CMD by giving proper reasons. 
3. Each Bank/FI should have a robust grievance redressal mechanism for borrowers, depositors as well as staff. The aggrieved person should have an opportunity to represent his case at least at two levels. 
4. It is trusted that the freedom given to Banks/FIs by assurance of non-interference will be used in the most objective manner. However, if any complaint comes to this Department from anybody informing that exceptions were made in certain cases without any objective basis, and in order to favour somebody, the person taking such decision would be accountable. 
In his address, Prime Minister Narendra Modi had also told bankers that banks would be run professionally, and there would be no interference. But the accountability was essential. He said the Government had no vested interest, and public sector banks can derive strength from this fact. This circular is also in line with these directions of the Prime Minister.
My Comments are as follows:----

Gyan Sangam which remained for two days in Delhi on 2nd and 3rd of this month ended and the outcome which emerged is that banks need more freedom and Government of India will not interfere in functioning of banks . Mr. Finance Minister and Mr. Prime Minister both have assured Chiefs of banks which participated in the said conglomerate, that they will not interfere in banks' working and they want the bank to become socially useful and commercially viable. On the other hand Chiefs of banks might have also promised as usual to fulfil the agenda of the Government. Gyan Sangam ended with note of flattery from both side and promise from each side to look into other's grievance as use to happen in the past too.

I don't know it is a win-win or loss-loss game for both. But I am unable to understand what strategy they have planned to achieve the goal of social objective and that of profit aspiration of bank ,other than focusing on their own ideas and ending without reconciliation in the larger interest of people of India for which banks were nationalised. It is not clear what motive banks like to fulfil, They want to serve common men or to earn profit and exploit common men like their counterparts in private sector.

I simply ask following questions to top officials of banks who are asking for free Hand to combat menace of bad debts and to earn more profit .


Management of public sector bank was free to recruit employees in all cadres as per whims and fancies of top officials of the bank. Bank staff are recruited through IBPS which is manned by retired bankers only . Top Officials of each bank even recruited thousands of officers from campuses to please sons and daughters of their friends and relatives and to please college managements which were associated with top officials of the bank.

Now What more freedom They need to make banks safer and growing?

They were completely free to recruit talented staff as per their need for last a decade and more and undoubtedly they recruited as per their sweet will only. Still they failed to protect banks from losses arising out of rising bad debts and frauds. Only last year Supreme Court stopped them when some one filed PIL in court and the court found campus recruitment against the spirit of the Constitution.

What more additional power and absolute freedom Chiefs of bank management mean now?


Bank management use to promote officers from one scale to other absolutely as per their sweet will. They never cared the reports written or marks given to any officer in Annual Performance Appraisal Report (APAR). Members of Interview Panel used to give higher marks ( 25 out of 25 ) to officers who were close to them or who were recommended by some Very Important Person.

This manipulation in marks is done by promotion board  not only in case of junior officers , but Even in selection of ED or CMD we have seen how officers like S K JAIN was given higher marks in Interview though his rating AAPR was poor. Every bank officer knows very well that an officer may be inefficient, corrupt, negligent, bribe earner, unskilled for post and cadre , but if he has close relation with any senior officer or his immediate boss , he may be promoted.  In addition ,Management of each bank has absolute power to transfer any officer from one corner to other without any restraint from GOI or RBI. Officers who do not act yes Perfect YESMAN of his or  her bosses are posted at remote , critical and rural centres. This is why culture of flattery is more prevalent than culture of performance in banks.

Management ,after enjoying such devious power of promotion and added by monstrous power of transfers, What more power top officials of public sector banks need to cure sick banks?

How much power and freedom they need to continue their arbitrary rule and to become wealthy figure in society making their banks poorer and sick?

When top officials of a bank are unable to read , assess and ascertain the real quality of an officer working under them for 10 to 30 years of his or her service , what quality they may assess and ascertain in two or three minutes of Interview they conduct for promotion of such officers is another pertinent question which every fan of Modi Government or protagonist of merit oriented promotion policy or supporter and seekers of freedom for top officials of banks have to ponder over and answer to field level bank staff .

People should know, bank staff should know and Government of India who even after burning entire body of bank only due to misuse of power by top officials should know and make it clear what additional freedom they suggest for public sector banks to make banks socially useful and commercially viable.?

Why GOI, RBI and Chiefs of PS banks demand absolute and greater freedom for bank management and what is the broad idea of such freedom should be brought in public domain.

Sanction of loans:

Management of banks have enough powers to sanction loans strictly as per their sweet will. Branch head of each branch can sanction loan to small loan seekers and higher offices can sanction loan to bigger business men and big corporate houses without any restraints from GOI.

Is there any interference in sanction of loan from the government?

Branch Head and Regional Head should enlighten government and people of India what type of interference they face at branches in loaning process.
There is system of Credit Approval Committee in all administrative offices of all banks , but even today, majority of loans are sanctioned as per sweet will of the Branch Head or Regional Head or Zonal Head or Chief of Bank Head called as CMD or ED. High value loans are sanctioned by Board of Directors represented by GOI, RBI and Chiefs of Bank. And ninety per cent of stressed assets are those assets which have been sanctioned by top officials only and that too after due diligence made by various committees and many professionals like valuers, Chartered accountants, advocates etc.

Is there any top official in any bank who may say boldly that he or she had or has enough courage to deny sanction of any loan proposal against the will of the boss or against the will of de-facto head of such committees?

Can any officer sitting at any branch or any office have courage to move against his or her boss even though everyone officer is free to voice his unwillingness to sanction any loan due to inherent weakness in the proposal?

It is true that politicians also build pressure on them to sanction loans as per their choice and to their close relatives, friends, corporates etc..,. But do any officer at any branch or at administrative office has courage to decline loan cases recommended by such corrupt politicians ?

Government ask for financing to any particular sector or to any particular scheme formulated by them and this will continue in future too.

Has any officer of the bank courage to oppose it?

Or is it desirable for government to allow PS banks to neglect national priorities for the sake of earning profits only?

or I can ask in different way , whether government , the owner of the bank do not have power to frame policy of credit delivery as per national priority and urgency?


Management of each bank is free to park surplus fund of the bank in any mutual fund or SLR linked fund even if banks have to incur interest loss . Banks are supposed to achieve target fixed for lending in priority sector , for lending in agriculture and for weaker section of society or minority communities. When they fail to do so even by manipulating datas of other sector lending towards preferred lending, they think it wise to park fund equivalent to gap of actual with target in government prescribed low interest yielding fund even though it causes loss to bank. These banks prefer parking idle fund in mutual fund even though it causes loss to bank indirectly.

What more freedom they visualise and what more freedom they demand now?

Interest Rate and concessions:

Banks are free to decide their base rate or Prime Lending rate keeping in view cost of deposit and expenses and they have been enjoying this freedom for last two decades. They are free to give concession in interest rate, processing charges and what not to any borrower as per their whims and fancies, not as per the merit or demerit of the case .

Even after giving all concessions , they are unable to safeguard banks fund and they are unable to increase profit of the bank whereas private banks are using their freedom for the growth of banks credit and bank's profit. On the contrary top officials of public sector banks use power of interest concessions to please the borrower who can please senior bosses by gifts in cash or in kind.

It will not be an exaggeration and incorrect to say that majority of borrowers who are given various concessions at the cost of bank's interest are now considered as Non Performers and loans given to such borrowers has gone bad or are in category of stressed assets

I dare ask top officials of bank what more freedom they seek from GOI and I ask RBI and Finance Minister too ,what more freedom they are likely to give bankers in fixing of interest rate structure to make banks economically viable and socially useful as prescribed and desired by Mr. Jayant Sinha, learned Deputy Finance Minister.

Write Off and compromise settlement: 

Management of each bank have full freedom to frame their recovery policy and decide their terms of compromise settlement with loan defaulters and conditions for writing off a bad loan. They are free to restructure any good or bad loan to hide stressed assets and to avoid legal actin against any borrower they like .They have written off bad loans and sacrificed banks good money amount to Rs.1.65 lac crore during last five years. Huge drainage of money in writing off of loan or sacrificing of principle and interest amount from loan defaulters .

Now Chiefs of banks should make it clear what more freedom they aspire to stop pilferage and drainage of banks good money ?

What more power they need to increase in loss to banks by writing off loan and by sacrificing bank's interest in compromise settlement?

Do they have any plan and idea to stop such losses which deprive stakeholders of dividends ?

Do they have any idea to stop such losses so that they may earn higher profit and they may stop begging capital infusion in future?

Branch Expansion: 

During last ten years every bank has undertaken rapid branch expansion. Banks are now free to open branch in any corner of the country as per their suitability . Interference of RBI has been reduced to minimum. Bank can open as many branch as they like to enhance profit prospect . They can install an number of ATM to improve customer service.

What more freedom management of bank seek from GOI in this aspect?

It is not an exaggeration to say lastly that it is the unbridled freedom given to bank ED and CMD by UPA government in lending and in writing off of bad loans , in recruitment and in promotion that has resulted in critical sickness in banks. FM and PM used to give oral instructions to CMD and ED and in turn bank officials used to run pillar to post to abide by his verbal orders , even if they were sure that bank will have to suffer loss in long run. All instructions to chiefs of banks given by VIPs, and Ministers to bank to help friends, relatives, political associates by loan or by write off are invariably given on phone or in meetings .

Present government has promised banks that thy will not interfere in functioning of banks . This is for the sake of circular only and such circulars have been issued in the past also . But such circulars are never put in force in true spirit . Misuse of power cannot be stopped until we end flattery of all types. 


State-run banks seek a free hand-LiveMint

Clamour for freedom was key theme at brainstorming sessions between bank chiefs, govt and RBI officials  05.01.2015
 State-run banks, facing mounting bad loans and pressure to boost profitability, said they need greater autonomy from the government to improve their performance, at a special meeting attended by Prime Minister Narendra Modi and central bank governor Raghuram Rajan.
The clamour for freedom was the key theme that emerged in brainstorming sessions between chiefs of state-controlled banks, the Union government and Reserve Bank of India (RBI) officials over two days in Pune. The meeting ended on Saturday with bankers presenting a seven-point agenda to the government.
Bank officials urged the government to implement the recommendations of a committee headed by veteran banker P.J. Nayak in its report submitted in May. The panel had recommended that the government cut its ownership in state-run banks to less than 50% and that government stakes in the lenders be transferred to a new holding company.
“There was a fairly high degree of consensus among the bankers that the government must distance itself from the functioning of the banks and implement the recommendations of the (Nayak) committee. This was reflected in the final presentation of the bankers to the government,” said a senior banker who is familiar with some of the deliberations at the meeting.
Bad loans at state-run banks, which account for more than 70% of the nation’s outstanding loans of about $1 trillion, are far higher than those at lenders outside government control. While the poor performance of the state-controlled lenders can be partly attributed to a sluggish economy, many say imprudent lending, at times motivated by political considerations, have contributed to the current mess.
State-run banks had no option but to convey the need for operational freedom to improve their performance, said a former chairman of a state-owned bank, who was present at the meeting called Gyan Sangam, which roughly translates to Confluence of Knowledge.
“We had to tell the government that you can’t tie one of our arms and then ask us to be as good as the private sector banks. We told them clearly that the government has to take a step back and give us breathing space when dealing with business realities,” said the banker, requesting anonymity.
More specifically, state banks want a bank boards bureau, comprising professionals and eminent bankers, to be set up to appoint senior officials. They also want the government to set up a bank investment committee that will hold the government’s stake in state-owned banks. Eventually, they are seeking a reduction in government ownership to below 51%, which will free banks of restrictions that come with majority government ownership.
“Senior officials in the ministry of finance seem supportive of this view. But given that most of the crucial recommendations (such as transferring the governments stake to a holding company) need a change in legislation, it’s up to the top leadership in the government to decide whether they have the political stamina to do this and whether this is a priority for them,” said the first banker cited above.
In comments made during the course of the conference, the Prime Minister and finance minister Arun Jaitley acknowledged the need to provide greater autonomy to state-owned banks, even though they stopped short of accepting the need for legislative changes and a reduction in government holding in these banks.
“The Prime Minister said banks would be run professionally, and there would be no interference,” said a release issued by the Press Information Bureau on Saturday. The release, however, added that while the Prime Minister is against political interference, he supports “political intervention in the interest of the people”.
A number of former bankers that Mint spoke to highlighted the fact that until the government agrees to make legislative changes, such as repealing the Bank Nationalisation Act, it will be difficult to make meaningful changes in the operating environment for state-owned banks.
In the interim, steps such as setting up the bank boards bureau to oversee appointments can be put in place.
“Holding company structure is implementable, along with constitution of bank boards with more professionals in it. Such bank boards will give more objectivity to banks,” said B.A. Prabhakar, former chairman of Andhra Bank, adding that splitting of the posts of chairman and managing director is an important first step as the new chairman will be able to drive discussions in the area of strategy more effectively, while the managing director will manage the bank.
On 31 December, the government announced that the chairman and managing director posts at state-run banks will be split. Until now, except for the State Bank of India (SBI), all state-controlled banks had one person appointed as the chairman and managing director. On 28 October, the government also said that it is reviewing and strengthening the process through which bank chiefs are chosen. The process, however continues to be driven by government and RBI officials.
Reduction in government ownership to below 50% is also critical as this will give banks the freedom to set hiring and compensation policies and also ease scrutiny from agencies such as the Central Vigilance Commission, the Comptroller and Auditor General of India and the Central Bureau of Investigation. Banks have argued that fear of action from such agencies often impacts and slows decision-making.
Bankers, however, say reducing the government’s stake will not be easy to implement and may in fact have negative implications, specially for smaller banks that have benefited from the guarantee that comes with government backing.
“If the government relinquishes control, some of the banks, particularly the weaker ones, could see a flight of retail deposits, and even PSU (public sector undertaking) companies would not patronize the PSU banks for parking their surplus funds as they do currently,” said Pratip Chaudhuri, former chairman of SBI, adding that some banks that have incurred losses in the past did not experience a run on their deposits because of an implicit sovereign guarantee.
The demand from state-owned banks for a level playing field comes at a time when these banks are under immense pressure to improve their performance and narrow the gap with private sector peers.
State-owned banks still account for 76% of the system’s advances and 77% of deposits. They also have 82% of the branches across the sector. Still, their credit quality and profitability lag private banks—a fact that is reflected in their performance on the stock markets.
State-owned banks have a net non-performing asset (NPA) ratio of 2.6% compared with a net NPA ratio of 0.7% for private sector banks, according to a presentation made by consulting firm McKinsey and Co. at the two-day conference. The return on assets for public sector banks is much lower at 0.5% compared with 1.6% for private banks.
“PSU bankers must have told these to the government out of sheer desperation. They have been pushed to the wall. They must have wanted to tell the government that you keep on criticizing us, but here is the real problem. Now you show how you want to resolve our problems,” said a second former chairman of a state-owned bank who declined to be named.
This divergence in operating performance is a key reason for the underperformance of state-run banks on the stock markets. The average price-to-book value of state-owned banks is at 0.67% compared with 2.35% for private sector banks, noted the McKinsey presentation. The presentation added that state-run banks’ share of the market capitalization of all banks is only 36%.
“The problem lies basically in the way the goals are set for PSU banks and the private sector banks. In case of PSU banks, the stock price or the market capitalization is never a factor in performance appraisal, and consequently don’t be surprised that Kotak Mahindra Bank has a market cap much higher than PNB (Punjab National Bank) or BoB (Bank of Baroda) although Kotak Mahindra is one-third in terms of business and number of branches,” said Chaudhuri.
Correcting the underperformance is also critical to the state-run banks’ capital-raising plans. Indian banks will need an estimated $200 billion in capital by 2019 to meet Basel III norms and growth capital requirements, according to Fitch Ratings. State-run banks will account for 85% of these requirements.

Govt will not release bank guarantees of all coal block allottees-Times of India

NAGPUR: The inter-ministerial group (IMG) on coal has refused to release the bank guarantees (BGs) of coal block allottees, whose allocations were cancelled by the Supreme Court (SC). It has decided to issue show cause notices to all the allottees and then take a decision on case by case basis. The companies would be asked to state the milestones that were not achieved and the agency responsible for the same. The decision on BGs would be taken on the basis of the replies.

After their allocations were cancelled by the SC, a large number of companies had approached the Delhi high court (HC) praying that coal ministry should release their BGs.

The companies contended that the BGs were in nature of performance guarantees and after de-allocation these guarantees had become infructuous. The ministry of coal said the release of BGs were under consideration of the government.

The HC disposed of the petition with some directives, including that the block allottees should keep the BGs alive for a further period of three months. The coal ministry should take a decision on the BGs within a period of eight weeks. The decision should be communicated to the concerned allottee within a week. In case the ministry decides to invoke the BG, then it should not do so for two weeks so that the concerned company gets an opportunity to take appropriate action as per provisions of law.

The matter was then referred to the department of legal affairs (DLA). The department said that the terms of allocation letter, including BG terms agreed to by the parties, is a contract providing for mutual obligations. Performance of the obligations on part of both parties is essential. Deduction or forfeiture of the BG depends on the conditions of contract agreed to by the parties.

The IMG reached a conclusion that subsequent de-allocation of the block did not have any bearing on the performance of the allottee earlier. The matter has to be decided on the basis of whether there have been delays and lapses attributable to the allottee in achieving the set milestones. It has also to be taken in consideration that there was delay on the part of the government in doing its part of the job.

Guaranteed penalty

* SC deallocated 214 coal blocks

* Block allottees approached Delhi HC seeking release of bank guarantees

* Delhi HC did not give them any relief

* Govt says deallocation of coal block will not have bearing on BG decision

* If an allottee was unable to achieve set milestones, it will fined

* Govt will issue show cause notice to all allottees

* They will have to explain reasons for delay

* Decision on BG of an allottee will be taken on basis of reply

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