Lets reverse the slow down

The corrective measures introduced in budget and subsequent policies announced by the regulator reveals that the authorities are well aware of the constraints in banking sector and all the policies are pragmatic and in right direction.What is lagging is the process of implementation. Historically banking segment, because of primarily human orientation, responds to certain method of implementation. This was observed at the time of Y2k implementation. There were series of interactions from top level to bottom , by holding seminars , workshops etc. It was interbank first, led by IBA, bank’s top level, which had gradually filtered down to the desk level. The training system was fully utilised to hold workshop etc . At the same time individual banks improved their preparedness.

The current issue is more serious.The morale has to be boosted so that decision makers are back to credit sanction. The restraint of the lending decision makers are not only affecting the banking sector,but also taking a heavy toll on the exchequer since lack of demand plagued the economy. Corporate sectors are shrinking business, employment is contracted. Even there are defaults in retail segment , which had the reputation of least impaired segment. The only respite can come from banking sector , by improving the pace of credit sanction and disbursement. Why it is not happening.

The desired moral impetus cannot be forced on the decision makers. Along with moral boost up certain steps are necessary to instil confidence on the bank officials. While the role of RBI/IBA is conceived as parental , Officers association/Employees associations play the role of mother. Whenever there were crisis in banking sector, specially after 90s, i.e, y2k, NPA etc, trade unions responded to the call and were involved in disseminating information to the the ground level. The lead should come from the top. IBA need to involve professionals as well as some academicians in the job, create task forces, interact with the individual banks after evolving certain measures. What could be the possible measures.

1. Primarily the ice should melt. Long pending cases pending against bank officials should be examined and decision should be taken to ensure that those officials do not live in agony. This is applicable for retired officials also. Presumably during 80s. old legal cases against bank officials were examined and the process of judgement was expedited to remove the uncertainties among bank officials. The measure resulted in actions in the banking sector. Any case pending for more than 1 year should be examined by a special group and the decision be expedited , to generate a feeling that the policies adopted at the center is being followed up by actions.
2. The next step would be to examine whether in the cases of terminal accounts banks extended hand holding support. Support was extended to banks during 2008-09 during forex problems, and as per authorities permitted by RBI, banks extended supports to units which had difficulty in servicing debts. Many accounts came out of critical stages and started functioning normally. Special dispensation should be provided to the MSME sector where there are legal cases due to which the unit is facing problem, including delay in realisation of dues for supplies made to governments/large corporates.
3. Empowerment of branch level functionaries to dispose of cases of MSME segment up to a ceiling, subject to certain pre decided conditions could activate sanction. In this regard it is necessary to review the external rating of green field projects. Banks are required to obtain minimum credit rating of BB+ or so, for capital adequacy of 100 % (9 % on the exposure).In absence of published balance sheets with good results rating agencies do not assign good rating. In fact only limited rating agencies assign rating at project implementation stage , and also issue it as provisional. Such ratings do not offer any benefit to banks, but sometimes they consider to ensure internal compliance. There should be a separate mechanism to assess the strength of such Green field projects ,so that banks may consider for sanction. Since rating agencies do not disclose the mechanism, it is not possible to ascertain the justification for such low rating. Even functional units , approaching for bank fund for the first time , are not awarded the required minimum rating, which influences the credit sanction to green field projects as also existing units willing to avail bank finance for the first time. One informal discussion reveals that they cannot act because there is no credit history.
4. Risk management departments maintain a list of segments where exposure is to be restricted by banks. The list is updated from time to time. Normally exposure restriction are imposed based on study of large industrial units , which is primarily sourced from rating agencies, and based on study of own portfolio (specially large units) further exposures are restrained. In fact there are many local fabrication units which are not affected by such cyclical factors and their strengths are not being assessed separately. In case it is possible to address these issues, external rating could be a benchmark for delegation of power for sanction of new proposals by branch heads.
5. It is true that the interface between branch and customers at present are very low. In case of credit accounts monitoring is a casualty. Due to shrinkage of officials handling credit , banks are not in a position to assign monitoring responsibilities. This is true of all accounts, irrespective of the size. Small borrowers, specially in rural and semi urban sector responds better with human intervention. Even large borrowal accounts require constant surveillance, which is virtually missing resulting in build up of NPA.

The emerging slow down could be reversed by taking a series of measures, for which it is essential to realise the degree of seriousness . The slow down is likely affect the entire economy unless corrective measures are implemented. Bank finance is like blood of the economy, and any contamination is like to affect the health to the country, not only the banking sector. Immediate interaction by academics and professionals are necessary to evolve measures to activate the credit sanction and disbursement and RBI/IBA had to take the lead by forming committee of experts in the field and by augmenting a process of consultations with the filed functionaries.