Risk Taking is True Banking

“In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risk“.

World history is being rewritten in the shadows of onslaught of pandemic and new heroes are emerging as Corona warriors. Police, para medical staff, ambulance drivers even milk vendors and grocery shop owners have been applauded for rendering frontline services without fear. However, bankers who have also fought from the front and ensured percolation of incessant supply of cash, remittances, digital transfers and MSME benefits, have not got the recognition and gratitude they deserve despite working round the clock. The reason is not difficult to discern. Public at large, though comfortable with the catered banking services, expects more from bankers. It knows that the bankers are taking normal superficial risks and avoiding the real risks of taking credit decisions they are expected to take that can bring a real change in the lives of Indians.

Despite several relief packages floating around, the common man is still searching for succor and finds himself high and dry to blame bankers for his predicament. Imagine the impact on common man’s perception about the sincerety of bankers when country’s highest Supreme Court intervenes into their day to day activity and orders Banks to release the sanctioned home loans in a housing project recently !!

Indian Banking, despite being masqueraded as team-work is effectively functional on 80:20 basis. It is 20% work force that is actually taking risks while the remaining 80% perform day to day rituals.  The performing 20% have also gone into cocoon shells and entire cash accumulation is being deposited in reverse repos with RBI by banks. 

Periodically huge figures of loan sanctions are announced by almost all banks with virtually nil disbursements. The normal 10-page sanction letter contains nine pages full of terms and conditions which cannot be complied with, making the loans non-disbursable and bringing banking into bad light. Not surprisingly, a leading financial analyst summarizing the growth of Indian banks castigated that the Indian Banking system manufactures money out of nothing. Our bankers appear to have forgotten that ships in harbor are safe but that is not what ships are built for.

Having worked in five banks across India and Europe, I find the fears of bankers as overstated. The banks have well defined structures to sanction loans. The norms of lending are pre-defined for ages. The documentation is pre-printed, time-lines are clearly stipulated. The sanctioning process is online with adequate transparency. There is a time- tested well-oiled reporting, controlling and monitoring system. RBI inspects accounts regularly and tolerates a level of 3% of NPAs in a healthy bank because loans do go bad due to business and management failures in all economies of world.

Over 87% of the show cause notices issued to bank sanctioning and monitoring staff on failures of loans are dropped on the first reply itself. 12% of the recalcitrant loan files are closed at senior levels within the bank. Remaining 1% of delinquent loans are referred for detailed Inquiry for dissemination of vigilance angle to a committee of General Managers within the Bank itself. Here 99% of the cases are dealt administratively and just 1% are referred to CVC. Loans below Rs.3 cr are not referred to CBI/ CAG. More than 75% of cases referred to CVC are rejected as Non- Vigilance cases and the remaining are once again sent to the respective banks for initiating the punitive action through the Competent Authority who is again an officer of the bank itself. 

As such discovering a scare crow of accountability in all nooks and corners of bank branches has become a fashion statement authored by the 80% non-performers, to camouflage acute risk aversion tendencies gripping the bankers.

Banks in India are harbingers of prosperity. They are veins and arteries of country’s economic life line. They are integral part of day to day life of milling Indians. Without there active support India can never actualize its potential of becoming a USD five trillion economy. 

The bankers must imbibe that if they are not willing to risk the un-usual, they will have to settle for the ordinary. The reason for non-settlement of salary revision of bankers pending since 2017 is adequate proof of how lightly the administrators of the state, value the contribution of contemporary bankers. Risk taking is the only job of bankers because banking is pure risk taking. Data punching can be done by desk tops and ATMs which do not add value to the aspirational Indians. In the words of Bill Gates ”Banking is necessary, Banks are not”. So let the bankers do their job with objectivity, zest and passion and devotion with clean hands. If they do not soil their soul in decision making and fearlessly sanction loans on merit within the discretion, no power on earth can bring them misery of Administrative action or Vigilance inquiry. 

Good banking is produced not by good laws but by good bankers and trust is the only thing a bank sells by judiciously recycling the national wealth mobilized in short term funds and converts it into long term investments by leveraging the law of averages for creation of valuable national assets in public and private sector that push the economic wheels. 

Breaking the recycling chain of funds results in pile of cash with banks which is unwittingly invested in low yielding assets affecting the profitability and long-term viability. This leaves very thin margin to provide for NPAs and growth. Deliberate attempts are made by top authorities to reduce the quantum of loan to push the sanctioning process to lower committees to avoid sanctioning of loans at their ends, making the projects non-viable before approval itself. The high-powered credit committees are deliberately under-staffed to avoid recommending loan to the Board in the absence of quorum. Such indulgences have demotivated the credit deciders down the line resulting in policy paralysis. CVC should bring in such delinquencies in the ambit of Vigilance investigation.

The risk aversion paralysis ultimately harms the life of the bank itself which are being merged impacting employment in banks adversely. As such decision making is actually a self-help exercise for bankers to ensure enrichment of their carrier progression within the bank. 

During my banking assignment of more than four years at SBI, Frankfurt, Germany, an interesting lending practice came to light that succeeded predominantly in shunting the risk aversion tendencies of bankers. 

Local German banks have introduced a three-visit policy for customers desiring to avail loans. In the first visit, the customer submits loan application, KYC documents, proforma invoices and project report. In the second visit he is advised of the acceptable loan amount, pricing and securities. If the borrower agrees to the terms, the loan is disbursed in third visit. If unsatisfactory reply is given at this stage to delay the disbursement by banker, then the customer is entitled to issue the payment instruction/ authorization in favor of supplier which will have to be honored by the banker. Failing to honor such a mandate makes the banker answerable to the Regulator/Courts, resulting in penalties on Bank and the bank employee vacillated and failed to redeem the request of the customer in accordance with lending practices. Indian banking also needs such revolutionary steps to kick start decision making in banks.

As a former Chief Vigilance Officer of two nationalized banks, it is my earnest appeal to banker colleagues to take regular credit decisions without bothering about results. The decisions may not be positive in all cases. But a customer should be promptly advised the decision.

Banking is the fulcrum around which the monetary ambience of the country is carved. It  makes countries fail or succeed. A genuine banking decision taken with clean hands and open mind basic premise of commercial lending which is rarely questioned. Let bankers play the economic warriors with their diligent decision making and break myth of risk aversion. 

Today the biggest risk is not taking any risk.