NABARD can change face of rural India

Need for a new approach to make agriculture and rural economy strong

The need to support the rural sector which is the real support of our promising economy has been well recognized and the efforts that have gone in this direction have been enormous and institutions set up to aid this sector have been aplenty. The allocation of resources exclusively to develop the agriculture and other rural segment of the economy by the Central and State Governments, financial institutions and other agencies is huge by any reckoning and the results achieved also albeit are commendable, but fall short of expectations. Definitely, the contributions from the rural sector particularly from agriculture do not commensurate with the resources spent or allocated.

The agricultural sector hitherto considered to be the backbone of the economy cannot and should not remain weak for long. The sector unfortunately is still a gambling on monsoon and dependent on informal credit .The problems encountered by the farmers (particularly small farmers and people from rural areas engaged in different vocations again belonging to lower segment) broadly relate to understanding and taking advantage of various facilities available from multi agencies such as Commercial banks, Regional Rural banks, Cooperative Banks, Local area banks, Government agencies, Self Help Groups, Micro Finance institutions absence of a steady income, high fluctuations in the prices of their products, high level of inflation affecting their limited and uncertain income, increased input costs, lack of dependable infrastructure like electricity, transport, marketing and storage facilities.

Reforms of land, labour laws, education system, elimination of middlemen, integrity of data relating to employment and creation of assets, migration of labour, proper identification of beneficiaries, corruption at all levels, lack of coordinated approach of agencies involved, unsympathetic and absence of commitment in the approach of credit providers , exploitation of the situation by powerful money lenders, dominance of large and influential farmers, lack of political understanding at states ruled by different political parties are the areas challenging effective and meaningful financing of agricultural and rural sector.

There is an urgent need to find a change in approach with a new focus to turn the rural sector attractive and regain its dwindling share in GDP growth.

Basically development of agriculture and rural sector is a state subject and the initiative and leadership have to come from the states. The introduction of Rural Development Index based on which allocation of resources and grant of incentives by the Central Government can perhaps be a good beginning. The index should reflect improved rural infrastructure, enhanced productivity in agriculture, augmentation in productive rural assets including agricultural land and stoppage of migration of labourers to urban areas, reduction in poverty level, and change in the confidence of the people to continue to show interest in agriculture and rural activities.

National Bank for Rural and Agricultural Development (NABARD) has to play a constructive role in ensuring that the coordination between the States and the institutions involved in rural development is smooth and result oriented. NABARD needs to have a very focused and different approach for each state in identifying the gaps, deficiencies and problems in the development of agriculture and rural industries and providing the needed coordination, support, guidance and encouragement to the agencies involved therein.

The multitude of agencies presently visible adds confusion and conflict of interest giving room for unhealthy practices, corruption and abuse of facilities. The approach should be preferably to have a single window concept and the institution should coordinate the support system including insurance for the borrowers with the aid of NABARD. The institution having a strong presence in terms of business, infrastructure and having proven commitment in serving the people should take up the role. The commercial banks should gradually give way to Regional Rural Banks (wherever feasible), Strong Cooperative banks or Local area banks and Micro finance institutions. NABARD can play an active rural in identifying the institution fit to serve a particular block or area and provide the leadership. The State Government and NABARD have to jointly change the rural face by introducing incentives and awards for retention of interest in the agricultural and rural activities both among providers of credit and borrowers. The Information Technology and the proposed Unique Identity Card can be of great help to optimize the distribution of credit and making the Financial Inclusion a reality.

Ultimately the human resources associated have to be mentally attuned to help the needy. The involvement of top Management Institutes and social workers can be thought of to activate the rural economy and realize enduring real benefits to the whole economy and its people.

T.V. Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India.

(An edited version appeared in The Hindu Business Line 28/06/10)

Freeing of interest Rates

Freeing of interest rates.
This refers to your edit Set it free-Let go off Savings bank Interest rate ( ET ,June 19). The Reserve Bank's recognition of the need to deregulate the interest rate on savings bank deposits is appreciable and needs to be viewed as a very progressive step and part of next instalment of banking sector sector reforms. This will help to bring in constructive competition among public sector banks and between public sector and private sector banks. More than anything else, this step alone will bring in improved customer service in public sector banks as retention of deposits is based not only on interest payment but also on the efficiency of service. Customer stands to benefit a lot from this deregulation as and when made effective. Small depositors and pensioners can expect to have a better return from this change.

For banks, this is an opportunity to achieve better operational efficiency and improved customer service. Their cost of deposit on savings bank deposits will however, increase a bit which has already gone up effective from April1, on introduction of payment of interest on daily balance basis. The SB interest deregulation coupled with the implementation of base rate for their advances from 1st July, the banks will have to fine tune their balance sheet and bring in more dynamism and perfection in their Asset Liability Management to reduce the cost of funds and maintain net interest rate margin,

Dr.T.V.Gopalakrishnan

(an edited version of this appeared in Economic Times Dt 21/06/10)

Time to introduce Customer Service Ratio

Another Panel to improve Customer Service In banks
The Reserve Bank has appointed a Panel under the chairmanship of Mr. Damodaran, Former, SEBI, Chairman to improve the Customer Service in banks. In its Annual Policy for 2010-11, the Reserve Bank expressed its concern that ” The issue of ‘treating customers fairly’ is assuming critical importance as the experience shows that consumer’s interests are often not accorded full protection and properly attended to. Customer service in the banking industry is increasingly becoming important as banks are privileged institutions and banking is a special public utility service. The Reserve Bank and the Banking Ombudsman’s offices have been receiving several complaints regarding levying of excessive interest rates and charges on certain loans and advances.”
The present Committee will look into among other things the issue of services offered by banks to retail and small borrowers including pensioners, interest rates, bank fees and charges, the system of grievance redressal mechanism prevalent in banks , its structure and efficiency and suggest a mechanism for expeditious resolution of complaints..
The regulator has so much concern for customers, but unfortunately the service providers who earn their money and depend on customers have mastered the art of serving the customers who matter and ignore others conveniently although at a cost. The ingenuinity with which banks ignore the customers has to be experienced to believe. Unfortunately many who experience seldom takes the pains to escalate the complaints to appropriate forum as the efforts and time required are often unaffordable although results are generally favorable. Leave it and silently suffer have been followed faithfully as a fait accompli.
Competition will improve the service has all along been the expectation, but this has been belied as service is no way better in private Sector banks particularly the so called new generation banks compared to that of Public Sector Banks. The problems encountered by customers from new private sector banks are something different. They trap customers with variety of products other than banking products in bank branch premises and customers are forced to retain the products as otherwise they have to incur a heavy loss. Charges are never transparent and one comes to know only after the receipt of the formal document.
Service provided by the ATMS and internet banking are no doubt better as there is no personal inter action and machines do what they are programmed for. Again by chance MACHINES FAIL and an Inter-Action with HUMAN BEINGS become necessary to get a solution, and then one had it. All the joy enjoyed with the aid of machine vanishes the moment the machine fails. Then only contacts and influence will get one the solution early.
The approach of the committee should be to gather the nature of complaints reported and not reported. While information on reported complaints can be gathered from Consumer Forum,( District and National Forums), The Reserve bank, Banking Codes and Services Board Of India, Banking Ombudsman ,banks own head offices, Zonal/Regional Offices/ branches representing metropolitan, Semi-urban ,urban and Rural areas and Indian Banks Association, information on unreported complaints which are many fold than reported has to be obtained through surveys, incognito visits and personal interviews of all types of customers.
The committee has to identify innovative measures to forcefully change the attitude of human resources who provide the service. Introduction of incentives and disincentives in promotion, transfer, emoluments and bonuses linked to customer service will go a long way to change the mindset. The assessment of customer service has to be done independent of Reserve Bank annual inspection, but should reflect in Reserve Bank’s overall rating and should be made transparent for all customers of all banks to see. Perhaps a ratio akin to capital adequacy ratio reflective of Customer Service should be thought of to make bank and its human resources behave responsibly.
Change of mindset is the need of the hour. The message for employees should be “Do Not Ignore any Customer, Treat every Customer as the Bread Winner of the Bank and its employees and Know the Customer through Service”. The Committee’s task is not that easy.
Dr.T.V.Gopalakrishnan

(edited version of this appeared in Business Line Dt15/06/10).

Good Idea bad Timing

Good Idea ,bad timing,
The move to increase the share of public holding to 25 percent is long overdue and the capital market and retail investors should welcome it and encourage.

As pointed out, the timing may not be very appropriate, but that should not be taken as an excuse to implement it. Compliance to the requirement may take a little longer time than what is envisaged because of the present highly volatile market conditions and tight liquidity environment due to pressing demand for funds from different corners which include funding infrastructure,the idea should not be diluted or shelved even for the time being.

This is an opportunity for widening and deepening the capital market and the benefits are very many for the economy and retail investors. The craze for investments in gold and real estate will cool down and it is an excellent move for creation and distribution of wealth for a vast segment of people. The volatility seen in the market will also gradually get eliminated to a great extent when the share holding pattern changes. Retailers will derive the satisfaction of being contributors towards capital formation for nation building activities.

This approach of the Government carries wisdom and should be accepted and implemented although it may appear to be ill timed.

Dr. T.V. Gopalakrishnan

A Healthy Move

Public Float
This refers to the news item Listed companies must have 25 percent public float(ET, 5th June,2010). This is an excellent move and retail investors should welcome,encourage,support and improve their own saving pattern by switching over to investment in capital market. Minimum 25 percent subscription by public will result in better and fair price discovery of the shares and bring in some order of stability in the volatility of the market.

Such a move as and when get fully implemented and complied with by all listed companies will ensure better distribution of wealth, improved liquidity in the availability of shares and also offer an opportunity for retailers to take part and contribute in the capital formation. This will also pave way to gradually move away from investment by households in gold and Jewelery. In the long run, this measure alone will prove to be a challenge for FIIS who dictate terms to our capital market. Over all this is going to improve the health of the capital markets in all respects.

Dr. T.V. Gopalakrishnan

(This appeared in ET Dt 7th June 2010)

Banks need to discipline borrowers to contain NPAs

Nonperforming Assets (NPAs) are back in the news again. Gross NPAs of banking sector are likely to touch 5 percent in 2011 from 2.3 percent in 2008.In absolute terms; NPAs are estimated to triple by the year 2011 and would increase from Rs 55000 crores to Rs 1.9 lakh crores.

The Gross NPAs of public sector banks which stood at Rs 56473 crores in March 2002 came down to Rs 38968 crores in March 2007 and again increased to Rs 45 156 crores in March 2009.

They could reduce the NPAs during 2002 to 2007 because of the good performance of the economy, better recovery under SARFAESI Act, improved profitability particularly from treasury operations permitting banks to write offs, sale of NPAs to asset reconstruction companies and restructuring of assets as permitted by the regulator. The steep increase from the year 2008 onwards only confirms the worst fears of recession the economy experienced since the global financial crisis which triggered in the US since September 2008. Besides, higher rate of interest, failure of monsoon, high inflation, exchange rate fluctuations etc have added the NPAs .

Big Burden

Banks have umpteen ways to camouflage the NPAs; restructuring of assets is an officially permitted method they largely resort to. This helps them to make comparatively less provisioning and gain some time to recognize the problem.

However, the fact remains that NPAs continue to be a big burden and drain on banks’ resources affecting all stake holders who include, Government, good borrowers, depositors, investors and tax payers.

Banks’ provisions towards NPAs have also shown a corresponding increase during the year although they fall short of regulatory requirement stipulated at 70 % of bad debts. This regulation itself compels banks to underestimate NPAs , as more provisions mean less profit and consequential damage to the image.

Capitalisation

A good share of banks’ profit is earmarked to make provision towards NPAs and Government contributes a huge sum towards capitalization of banks at frequent intervals. The Government not only loses its dividend and also provides funds towards the capital of banks adding to its worsening deficit. The Government proposes to infuse a sum of Rs 16500 crores by March 2011 towards banks’ capital requirements.

Find Solution

As NPAs are like hidden bombs and it can burst at any time, banks have to discipline the borrowers and involve them in arriving at the solution to contain the NPAs. The approach of banks should be to rate the borrowers and levy a penalty based on the rating. This levy can form a corpus which if necessary can be supplemented by banks themselves. Over a period this fund will be equal to NPAs and banks are free from this menace with a strong balance sheet.

The present system of making provisions for bad debts and write offs affect the depositors, good borrowers, investors and all stake holders other than bad borrowers. This needs to be thoroughly reexamined. The loss to the exchequer and others is definitely avoidable.

Punishment should be for bad conduct of loan accounts by borrowers. When solution for NPAs lies within the banking system, expecting others other than the borrowers particularly the bad borrowers to bear the cost of NPAs is neither desirable nor justifiable. Time has come to make borrowers understand their responsibilities to banks that collect public money and lend to the borrowers.

Dr.T.V.Gopalakrishnan

( This article appeared In The Business Line Dt 7/06/10)