DWINDLING TRUST IN BANKS- 20 Steps/ Remedial measures Suggested

The deteriorating health of banks during the past couple of years has shaken the public confidence in the banking systems. The ever-increasing NPAs which at present are estimated to have touched a whopping figure of about Nine lakhs crores sends shivers down the spine of the stakeholders. Every year a fresh and heavy dose is added to the portfolio of bad loans and the trend doesn’t seem to have an end. This volcanic effect if not arrested, will wipe out the important agent of economy i.e. banking from the scene.

Another monster endangering the industry is the increasing incidences of big frauds in the banking sector in the recent years. It appears as if the bankers have surrendered before the fraudsters and the defaulters. The causes have already been discussed in earlier blogs Defects in bank audits and inspections and Bank’s NPAs. The faith and trust of the public in the banking sector is shaken badly. BANK IS THE OTHER NAME OF TRUST. PEOPLE KEEP MONEY WITH BANKS ON THE TRUST THAT THEY WILL GET GOOD RETURNS AND THEIR FUNDS WOULD REMAIN SAFE. However, with all said and done, the following 20 measures are suggested to regain public confidence in the banking sector:-

  1. Remove uncertainty in the banking operations once for all. Clean up the balance sheet and don’t keep any NPAs under the lid. Any evergreening or hiding of NPAs may be a short time solution but its effects are dangerous. BRING COMPLETE TRANSPARENCY IN THE OPERATIONS.
  2. Once done, you can start afresh and can put the progress on track and by moving slowly and cautiously you can regain the lost speed by putting in more vigor, experience, honesty, and hard work.
  3. With speed, you need to avoid accidents by choosing the right tracks and extra vigilance. Make internal inspection and controls more effective and purposeful rather than a mere formality. The concurrent audit is a very effective tool for inspections as it nips the evil in the bud. Make it more effective by allocating the job to experienced and hard working people. More stress should be on spot rectification rather than just pointing out and reporting. Any mistake or an irregularity if allowed to stay for some time takes roots and destroys the system, so spot rectification is need of the hour to stop the spread of the weed.
  4. At present, there seem to be too many inspections by different departments and controlling heads and some of which are an overlapping on one and the other. Too much of everything is bad including the number of inspections. The number doesn’t matter, it is the quality which counts. It is generally seen that inexperienced people and not so good performers are placed in the audit and inspection wings in the bank. This attitude needs to be totally changed, and efficient, knowledgeable and hardworking people should be allocated this job. Unless a serious thought is given to this issue and the inspection/audit deptt. is not strengthened, the chances of intrusions into the systems would continue, thereby adversely affecting the health of the banks.
  5. Specially trained staff should handle credit appraisals, sanctions, and disbursement of loans. Follow up of credit disbursed should be done on time and in a very effective manner. Inexperienced and untrained staff is prone to make mistakes, mishandle, and ultimately land the bank in trouble. Don’t jump into the fields about which you have no experience. Many banks went into trouble especially in the consortium financing because of their lack of adequate experience and blindly following the leader of the consortium.
  6. Controlling offices to be more vibrant and vigilant. Every tier through which the credit proposal moves including the board of directors, must add value to the proposal and share responsibility. No one can shirk responsibility on the pretext of being nontechnical in the respective field. This is a very dangerous attitude. People at the helm should be more serious, accountable and responsible.
  7. Banks should have experts as directors on the boards of the bank who could provide better guidance and direction based on their rich expertise and experience in their respective fields. Persons with political leanings/connections should as far as possible be not appointed as directors on the boards of the banks.
  8. A periodic rotation/shifting of people in the credit wing be done regularly as well as proper training and refresher courses be conducted for the persons handling credit in order to keep them abreast with day to day changes in the credit market, its procedures, and emerging risks.
  9. No proposal should be handled in a hurry. It may be processed expeditiously but not in a hurry. The prospective borrower is always in hurry, make him appreciate that even hurry takes some time. There have been instances when the highest body of the bank i.e. board of directors have complained that sufficient time was not provided for evaluating the agenda of the board meeting and some proposals were introduced as a supplementary agenda item on the day of the board meeting. How can one expect any value addition by any expert to such an item on the agenda?
  10. With the digital and online banking have taken roots, the interface interaction with the customers seem to have taken the back seat. Although the banks have effective complaint redressal systems yet face to face interaction is very important. Banks must conduct periodic customer meets at all levels and listen to the point of view and suggestions of customers and redress their grievances if any. The customer is the working capital of the bank. His suggestions must be evaluated and acted upon on merits of each case.
  11. Interaction with the staff by the executives at different levels helps in knowing their expectations from the bank as well as sharing the expectations of the management with the staff. This needs to be done periodically wherein individual staff targets can be set and evaluated. The concerns and policies of the bank must be shared with the staff as a family and they should be involved in the overall development of the institution and encouraged to meet individual targets. This can help banks to build good teams and induce a sense of responsibility, understanding, and a deep sense of belonging to the institution.
  12. The policy decisions of the board as well as of the regulators must be strictly followed in letter and spirit.
  13. Banks must learn from the past experience and avoid entering into waters whose depth and force of the flow is not known.
  14. Avoid wasteful and avoidable expenditure as you are under the constant public glare. This creates a lot of negative publicity for the institution.
  15. The seniors at all levels have to be a role model for others in the field of dedication, devotion, hard work, honesty, transparency, simplicity, no favoritism, and expenditure control.
  16. Banks should not spare the rod where ever required without any prejudice or bias. They should also be not miser in encouraging and promoting people to achieve the given targets.
  17. Banks must have a workable and sound whistleblower policy. People at the top need to be sensitive to even minor and feeble signals of misdeeds by anyone in the institution. They should read between the lines and make independent investigations where ever required.
  18. Banks should create and strengthen other layers of income from para-banking activities and also try to increase income from fee-based and non-fund based business.
  19. Banks, till date, had been enjoying the luxury of managing comfortable NIM (Net interest margin) which is a ratio of the difference in interest earned on assets and interest paid on deposits to the assets. Since there are a number of well-organized trade and industry association both at the local and national level who manage to get the interest on trade and industrial loans reduced, but unfortunately there is hardly any organized body representing the depositors who can watch their interests. The result is that depositors have no option than to accept whatever is offered to them. The consumers of the credit manage a good deal, banks manage a comfortable NIM, and all this adversely affects the returns for the depositors. This situation is fast changing with more awareness especially through the internet and the depositors are searching for the better green pastures in the shape of mutual funds and other instruments with better security and returns. The shift of capital to cryptocurrencies is a matter of concern for the banks. In such circumstances, the banks may find it a bit hard to mobilize funds except after sacrificing a good part of their NIM.
  20. In view of above banks need to make long-term strategies for managing funds and lay more stress on non-fund based and fee-based income. A more scientific asset liability management and better risk management strategy will go along way in increasing incomes of the banks. The funds locked in bad debts need a special focus of the top management. The recently passed insolvency and bankruptcy act is a boon for the secured creditors though with a cost yet very useful for recovery and cleaning the balance sheets of the banks.                                                                                                                                                           The suggestions put forth are not exclusive and the banks can take any other measure to improve its working and image in the overall interests of all the stakeholders and also in order to regain the lost ground.

DEFECTS IN BANK AUDITS AND INSPECTIONS

These days most of the Banks are suffering from the problems of Bad Loan around the world especially the Asian countries. As a result of globalization, any failure in banking systems in any part of the globe affects the banks in other countries too. The subprime lending in American banks had its effects in the banking sectors across the globe.

The recent trend of increasing NPAs and frauds happening in the banking sector is a serious matter which has shaken the confidence of not only of the depositors and other stakeholders but also that of the general public, in the banking institutions.

This trend needs to be curbed in order to reverse the shaking of confidence of the public in the banking systems. The reasons for loans becoming NPA is already discussed in the blog published on 16th December 2017. The reasons for frauds may be:-

  • Due to staff negligence/Connivance.
  • Lack of proper supervision and controls.
  • Lack of experience, knowledge and adequate training of the staff.
  • The absence of corporate governance from the banking systems.

Most of the frauds have happened due to the staff connivance and it appears as if these were like a consensual rape. Unless there are strict deterrents in place, the frauds will continue to happen. Any laxity in taking strict actions against the delinquent staff of all cadres overtly or covertly involved in the fraud will continue encouraging them to commit more frauds. Many big and small frauds have happened in the past, but hardly there is any action against the perpetrators, more so, in the higher cadres. Only a few small fish is caught in the net and the big ones are allowed to escape. All those who are involved in the crime need to be named, shamed and severally punished. There should be no place for the dishonest people in the financial sector as they not only spoil the sacred institutions by themselves but also induce others to follow the dirty trend.

However merely Staff is not responsible for all the deceit in the system, there are many problems with the audits and inspections in the banking system too. The staff hardly gets time to attend or go through all the voluminous audit and inspection reports and thus they are hardly of any use. Many inspections are just repetition of each other and need to be done away with. Nothing can be achieved by repeating the inspections and only effective inspections and audits should be carried out. At present, the banks go through:

  • Internal inspections mostly conducted by the bank staff only.
  • The concurrent audit carried out daily, snap inspections by all senior executives every month.
  • Credit audit and stock audits.
  • Central bank’s audit and statutory audit of select branches in every quarter.
  • An audit by the teams from Auditors from Auditor General’s office.
  • The yearly statutory audit by the chartered accountants deputed by the comptroller and auditor general’s office.

In spite of all these audits, financial frauds are still happening. ‘Too much of everything is bad’ is an old adage which is truer in respect of the audits of banks. Banking system can adopt following measures to make audits simple and more effective:-

(A). The concurrent audit on real-time bases should be made more effective by allotting the job to professionals and they be made accountable for any lapse that may remain in the day to day transactions. The concurrent audit is the most suitable solution because when a lapse happens and if not detected immediately may prove to be fatal afterward. Lapses such as  ‘release of the loan without execution of documents’ can only be rectified on or before the date of release of the loan and not afterward.

(B). Statutory audit is the domain of comptroller and auditor general whose auditors are masters in their field and have a reputation. Unfortunately, this important task is outsourced by the CAG to the Chartered Accountants against a fee to be paid by the banks directly to the Chartered Accountants. Anybody is bound to be loyal to his paymaster and to none else. Banks can get their balance sheets structured by putting pressure on these CAs. In case if the  CAG does not have enough staff to take the load of these statutory audits of banks, then at least they can pay the fee of the CAs through their office after successful completion of the audit after recovering the same from the concerned banks. CAs would then not oblige the banks, instead, they will remain true to the audit and the CAG.

(C). Recently the World Bank has advised Indian Government to give more teeth to the Reserve Bank. RBI auditors too are very professional but the audits are not properly followed and strict actions are not taken.  RBI should make the Boards and the top bosses in the banks accountable for any laxity in the corporate governance of the respective banks.

(D). Too many audits and inspections consume the too much working time of the branch staff and they get fed up by repeated audits and tend to ignore the same. Some of the useless inspections may, therefore, need to be done away with.

(E). Banks are doing everything except banking. They should not enter into the domains not meant for them. They are made to go for pennies and lose pounds. Banking is the backbone of country’s economy so they must be allowed to focus only on their field of activity.

(F).Well trained, efficient and experienced staff should be posted in the audit and inspection units of the banks. Generally, those who fit nowhere in the system or don’t compromise with their bosses are posted in the inspections department. This vital organ of banking has been ignored but it needs to be strengthened. As a matter of policy, it should be made mandatory for every upcoming officer to undergo a Compliance training or certification by the bank and must be made to give at least one tenor in this department for promotion to a higher grade because one learns a lot in this department.

Banks, therefore need to lay more stress on corporate governance, make inspection wings more active, vibrant and efficient. ‘When the old cock crows the young one learns’, the senior functionaries should therefore create a self-example of honesty,  dedication, and sense of belonging to the institution. Unless some harsh measures are not taken to restore public confidence, it is feared that the future of banks may remain uncertain. The Central Government, Central Bank, and Comptroller & Auditor General need to make changes in the policies for the banks for bringing transparency in their functioning.