No-frills accounts aren't a nuisance: D Subbarao

7 JUL, 2012, 10.04AM IST, TNN 
Reserve Bank of India governor D Subbaraohas berated banks for eschewing low-value customers and small transactions. The central bank chief said that India ranks 50th in financial inclusion-below countries like China, Kenya and Morocco-as banks fail to see opportunity at the bottom of the pyramid.

"By and large banks have outsourced the 'last mile' to intermediaries such as microfinance institutions and self-help groups. This is a model that has worked, and one that we should pursue, and refine. Nevertheless, the question is, 'is there a business case for banks to do some of the last mile themselves? Can banks rely entirely on outsourcing? Isn't there a valuable experience to be gained by banks by dirtying their hands more and reoccupying the last mile?" Subbarao was speaking to bankers at a platinum jubilee function of Indian Overseas Bank in Chennai this week.

The governor said: "The general impression I got is that frontline branch managers treat no-frills accounts as a nuisance and low-income households as an intrusion into their time and their business. This is disappointing to say the least," he said. "Banks should look upon financial inclusion not as an obligation but as an opportunity to build fortune at the bottom of the pyramid. I am also conscious that the bulk of our effort so far has been from the supply side-opening branches, appointing business correspondents (BCs) and opening accounts that remain largely inoperative. If this is all that happens, the entire effort is both futile and wasteful. We need to supplement that supply side effort by a demand side effort-by reaching out to people left behind, inspiring their trust and confidence in the banking system and supporting them in improving the quality of their lives," said Subbarao.


Subbarao pointed out that in the first index of financial inclusion, prepared by the Indian Council for Research on International Economic Relations (ICRIER) to determine the extent of reach of banking services in 100 countries, India has been placed at the 50th spot.

RBI has said that bank branches should focus on financial inclusion and not leave the job for BCs. "I think there is a strong case for a much larger effort on innovating a cost-effective village branch model. Second, it is important that all BCs are trained in the use of technology, knowledge of bank products and processes, and importantly, in customer service," said Subbarao.

The governor said that the central bank's efforts at increasing rural branches by linking branch licences for tier-I cities with rural branches was being stymied by the mindset of bankers. "Unless banks are convinced that reaching out to the common man is not just a forced regulatory imperative but a potential business opportunity, the numbers will remain without life. The Reserve Bank looks forward to competition among banks to develop business models for such small, low staff and low-cost branches," he said

Pointing out that priority sector status did not provide any advantage in either the cost of funds or ease of access, Subbarao said: "The more sectors we include in PSL, the more they will compete for the same fixed pool of resources and crowd each other out. The priority sector can deliver on its promise only if eligible sectors are restricted to a select few which are important from the perspective of improving livelihoods." 

Norms for PSBs’ takeover of loan accounts tightened

BL :Mumbai:8 july 2012

Concerned that the loans they acquire from other banks could turn out to be lemons, the Finance Ministry has issued guidelines to public sector banks.

This move is to prevent unethical/unjustified takeover of loans. The ministry has come up with the guidelines as the Central Vigilance Commission (CVC) has noticed that sometimes existing loan accounts which are already showing signs of sickness with one bank are taken over by another bank.

Such loan accounts, predictably, turn non-performing within a short-time in the bank that has taken over the account.

GUIDELINES

As per the guidelines, banks must put in place a board-approved policy for taking over loan accounts from another bank. Banks, normally, can take over only those loans whose credit ratings are above the level approved by the board.

Concessions — lower interest rates on loans and charges for non-fund-based facilities — to taken over loan accounts can be extended only in extremely deserving cases with specific reasons recorded in writing.

DUE DILIGENCE

In all cases of take over of loan accounts, the ministry emphasised that due diligence, including visiting the prospective customer’s premises/factory, should be undertaken.

“A bank just cannot afford to depend on the credit report of another bank from whom it is taking over a loan account. It is possible that the report has been whitewashed to hide problems in the account,” said a senior public sector bank official.

Where a borrower seeks additional exposure from the bank that has taken over his loan account, the ministry said the guidelines of joint lending should be strictly applied.

All borrowers with individual credit limit of Rs 150 crore and above are covered under a joint lending arrangement, whereby banks have a holistic view of all banking relationships of a borrower so that frauds can be minimised.

INFLUENCE OF OFFICIALS

A public sector bank should not take over a loan account from another bank where any of its Executive Director or Chairman and Managing Director had worked earlier.

If such cases need to be taken over, the proposal should be put up to the board with specific reasons justifying the need for taking over the accounts.

The CVC has observed that some accounts shift from one bank to another as senior functionaries are elevated to the ranks of EDs and CMDs.

In this regard, the Commission has pointed out that sometimes even influence from senior officials, including directors on the board of banks, leads to the field-level staff as well as those working in credit departments of regional office/zonal office/head office coming under pressure.

In view of the ministry guidelines, public sector banks are expected to be more circumspect in taking over loan accounts from other banks.

The guidelines come at a time when the RBI’s ‘Financial Stability Report’ has expressed concern on banks’ loan quality.

The Report said an increase in slippage ratios, rise in the quantum of restructured assets and a high rate of growth in non-performing assets (NPAs) relative to credit growth implies that the concerns on asset quality of banks remain elevated.