RBIs tight control of interest rates and credit allocation did not prevent banks from piling up non-performing assets. The best analogy is with a driving instructor who kept his eyes and mind off but never really took his feet off the brakes, clutch and accelerator and still expected the trainee to be fit for the car rally! There is a strong correlation between the health of a bank and the pliability and incompetence of its management. Where both were at their worst, banks are now irretrievable. Most need major overhaul and reconditioning. Even the `shining stars need massive infusion of technology, skills and reorientation of revolutionary rather than evolutionary proportions. The least of the damage of making paradigm shift from controls to deregulation, without restructuring banks and rectification of their deficiencies, is loss of market share of good banks.
Let us use the total exemption of preference shares and corporate debentures from the 5 per cent investment limit to illustrate the issues. Although, as of now, banks have availed of this freedom peripherally, the future course of banking cannot be different from the global trend. Increasingly, industrial lending will be in the form of securities rather than loans and loan spreads are squeezed because of overcapacity. In the process of coping with risks of securities business, banks have realised their shortcomings.
True, substitution of loans by securities does not increase credit risk per se. But risks of securities business are qualitatively different. As it is, the risk management record of banks as regards short-term lending is poor. Most banks, having failed in developing project appraisal skills, piggy-backed for project lending on term lenders. With this track record, doubts about banks ability to manage new risks are hardly misplaced. On the liabilities side, the risk of market-determined interest rate is almost a new one and that of maturity mismatch much larger. Market prices of securities (assets) will be susceptible to change in fundamentals (risk of asset quality and semi-macro risk of industry exposure) and market-driven yields (macro risk). Banks cannot follow a policy of invest and hold without questions from auditors, shareholders and public. Per force they will have to trade, ostensibly with a view to increasing yield.
Banks may point to trading in government securities and foreign exchange operations as evidence of their trading and risk management skills. But bathroom singing is hardly an evidence of professional singing calibre! Trading in free market is a high pressure activity. High quality research, efficient back office and strong controls are integral parts of trading.
Typically, traders and resea-rchers are among the highest paid in the financial services industry. Trading outfits are lean as traders enjoy tremendous independence. Let alone retain, public sector banks cannot attract high quality professionals. How can they be an engine for skill upgradation and new product development? Banks are in no position to match market compensation of traders, researchers and credit analysts let alone moving to performance-linked compensation which strikes at the very root of grade and seniority-based reward structure.
In 1995-96, of the total staff, officers accounted for 20 per cent in the case of public sector banks compared to 27 per cent, 89 per cent and 40 per cent in case of old private sector banks, new private sector banks and foreign banks, respectively (Performance Highlights of Banks - 1995-96, IBA)! Average compensation in public sector banks at Rs 1,25,000 was a little less than one-third of foreign banks (Rs 3,55,000)! The figure of Rs 1,55,000 for new private sector banks raises doubts about comparability due to say, the accounting treatment of incentives, as some of these are in the form of preferential allotment.
Little is known about investment of public sector banks in information technology. A reliable estimate places the cumulative figure at Rs 1,000 crore, as of date ! In contrast, new private sector banks, with one-sixtieth of deposit base, are estimated to have invested already over Rs 75 crore!
The economic capacity of public sector banks (26), with aggregate net profit of less than Rs 1,000 crore in 1995-96 (excluding Indian Bank) is abysmally small! Nor is their technology vision big.
Another constraint is management style and structure. Lack of empowerment hinders quick response and on-the-spot decisions, prerequisites for good customer service. Even if they want to, banks cannot pursue effective delegation in the absence of well-tested systems. If they do, it could spell disaster.
Though government appoi-nted, some boards boast of liberal professionals but they are outnumbered by humble public servants for whom bank directorship is a symbol of political clout. Banks could benefit from empowered boards. In all probability, public sector bank boards would fare poorly in any objective evaluation of corporate governance standards.
The worst handicap of bank management, like other PSUs, is peculiar accountability and business philosophy of a government monopolist which lacks customer service orientation. Management style and performance accountability centre around adherence to cumbersome procedures, customer-unfriendly processes and obsolete systems. Enterprising managers run the risk of being accused of complicity for which they could be hounded for a long time, before their innocence is proved by snail pace processes. Ironically, it is easy to mismanage freedom, more so if it is torrential.
