The blunt, almost direct question raised at any forum where the Bankers too are sprinkled is that “why are the Banks charging a princely sum when lending that too from our funds and why are the banks niggardly in paying interest on our hard-earned savings entrusted as deposits with them?”
This has two dimensions. One is what the Bank pays on deposits. Demand deposits (Current account balances) are sterile though advanced countries pay interest on it. Savings Accounts are paid between 5 to 6% and time deposits 8 to 10% p.a. whereas the Bank charges as much as 15% or even 24% when it comes to unsecured temporary accommodation. There is also the penal rate for non-repayment as stipulated, i.e. another 2%.There is some justification for stratification for bank has investments. Investments may be with varying durations and withdrawals at will without loss of returns may not be possible.
What is irksome to the articulate and discerning public is the difference between what the Bank receives on advances and the Bank pays on deposits. It is this spread that is drawing their attention. Is this wide or widening spread necessary? It is being justified on the basis of infrastructural costs like buildings, human resources, insurance, safety, security, other costly sources of funds and so on to name a few.
One convincing analysis about this wide spread has pointed out that it keeps the inefficient banks afloat and makes the efficient ones to flourish. The relative efficiency or otherwise centers round the deposit mix and advances portfolio, not taking other factors into consideration in this context. The advances portfolio is stacked with Non-performing Advances, may be endangering the Plimsoll line. As for the efficient banks their credit decisions are based on banking norms it is contended. They receive repayments in most cases, recoveries are marginal for they take action in the first month itself and their Non-Performing Advances are within allowable limits and are covered by the loans loss provision as stipulated by the Bankers’ Banker.
What ails the inefficient banks has been diagnosed as the excessive dependence on deposit based income without following the basic levels/norms of ensuring the lending on professionally studied credit decisions. In some instances the dictates of the political masters are blindly adhered to resulting in imposing a new benchmark for lending with deleterious effects. It also has a multiplying effect for nobody dares to treat it as a special case, (personal to the borrower thereof) and thus shutting it out being treated as a precedent by decision-makers. First and foremost the deposits are the responsibility of the bank. If they lend out of these deposits it is their bounden duty to replenish the amount drawn for lending purposes. Loss or non-return of the amount results in double loss to the banks –the amount lent plus the amount returnable to the depositor. If the loan is smooth sailing it can create deposits at least in the next round. To present a truthful picture the irrecoverable advances are treated as written-off amounts. This accounting phenomenon has on many occasions been treated as wiping out the liability of the borrower. It is not so and the bank has to pursue the recovery process until they recover the defaulted amount. If not pursued the impression created is it is a shady deal or “binami” deal.
With the existing, wide spread if the amount lent is repaid promptly the bank flourishes for there is a big margin between what they receive as interest on advances and what they pay as interest on time deposits only, the base for their lending activities. This does not rule out the heavy outlay on infrastructural commitments of varied dimensions.
What is important is that the banks should attract, mobilize, more deposits for the country needs funds for investments. More the domestic savings is more is the freedom from external debts for the country in due course. To attract deposits the depositors must be paid something worthwhile for parting with their savings, postponing consumption, discourage hoarding and for preventing from seeking alternative investments especially in the informal sector. At the same time country needs less costly funds for investments. This can materialize only if the lending rate is reasonable. As it is even the basic facilities (electricity, water, communication, transport, etc) are expensive. Banks can ease these constraints by making available funds at reasonable cost and attracting more deposits by enhanced reward for waiting (interest).
How can the bank find a way out for the sake of the development of the country?
It has to attract more deposits and at the same lend more advances. Both need the interest component to move in the opposite direction. The deposit rate must increase and lending rate must be lowered. This is not possible as long as the banks depend on its deposit base as the sole source of funds and source of earnings. A change of focus is required. Sophisticated banking is based more on fee based income rather than the deposit based income.
Fee based income accounts for more than 60% of the earnings of sophisticated banks all over the world. For this to be feasible in our context the pivotal point to be taken care of is it’s Human Resources, its cadre, its staff. From chits and quotas in appointment and elevation based on “seniority and absence of adverse reports” banks must proactively encourage and support the staff to not only qualify in the traditional banking professional qualifications but in a number of lateral fields .The banks should have a team of professionally qualified men and women capable of applying their acquired knowledge in their day-to-day work and explore innovations. In addition to the dynamic banking knowledge they should seek out related fields (or even unrelated fields) that serve as the source of fee-based income.
Bank has to become “One Stop Shopping Complex” for all related financial services not only for the indigenous clientele but also for the expected/incoming Foreign Direct Investors.
These calls for drastic changes in the recruitment stage, at the placement level, at the promotional level and branching out into activities hitherto shunned or ridiculed as beyond us for want of a competent team of knowledge workers. Without drawing the ire of the entrenched heads and shoulders let us think of making it possible for the banks to earn as much or even more but not by fleecing the investors or denying the reward for hard-earned savings but by providing a series of sophisticated services and products which can be provided only by those Competent Knowledge Workers with specialized knowledge in the relevant fields.
Bringing in experts is one of the wrong moves adopted. For the experts may be competent in their field of specialization but what is required is a blending of banking knowledge and experience and the lateral qualifications in the appropriate fields ranging from share market operations, venture capital, insurance, travels and project formulation to name a few fields of service the banks have ventured into and our banks can venture into.
. “An IT expert without the banking knowledge will be as useless as a banker without IT knowledge” as was expressed a little harshly by a knowledgeable banker.
This note does not seek to give a detailed analysis it is intended to be an eye-opener.