Six innovations banks should try

Good practices make the banking a better business


Adve Srinivasa Bhat | January 21, 2015

1. Public sector banks should report with the depth of social logic and to the larger society

How could PS banks ‘manage’ to write off 2.43 lac crores of loans so far? How could 14 of them collectively fail in their judgment in lending to an immature airline about 7000 crores only to see it turning bad? With the slow sailing work force in thousands how can they complain of lack of talent for replacement at the top, all of a sudden? Aren’t the PS banks failing?
Who cares?
That attitude, one could easily assume, is the root cause. Use of economic jargons disallowed, the managers at these banks can hardly explain their own plight. More troubling however at this juncture is the fact that in spite of the alarms being raised, more often of late, after all these years of carelessness we seem to continue to try the system with mediocre measures continuing to demonstrate ‘who cares?’ attitude rather ignorantly. The level of concern on the potential economic disaster seem to be awfully low among all the directly responsible stakeholders – the top level managers at these banks, the govt, the RBI, the opposition in the parliament, public finance specialist groups and also the media – at the cost of vast ignorant stakeholders.

‘Who cares?’ attitude is highly suspect when those who are trusted with the responsibility fail collectively. And in the case of PS banks since the responsibility is almost absolutely assumed by the revered public institutions which form the governance assurance system of the govt the failure reveals the deficiencies of the very governance system and that can only demean the management at these banks. An element of implied social contract arising from the situation demands that entities and persons trusted with the responsibility subject themselves to be reviewed by the larger society. The only way to facilitate that is by these banks reporting on the affairs comprehensively with greater details to the larger society.

PS banks should heed to that expectation not just because that happens to be a common management wisdom but also because comprehensive quarterly reporting, way beyond the limited information given out to the public by these banks, compels competitive governance and finer management thinking which seems apparently lacking in their functioning.

PS banks have no choice, however. The mountain of bad loans they have accumulated demands that they report in greater depth on the recovery and on the way they run their business, going forward. Three reasons make it compelling. One, PS banks still hold about seventy five percent of the vastly underserved banking business and they use public funds almost entirely. Two, banks directly impact economic activity and thus overall development and social well being but with deficient policies that are not consistent with the larger social needs they can cause negative impact also – as clearly evident with their flawed lending to a certain sector and a certain class – as explained elsewhere in this article. And, three, banks being fundamentally critical for enlarging the economy with social conscience India would surely need a set of large banks in the public sector. The cry for privatization only arises from the failure of successive govts in ably directing the PS banks towards achieving balanced social growth and of course owing to the deficient management and mishandling of these banks by the overreach of the complexly networked political powers which in time have effectively tarnished the very character of PS banks and ironically, their financial health.

As typical of the banking business, PS banks largely leverage their operations with huge amounts of public deposits trusted in them by the general public. That trust in PS banks happens to be sacrosanct by virtue of govt owning these banks and therefore makes a strong case for quarterly dissemination of their operations and intentions proficiently validated by the social logic – to the public with formal structured communication through the media. The suggestion is pertinent on two counts; a) socially unjustified operations of banks, as explained elsewhere in this article, can negatively impact; dormant, unconnected and ignorant stakeholders severely and, b) current deplorable condition of the PS banks and the underlying causes for that, demand that these banks are now run under cautious public observation.

In fact, the decision to get the PS banks to also report to the public with the depth of social logic can only be prudent from all perspectives. They are; a) the system would make the PS banks conscious of being observed and thus naturally compel them to tread the right path, b) it would naturally elicit public opinion on aspects good and bad and empower the mangers in keeping away undue and incompetent interference from govt officials and politicians, and more importantly c) it will enhance the credibility of PS banks with the general public – effectively yielding useful competitive advantage. Peoples’ trust being a critical brand attribute for banks PS banks should ideally initiate the practice in imposing transparency upon themselves which can ward off unscrupulous elements meddling in their functioning as also to fetch critical marketing advantage.

Would the govt ask the PS banks to do so? By the management autonomy it has promised, would the govt allow them to do so, beyond the customary periodical reporting they do to MOF and RBI? It only calls for political will on the part of the party in power or stubborn uprightness on the part of senior executives at these banks who have accepted the responsibility to professionally manage. BJP which failed to check the decay while being a forceful opposition for years happens to be charged with reinforced responsibility being in power now. Political will happens to be seriously tested when the party in power is endowed with actionable mandate.

2. Make the chairman’s position executive with responsibilities distinct from that of the Managing Director;

The govt’s decision in accepting an old RBI suggestion to split the position of CMD into two separate positions as ‘Chairman’ and ‘Managing Director’ does sound psychologically great but in reality will not yield the expected ‘check’ owing to the position of chairman being part time, and thus missing the true sense in the advice absolutely. I wonder what more would a non-executive chairman who would attend only board meetings achieve more than; the govt nominee director, the RBI director and other representative directors in the boards of these banks? The decision, of making the chairman’s position part time, in fact questions the earnestness and competence of these directors, particularly the ones from the govt and RBI who are actually supposed to provide the ‘check’ expected of the new chairman and that, also explains the futility of the decision. The justification provided by the RBI for the split, the ‘indomitable CMD’!, sounds way too diplomatic for its professional stature in avoiding the straight throw to the govt, ‘politically encouraged’, which is not just widely (not wildly) rumored but also evident in the unexpected catch (Syndicate Bank) and also as squarely indicted by the MOS in the ministry of finance, Mr. Jayant Sinha in a recent interview, of the past govts.

The new top set-up for the PS banks being fixed is like trying out tools without the skill to use them. One very critical insight which has become a thumb rule long ago which BJP govt should believe in – to be able to deliver real change – is that; - “often the cause for many things bad lies in the actions and inactions of the govt”. The concept of ‘independent director’ which is quite potential is literally absent in PS banks with all the directors wearing the govt mask – a pointer on the lack of political will to let off the banks off the political interference. Even with the companies in the private sector govt seems to lack the will or the know-how to leverage with that – as evident in its lame and mute response to the chaos at Infosys last year which could have been well avoided if only the govt had expressed with strong conviction, of its trust and dependence on the ‘independent directors’ in handling such situation – which would have also reinforced the very institution of ‘independent directors’.

Read: Et tu Infosys

With a good concept on hand the wise approach is to work with it hard and harder in making it forceful and thus more effective. A good set of independent directors, diversely competent and of exceptional integrity, in each of the PS banks can surely put the expected ‘check’ as well as the badly needed management support in charting them to level next. However, this thought of chairman, in addition to the independent directors – of course, does make immense sense in the context of PS banks if only it is made a full time executive position. Considering the large size and the essential nature of banks, of having to be socially prudent, a full time chairman who would be authoritatively responsible and particularly instrumental for competitive governance can surely help these banks mature and grow indeed professionally. That makes the contemplation in the govt for another tool, an ombudsman for banks, redundant – for good. The charged primary responsibility keeps the chairman out of the work in the managing director’s sphere which is about ensuring overall competitive performance. The innovation here arises from the diverse distinct responsibilities.

3. Reorganize management structure and the designations – by the function;

Banks in India, including some in the private sector, seem to have never thought of breaking away from the good old managerial hierarchy markers by the levels to more meaningful and therefore more effective designations – by the function and tasks. Banks, including those in the private sector do lack the constant prompt to objectively work towards enhancing and evolving products in the absence of formal ‘marketing department’.

Marketing as a function which is hardly understood in the right sense even in the consumer goods sector happens to be grossly so in the banking sector. Marketing is research and innovation critical and products happen to be the centre of all tasks in it right from evolving them. Banks seem to have passively grown all through with the buoyancy in the economy without the strong will to strategically impact it for the good of the larger society. In the comfort of lazy competition and the govt tutoring, banks happily over served, over the years, certain classes and segments sinfully under serving the larger market.

Banks I feel are unmindful of their own potential to powerfully impact the economy positively with thoughtful policies and they seem more oblivious to the fact that they do hurt the economy and the chances thereof with deficient policies. I believe banks in general and govt’s banks in particular have ignorantly hurt the interest of larger populace in running a very normal service how much ever large that may be without the critical thinking for making best possible social impact. Banks ought to know that their lending which fuels demand can also push it to superfluous levels hurting the fundamentals of the overfed sector / segment at the cost of much, much larger populace. Banks’ lending to the realty sector is so much flawed that their thoughtless lending to the builders beyond their project needs and to multiple home buyers driven mainly by collateral comfort carelessly ignoring the adverse impact of the superfluous prices has indeed unarguably made the first time buyers bear the brunt and the massive true demand being excluded. And, that’s just one example.

As it is with marketing so it is with other functions as well.
PS banks in spite of being in business for ages and characteristically employing tens of thousands of staff seem to have ended up in a strange difficulty at a crucial juncture which they put succinctly in relative context as; – cash is not our problem, lack of talent is. With a spate of new banks waiting to join the club the situation would only spike costs with expensive service extensions, undue promotions and inflated salary levels alongside surge in unemployed graduates – an incongruous social situation.

Banks should learn simpler lessons from the mistakes in HR management in the airlines business and also from their own unwise lending to the unwisely run aviation sector. The gang lending of such huge public money by the PS banks so callously to Kingfisher Airlines should ideally be used as an example to punish impropriety, dishonesty and even incompetence in PS banks towards effectively curbing notorious political meddling.
4. Get directions from the middle management. Create responsibility groups for loans also right there.

The strange situation PS banks have on the talent and staffing and the issues they have with their hardened loans happen to have common roots and therefore provide an opportunity to settle them advantageously with innovative approach. Wide knowledge and experience gaps in the human resource pool can hardly happen in a sharply tapering management hierarchy unless the decision making is closely held and instructed down the line. The typical line reporting structure and the classification of loans by volume for the sanctions seems to have put the authority on all big loans that make up the larger chunk with just a few at the top who also wield their powers to influence smaller advances down the line.

Typically banks offer career for the lifetime and catch their HR young for the long journey but seem to delay empowering them. That explains PS banks’ harder predicaments. That also explains the failure on the part of govt and the RBI in ensuring their competence in being socially judicious. That also explains the scope for political interference.

PS banks should be able to fix the issues of shortage of talent and the bad loans, in the short to medium term, by creating ownership for loans in the groups of staff in the middle of the management span.  Such a functional hub in the middle with sets of diverse staff spread across offices; evaluating, monitoring and guiding sets of loans provides an absolute check on the bad loans creeping in and also on those surviving to turn bad irrespective the powers that may try to support them. It serves as an effective deterrent and also as a flushing out mechanism. It would also serve as an effective system for faster sanction of genuine loans. Developed and nurtured well with elements of competence it would evolve to serve as a superior knowledge source for the top management in planning growth and taking management decisions. It would provide steady supply of competent managers for the top management positions. Creating that scattered management hub would be a challenge. Selection, training facilitation and technology adoption happen to be the critical inputs.

5. Create a hybrid management counsel team:

To put it as it is, for the generally concerned public, the news from the Gyan Sangam hardly had anything reassuring. A louder one was that of the bankers telling the govt -spare us from your wishes – to be able to manage more objectively. The govt in turn was quick to put in writing of its intentions to be hands off. But in reality the kind of interference that hurts banks are those that are invisible and happen uncontrolled at multi-levels, mutually.

And, of course, the other interference which the prime minister rightly called intervention is more of a habit evolved out of mutual interdependence at the cost of critical work of the ministry and competitiveness of the banks. Ministry of Finance intervenes in the functioning of banks ignoring their own work of conducting advanced research on the social balance that can be achieved through banks and evolving directions for the banks towards that end. Banks in turn seem to implement ministry’s instructions, not the directions, without strategy or tactic shedding the sense of ownership and competitiveness.

Read: In support of PMJDY

To overcome the inertia that is holding overall competitiveness banks need supplementary external inputs on concurrent basis on; marketing, technology and innovations which can be achieved by hiring expertise – full time or on assignment – to work with the ‘empowered management counsel team’ of which bank’s top management should be the absorbing and deciding authority.

Another suggestion at the Gyan Sangam put forward by the bank chiefs seems interesting because it would only keep things unchanged – at the mutual comfort of the govt and the banks. A ‘bank bureau’ is an old hat which would only keep all the PS banks equally bad or good which in any case can only be bad. It cuts the strategic thinking potential and competition spirit of PS banks and encourages the MOF to continue to manage banks at the cost of guiding them with critical insights.

6. Establish a competent research department and call it ‘Social Impact Research’ department:

Money support being the product, marketing in the context of banks essentially involves deploying it with care and diligence in the interest of larger society. All banks, particularly PS banks should know and know it well that their business; of lending to enterprises and people and their investments can negatively impact the society if not weighed with relevant social fundamentals.

To be able to impact the society positively banks need to have better grasp of the sectors they focus in and actively work with structured research to know the incongruities and opportunities they can base their operations on. The vision and mission statements of PS banks as put out in their websites which are all similarly silly only tells of the blind game they are up to. They need to work with harder to achieve but practical social objectives and elaborately developed task sets to be able to make commendable social impact.

Arguably, successive govts’ urge to drive social good through the banks with deficient products and initiatives such as; loan melas, loan waivers and other financial inclusion initiatives only reflect the failure on the part of banks in developing products in comprehension of the latent but critical demand sets. That, illiterate petty money lenders can still beat them on profits and volume tells of deficient understanding on the part of the banks on the larger purpose and the approach to the very business. That, PS banks’ lending and lending more and more to the rich business groups and influential entities beyond the limits of allowable bank finance and simultaneously pumping demand through costlier personal loans to consumers in collusion with larger businesses tells of their ignorance about what keeps the gaps between rich and the poor ever widening. That, micro finance and venture capital evolved outside the banking sphere makes it look obvious that most banks by and large have been merely sailing in the buoyancy in the economy without exploring opportunities with products competitively in the; lending, saving and investment sphere. That, the pile of up of rupees 2.4 lac crores of bad debts, much of it could attract the attribute ‘willful’, could have quite possibly helped equitable development if only suffered in lending across a larger canvas of social scope and opportunities only tells of the ignorance on the part of PS banks in understanding risk perceptions and the dynamics of true development they can possibly fashion.



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