Banking

As the Industry Changed, India’s Public Banks Lost the Most and Won the Least

Fundamentally, the government, the RBI and the banks themselves have to acknowledge the fact that the public sector can and must work.

This is the third piece in a three-part series on the state of India’s state-run banks. Read the first and second here.

As the new millennium dawned, new ideas erupted everywhere, and banking in India refused to buck the trend. One idea soon took centre stage in the country’s biggest public sector banks. Business process re-engineering (BPR) initially seemed to be some fancy new jargon but, soon enough, it acquired cult status among professional bankers here. The fact that the world’s biggest names in consulting piloted the idea and its implementation in India would explain why this was so.

Under the new regime, work processes had to be re-defined and restructured for achieving the twin objectives of  better operational efficiency and higher risk management standards.

BPR models in loan processing/delivery envisaged a clear demarcation between marketing and appraisal (and also supervision/monitoring) functions, with evaluation and assessment of credit proposals being entrusted to specialised cells located away from and outside the jurisdiction of branches and other customer-interface offices whose primary responsibility hereafter would be locating new lending opportunities and providing the leads to the processing centres.

The central idea looked to be unexceptionable: using specialised skill-sets for specialised functions. Front-line staff could be freed from back-office responsibilities so that they could focus on marketing instead. This would rigorously demarcate loan marketing from actual approval of those loans.

The implementation of the idea, however, was shoddy at best. The question of eliminating conflict-of-interest issues was tackled in the most inept manner conceivable and, at the end of the day, the banks lost far more in dissatisfied clients and botched delivery than they gained in better appraisal standards. The branch office, which till then had been the single-point interface between the bank and its client, soon lost its relevance in the overall scheme of things. Some banks carried the BPR logic to an even more absurd point where even supervision, documentation and monitoring of loans was taken out of the ambit of branches. In the event, loan supervision often fell between two stools and went out of sight altogether.

Besides creating a clear power hierarchy where the processing cells were the unquestioned kings while the poor branches made up a vast plebeian population, the BPR model—at any rate the variety that was implemented in India’s public banks – blurred reporting and responsibility lines very significantly. The result was chaos, loss of custom, a plethora of bad loans and abysmally low staff morale at most places. But the BPR jargon flew thick and fast. Learned phrases like ‘design principles’ and ‘turn-around time’ were merrily  bandied about in internal review meetings where the consultants made scintillating Power Point presentations – and business fell steadily. Where administrative fiat and iron-clad budgeting made sure that business grew nevertheless, quality was a serious casualty.

The second misadventure was the foray into what is popularly known as ‘cross-selling’. Thanks again to the consultants, public banks started imagining themselves as nothing short of financial supermarkets and one-stop financial solutions shops and what have you. Insurance, mutual fund and credit cards were  added to the ‘bouquet of products’( another gem from the consultants’ book) now on offer at these financial ‘power-houses’.

The hype was limitless, but the gain to the banks was minimal, often chimerical. The income earned (‘selling commission’ paid to the bank by the insurance, card and fund company) was minuscule when compared to the revenue streams from the banks’ bread-and-butter businesses, but the outlay in terms of man-hours invested by bank branches soon became humongous. The real beneficiaries of this project were the insurance, card and fund companies companies who stood upon the shoulders of the bank networks, employed only skeletal staff themselves, and laughed all the way to their banks. It was a lose-lose scenario for the public banks every which way one looked at it.

The banks of course were ready with all the proper-looking answers if you were to ask them why they diversified their activities in this manner. The first, of course, was the story of the ‘financial supermarket’ as sold to them by multinational consulting firms. Besides, the insurance, card and fund enterprises were usually the bank’s own subsidiary companies, and so it was supposedly a case of helping oneself and nothing less.

But, whatever the original motivation of this misguided venture, its consequences were disastrous in the extreme. The incentivisation models worked through plain cash and paid holidays in exotic (often overseas) locations. In reality, these incentives were without any ceiling, and just about every employee – right from the humblest member of the branch staff to the numero uno at the bank’s corporate office –could profit, indirectly if not directly, from this business. Inevitably, officers and other employees at every level came to prioritise ‘cross selling’ over everything else.

When  officers could earn twice or thrice their take-home salaries by hard-selling some nice-looking ‘products’, how can they be expected to give their humdrum daily duties any attention? Again, as it was a level-playing field, how could you stop a junior employee from earning a fatter cross-selling commission than her seniors? Or prevent others from suffering serious heartburn in such an eventuality? At branches as well as their supervisory offices, at head offices and at corporate headquarters, ‘cross selling’ was the new buzz. Iron had entered the soul and nobody seemed to mind.

Terrible as these consequences were, they pale before the havoc cross-selling wrought on customer relations. Branch staff would badger with sale pitches practically every client that happened to cross the threshold to step into the premises. Quite often, gullible customers were persuaded to buy into things they least wanted. And loan-takers were coerced almost without exception. Poor farmer or prosperous professional, unsuspecting homemaker or alert investor –everyone was fair game. What was truly bizarre is that everybody in the bank knew just what was happening, but none seemed to care.

All this is taking its toll on the workings of our public banks even as staff strength is dwindling at the operating levels, and as more and more unproductive, non-remunerative work gets thrust upon these banks, demonetisation and Aadhaar-seeding being recent cases in point. Morale being low and systems weak, a fresh rash of frauds appears every other day.

Worryingly, more scams seem to be in the making. Already, fraudulent Mudra loans are causing some senior bankers sleepless nights.

At the same time, these banks today pay their officers and employees far less generously than do most other employers, both in the private and the public sectors. Forty years ago, an officer recruited into a public bank was much better paid relative to most other professionals in the public sector, and the private sector in any case offered few white-collar jobs at the time. Today, the overall picture has changed dramatically, and our public banks are among the most-hurt as a consequence.

Can our public banks get out of the rut they find themselves in today? My personal experience of both public and private banks suggests that they can – provided the effort for their rejuvenation starts in right earnest, and it starts now.

Officers and other employees in these banks stand on a par with their private sector counterparts in ability, commitment and character. But years of indifferent  leadership, neglect and the couldn’t-care-less attitude so endemic to the owners, the Government of India, have brought these banks to the edge of the precipice. Things have to change, but changes a la the Banks Board Bureau are neither here nor there. Fundamentally, the government, the RBI and the banks themselves have to acknowledge the fact that the public sector can and must work.

Too often, there seems to be too little conviction in such a proposition.

Anjan Basu worked for one of India’s largest commercial banks for over three decades, both inside the country and outside it.