Banks, more significantly the public sector banks (PSBs), have been in severe stress for the last two years. The bi-annual Financial Stability Report-December 2016 released by Reserve Bank of India rightly diagnosed their key pain points. (i) Relentless rise in gross non-performing assets (NPAs) (ii) low off-take of credit (iii) liquidity mismatches and (iv) diminishing profitability with negative return on assets (ROA) recorded in FY16. RBI has been consistently calibrating its policy framework to empower banks to improve the status of asset quality. But the stress period is likely to stretch longer, with banks recording higher slippage in asset quality than cash recovery and upgradation put together. The tipping pain point has been the management of demonetisation and its aftershocks. The additional cost burden in handling large queues in note exchange and deposit of specified bank notes (SBNs) shall further reflect in Q3 of FY17. The loss of revenue on account of truncated banking activities, during and immediately after demonetisation, will also begin to show up in subsequent quarters.
Therefore, hastening the rejuvenation of banks will have to be meticulously planned with full force to prevent stretching of convalescing period. The positive take away for banks is the rise in usage of digital banking. This needs to be utilised as a springboard to plan eventual reduction of cost of operations. Even if all banks would have collaborated together to promote digital banking for a prolonged period, the results would not have reached the present level. Banks need to go digital in all their dispensation.
As part of future business outlook and prioritisation of credit flow, it is logical for banks as commercial entities to scout for profitable credit operations. While banks are looking to lend to bigger entrepreneurs to reduce transaction cost in credit origination and follow-up, the government is keen to channelise credit to large number of small entrepreneurs for broad-based credit deployment. Moreover, the added array of new year sops and interest subvention schemes announced by the prime minister, too, directs banks to gear up for lending to small sector and provide minimum 8% interest on monthly rests to senior citizens up to R7.5 lakh kept as fixed deposits for a decade. The schemes are good, but their implementation through banking network will need a different capacity building process. The current wherewithal needs to be reoriented with the help of technology to ensure flow of micro-credit to affordable housing.
Also, the cost implications of institutionalising such credit schemes need to be evaluated. Unless the ways and means of their sustainability are worked out to compensate banks for loss of revenue, the present structure of business model may make it difficult for banks to dispense credit to such small entrepreneurs/housing sector in large numbers. While some small-size lending can now be handled by the upcoming Small Finance Banks (SFBs), specifically designed to dispense 50% of their credit outgo to entrepreneurs of less than R25 lakh, the other commercial banks will have to reinvent their operating model to fall in line with the new order of credit flow.
Banks will have to quickly work out standard over-the-counter (OTC) credit products with simplified standard operating procedures (SOPs) that do not need much of manual intervention. These need to be driven by technology through the expanded network of close to 6,00,000 banking touch-points, instead of relying only on brick-and-mortar bank branches. Product-wise costing, pricing, follow-up costs, tie-up for expanded sales, centralisation of collection and recovery, operational overheads, etc, will have to be worked out targeting the break-even volumes. Banks may have to design ‘out of box’ loan products that can be disbursed through e-wallets, below R10 lakh, instead of going through the same lengthy procedure of credit sanctions designed currently for a ‘one-size-fits-all’ mode.
Moreover, banks may have separate credit policy and procedure manual for loans below R2 crore covered under Credit Guarantee Fund Trust for Micro and Small enterprises (CGTMSE). This should also be combined with proper incentivisation and performance rewards, so that actual credit disbursement takes place as part of institutionalised process. As a strategy, banks can simplify credit dispensation system for smaller loans and create hub-and-spokes model to ensure quick delivery. E-disbursement in urban areas based on simple documentation can also be articulated.
Though priority sector norms are prescribed and trading in priority sector lending certificates (PSLCs) is allowed, there is no size of loan restrictions. Banks chose to provide loans to larger entities in defined sectors in one go instead of spreading the credit to large number of entrepreneurs that calls for more expensive credit process. In a free market environment, banks will tend to chase large borrowers within the exposure norms to reduce operational hassles. Even the present reset of large credit exposure norms may not serve small sections of population whom the government is targeting. Therefore, if the objectives of banks and government are to synchronise, there has to be policy of cost compensation to convert micro loan schemes into mass delivery models.
Unless the internal credit delivery ecosystem is specifically redesigned to handle small- and medium-sector loans, it will be difficult to pursue fulfilment of objectives set by the government. Symbolic cut in marginal cost of funds based lending rate (MCLR) has followed in banks, but actual credit flow may need specific implementation strategies and a simplified framework of credit dispensation. For banks to contribute to seminal policies post-demonetisation, they need more support than a mere acknowledgement. Banks will have to quickly work out methods to meet the new set of challenges to speed up credit flow to desired sectors. It is an opportunity for banks to build low-risk credit portfolio with better potential to enhance risk-adjusted yield.
The author, K Srinivasa Rao, is an associate professor, National Institute of Bank Management (NIBM), Pune.
Views are personal