Could you imagine a world without banks? At first, this might sound like a great thought! But banks and financial institutions have become cornerstones of our economy for several reasons. They transfer risk, provide liquidity, facilitate both major and minor transactions and provide financial information for both individuals and businesses. Importance of smooth flow of money is like flow of blood in human body, one can’t imagine life without it. Banking industry makes an important contribution to the functioning of the economy and plays a constructive role in society. In India, Reserve Bank of India [RBI] has been entrusted with the responsibility of creating and printing money, regulating money supply and interest rates. Pradipta Kumar Jena, RBI Regional Director, Odisha, in a freewheeling interview with Nageshwar Patnaik discusses about the challenges before the banking industry in India in general and in Odisha in particular.

Excerpts from the Interview :

NP : The central government in general and the RBI in particular has a huge influence on a bank’s profitability. How do you look at such symbiotic relationship?

PKJ : There are two aspects – involvement of the Central Government and involvement of RBI over the commercial banks. It is natural that the Central Government in its capacity of as the major shareholder of the public sector banks would like them to function in tune with its policy priorities. Similarly, RBI being the central bank of the country will take steps to safeguard the interest of the depositors through prudent banking policies and would like them to be financially as strong as possible. In essence, both Government and RBI work in the interest of the public and the policies and if there is proper coordination there is neither conflict of interest nor issue.

NP : In the last couple of years, the non-performing assets [NPA] kept on swelling to an unmanageable level. Where does the banking industry stand to-day?

PKJ ; There are certain internal as well as external factors responsible for this slow down. Today our banking system is a very much a part of the global banking system and does not operate in isolation. There has also been a change of Government at the centre. We are hopeful that the situation will improve which in turn will also improve the asset quality of the banking system as well. During the last one and half years both RBI and the Government have taken many initiatives to take care of these issues like rapid clearance of infrastructure projects by the Government, clearance for mining projects, Corporate Governance and so on.

RBI has also taken steps to introduce a system for early identification and rectification of potential NPAs, action on wilful / non-cooperative defaulters, strengthening of capital base of banks, steps for improving infrastructure financing by banks like issue of infrastructure bonds, new PSL guidelines giving thrust on agricultural and social infrastructure etc. Hopefully, all these steps will bear positive fruits within a reasonable time and I feel we have already seen the worst and from here we can only look up and go.

NP : Three social security schemes, Pradhan Mantri Jeevan Jyoti Yojna, Pradhan Mantri Surakshya Yojna and Atal Pension Yojna were launched recently. Earlier Pradhan Mantri Jan Dhan Yojna [PMJDY] was launched. Some 15 crore bank accounts have been created under the scheme. What will be the impacts on the Financial Inclusion?

PKJ : These schemes will certainly have positive impact on financial inclusion. Now we can say that almost all the households of the country are linked to the formal financial system. The next level of challenge will be to make these accounts active. What is desirable is to generate and boost economic activity even at the grass root level; by way of Direct Benefit Transfers [DBT], by way of energising self-help groups [SHG] or by whatever new initiatives one could think of.

By ensuring that banking outlets are available at an accessible distance from all, either through a brick and mortar structure or a Banking Correspondent [BC] outlet our inclusion efforts will deepen. Even our new proposed Small and Payment banks will make a difference.

NP : What steps are being taken to streamline NPA reporting system?

PKJ : NPA management today is quite challenging for banks. Sometimes the big corporate lending becomes NPA due to the reasons beyond control, policy issues, etc. To ensure timely action in case of large NPAs, RBI has recently issued guidelines on early recognition of distressed assets. Under this banks report all their exposure (above Rs 5 crore) and also SMA accounts (Special mention accounts) to CRILC (Credit Repository of Information on Large Credits) maintained by RBI. Here, once an account is reported as SMA 2 an Auto Flash Report is sent to all other banks and banks then have to quickly form a Joint Lenders’ Forum (JLF for 100 cr. loans) to take action – Rectify or Restructure or Recover. Disincentives are also there for wilful defaulters and non-cooperative borrowers making their future borrowing more expensive. Disincentives have also been provided for auditors, advocates and valuers who provide incorrect opinions about borrowers and their assets leading to deterioration in the asset quality of banks. All this should lead to greater transparency and ensure closer monitoring. Loan fraud by the corporate sector is also being addressed by the banks separately.

Coming to the issue of technical write offs I can say that with this approach the account gets out of its books after being provided for instead of just lingering on. It helps to cleanse and bring in transparency to the Balance sheet. That does not prevent banks from making recovery efforts and any subsequent gain gets added to the profits. There is nothing wrong in it.

NP : Don’t you think restructuring of loans with retrospective effect has killed credit quality in banks?

PKJ : Restructuring of loans is sometimes required as the borrower could not generate income within the scheduled time due to several reasons. In business such problems do arise and it is the viability of the project whether short, medium or long term that counts. Hence need based restructuring of loans is a win- win situation both for banks and borrowers. It is a calculated business decision banks do take and it does not really kill the credit quality.

To take care of those cases which are not genuine and also to handle the increasing portfolio of restructured advances (stressed assets) by banks, RBI has recently issued instructions making debt restructuring norms more stringent and has said that loans recast after April 1, 2015 will need to be classified as NPAs.

NP : Corruption in lending issue also has cropped with the arrest of syndicate bank chairman recently by the CBI. RBI last week put in place a new framework to check loan frauds and plans to set up a Central Fraud Registry. Can you please elaborate on these measures?

PKJ : This is a case in isolation. One should not generalise the system. RBI has almost finalised the structure of Central Fraud Registry.It will enable quick sharing of information on entities found to be defrauding banks and it would work under the supervision of RBI. It will be a centralised searchable database, which can be accessed by banks.

Presently there is no single database which the lenders can access to get all the important details of previous frauds reported by banks. The creation of such database at RBI will make available more information to banks at the time of initiating a banking relationship, extension of credit facilities or at any time during the operation of an account.

NP : Bankers do have cut-throat competition for the same pie of market share. Often these competitions turn ugly, for which they pose as a divided house to outside world. How do you look at it?

PKJ : We do not see competition at market place to be something which is unwarranted but it should be healthy. Then only the best comes out. India is such a vast country, and there are unexplored potential particularly in the unbanked and under banked pockets, for which unauthorised bodies are flourishing. Essentially, our economy is too big a cake. It is desirable that Banks explore this untapped potential and move ahead instead of engaging in competition which is not value based. I think only then there will be real financial inclusion.

NP : Do you see a rise in hiring in the Banking and Financial sectors?

PKJ : Banks are in expansion mode. Existing banks are expanding their presence. New Private Sector banks that have received in-principle approval from RBI will soon have their presence. Small and Payment banks are also coming up. Besides, a host of new institutions have been announced by the Government in this year’s budget – like MUDRA bank, Bank Board Bureau etc. So there will be definitely large scale recruitments in the banking sector in the coming years. It is a good sign. In fact it has already started. In Odisha alone almost 900 bank branches have been opened in the last two years, and one can safely presume that nearly 3000 youth have found jobs. I am sure this is happening all over India. The prospects of growth of the sector will not only help in job creation in the core banking sector, it will also lead to the engagement of huge number of BC’s. Besides these direct engagements we expect a host of economic activities to begin which will indirectly create huge employment opportunities.

NP : The bank density is roughly 11,190 persons for all banks in Odisha and in case of commercial banks it is 12,284. The State stands midway at the all India level in this regard. While its position is better than some states, it lags behind many states like Kerala, Punjab, Himachal Pradesh, Haryana and Karnataka. The total number of bank branches in Odisha stood at 3782, while a smaller state like Kerala has 5675 branches. What is being done to remove this anomaly?

PKJ : We are comfortable in terms of APPBO (Average population per Bank Office) as compared to All India figure. However, banking density depends upon so any factors like economic activity, development index, entrepreneurial ability, infrastructure developments etc. Definitely there are some developed states in southern and western part of the country. Banks are gradually coming to the eastern part of the country as there is almost saturation in other parts. The State Government is very proactively pursuing with the banks for further branch expansion and we are also closely following up with the banks to open more and more branches in the State. In last two years we have succeeded in opening almost 900 branches of which almost one third are in unbanked rural locations.

Infrastructural constraints like Digital and Electricity connectivity are the main constraints now to open branches in the unbanked areas and they are being addressed seriously by the Government.
We are hopeful of further branch expansion in the State in next 2-3 years.

NP :The commercial banks, which account for more than 95% of the deposits, have not shed their conservative approach as far as advances to priority sectors like agriculture and MSME are concerned. What is being done for corrective measures?

PKJ : Odisha is behind the national average in both credit and deposits historically for various reasons. One major constraint for us has been the low penetration of banking infrastructure in the State. With the increase in penetration in recent times, savings of people are slowly getting in to the banking. This has ensured an increasing trend in deposits and I am sure by looking at the performance of the banks in unbanked pockets that this trend will continue.

I do not think Commercial banks are conservative towards priority sector lending. Almost 58% of total advances are in PSL and 30% in agriculture vis a vis the stipulation of 40% and 18% respectively. But in case we consider crop loan only the commercial banks are lagging behind the co-operative banks whose share is almost 65%. We need to look at this issue from an overall perspective, by looking at the ground level infrastructure, entrepreneurship, marketing support, recovery climate and so on.

NP : The State has a low Credit-Deposit [CD] ratio What is being done to improve this CD ratio?

PKJ : If you exclude the credit being sanctioned elsewhere but utilised in the State, the CDR is low. However, if you include outside credit, its 76% which is at par with national average. Odisha has a lot of potential – be it agriculture or MSME or Large Industries. But a lot that needs to be done is from demand side – for improving credit to these sectors.

If we take the agricultural sector – we need to do a lot to create demand – like improving irrigation, storage facilities marketing support, processing; labour issues, diversified cropping pattern, lack of technology transfer from lab-to-land and so many issues. Without this we are saddled with small ticket loans which really do not take CD ratio ahead.

Similarly there are issues involving the MSME sector and large Industries as well.

Recovery Climate in the State has also remained as a major constraint for banks in State. The NPA at 8.97% is quite high as compared to all India level of 4-5%. I am hopeful that the situation will improve.

NP : Odisha government has set a timeline of 5 years – March 31, 2019 — to work on a mission mode to cover all the unbanked GPs. Is it workable?

PKJ : It appears to be little ambitious as the State is having 4535 branches so far and what we are aiming at is to add another 4597 brick and mortar structures. But unless we set stiff targets we do not stretch and remain where we are. A lot of ground work has been done; all the stakeholders are committed to this and are working in close coordination to ensure that all infrastructural issues like digital connectivity, three phase electricity supply are sorted out. In fact during the last year alone 118 branches have been opened up in unbanked GP’s. Performance of most of the branches in the unbanked pockets also indicates that they are viable in a very short span of time which is a very encouraging sign. There may be a spill over but it is certainly workable.

NP :What steps are being taken to step up credit to the primary sector in Odisha?

PKJ :To finance the agriculture sector there is a system in place for which the base is an Annual Credit Plan. The envisaged targets percolate to the district as well as block level. The performance is also monitored on a regular basis during the structured meetings including the SLBC meetings. Now that private banks have expanded their reach they are also given targets. To say that private sector banks and public sector banks hardly extend loan to the farm sector may not be appropriate. The share of Cooperative sector is at 90% only in the crop loan segment where they have considerable reach.

Over and above this there are policies in place making it mandatory for banks to have 40% credit to the Priority Sector and they have to necessarily finance 18% to the farm sector. Most of the banks have achieved this. But for a state like Odisha we need to do more than what is mandated and we have to work towards it by creating the enabling infrastructure and close monitoring of the achievements of the banks.

NP : What are the changes you expect in banking scenario in the near future? What are the future plans being considered by the Government for integrating banks into the development process?

PKJ : Banking sector has always remained as an integral part of development. Today financial Inclusion is one of our thrust areas. After the success of PMJDY, banks are now having the task of mass coverage through pension and insurance schemes. This process will ensure the spread and coverage of banking services. This will also bring out the best from the banks as the demand for services will grow.

The whole scenario is going to be quite challenging. Government can always leverage on the banking infrastructure for any developmental measure and banks will align their services to suit that. The immediate thing that comes to my mind is the Gas subsidy and other forms of DBT. They can always work as partners to progress.