A wish list for Indian banks
2018 will be a big year for Indian banks with a resolution to the bad loan problem finally in sight as well as a big bang recapitalization programme for state-owned lenders. The start of what will likely be an eventful year is a good time to introspect and set goals to ensure they don’t go back to business as usual. Here is a five-point wish list for Indian banks in 2018.
Be more customer-friendly: While big borrowers might well be the source of all their troubles, in many cases Indian banks treat the small customer shabbily. This takes many forms as we have seen in the last year.
Some of the biggest banks have hit unsuspecting customers with high penalties for not maintaining minimum account balances. In another instance , officials of ICICI Bank have been accused of misselling insurance products as fixed deposits to illiterate customers. Selling add-on products without explicit customer consent (consumers have to opt out rather than opt in) is a popular cross-selling technique. As bancassurance has become a big contributor to profits, unscrupulous bank officials loaded with unrealistic targets are putting customers in the way of financial harm.
While cross-selling is not a crime, the manner in which it is being done is unjust to the customer. Then there is the issue of floating rate loans, especially home loans. In a down cycle, rates never seem to reduce as much as the Reserve Bank of India’s policy rate cuts. Former RBI deputy governor K.C. Chakrabarty has described the floating rate regime as “non-transparent and discriminatory.” Indian banks would do well by starting to treat the small customers well.
Be more open in embracing technology and fintech companies: The beginning of 2017 saw commercial banks trying to protect their turf against non-bank mobile wallet and payment companies by blocking transactions citing security concerns. In payments, fintech companies have stolen a march. Indeed, Axis Bank’s acquisition of FreeCharge was a clear sign that traditional banks could no longer ignore the new-age companies. The next area where fintech will expand is loans, traditionally the home turf of banks. Lenders such as State Bank of India, Yes Bank and Kotak Mahindra Bank have started to incubate fintech firms in the hope of technology solutions. They should be quick to implement these as well.
Take cyber security more seriously: The flip side of increasing technology is cyber fraud. In 2015-16, there were 16,468 cybercrimes related to ATM, debit card, credit card and net banking fraud, government data showed in response to a Parliament question.
The following fiscal saw a malware injection lead to a breach of 3.2 million debit cards, the largest such incident reported so far. In July 2016, Union Bank of India fell prey to hacking and lost $171 million, but luckily got it back because the hackers made a silly mistake.
In its June Financial Stability Report, RBI has warned that “concerns arising from frauds and cyber-attacks remain elevated with the recent global ransomware attacks.” In an increasingly interconnected India, where everything is linked with Aadhaar, which comes with its own set of issues, banks should be more vigilant in protecting customers from cyber risks.
Stop trying to cover up the scope of the NPA problem: In recent quarters, banks have been asked to report so-called divergences, the difference between Reserve Bank of India’s assessment of bad loans and their own. Big private sector lenders have had to reclassify their bad loans. In some cases, the reclassification has been four times as large as the bad loans originally reported as a result of which provisioning was lower and profits were inflated to the extent of 44%.
Banks have defended themselves by saying that RBI has been shifting goal posts, a charge rebutted by the central bank. While trying to avoid provisioning (which helps bump up net profit and pleases shareholders) seems to be a key driving force, it will be in the best interest of all if banks were to come clean on the actual levels of bad loans in their books.
Move decisively on bad loan resolution: It required RBI’s nudge for banks to finally start taking errant borrowers to bankruptcy court. Banks were hesitant to take sacrifices on their loans fearing higher provisioning and being pulled up by vigilance agencies years later. The new bankruptcy framework at least solves the latter problem. Only by cleaning up balance sheets will banks be able to kick-start credit growth and get back to regular business.
A corollary is that banks should start thinking in terms of stronger credit appraisal frameworks and be more open to sharing information, especially on errant borrowers. This will ensure that the bad loan problem, which has cropped up thrice over the past three decades, is nipped in the bud.
Ravi Krishnan is assistant managing editor, Mint.