The pandemic has paralysed our lives. More than that, it has a devastating effect on our economy. We will have more people moving to below-poverty-line. In this backdrop the policy makers have an ambitious but conservative approach in the stimulus program it has announced. There is very little of placing money in the hands of the poor in the form of direct benefit transfer to the lower end of income strata. The irony of the situation is that the stimulus program is designed to encourage consumption at the grassroots level. Instead there is a program which is expected to push credit through the banking system to the small and micro businesses, and the farmers. There is a recognition that these are the pillars of the economy and a total of Rs. 5.5 lac crores of credit to be provided to the above two sectors, which in some parts is guaranteed by the government. However, insufficient or otherwise the program may be, it is now critical that our weak public sector banking puts upon honest effort to implement the program effectively. Here is the need for a fresh approach on the part of the policy makers and the regulators to intervene and create a conducive environment for the banking system.
The experience indicates that the government should support and monitor the public as well as the private sector banking in the execution of the program. Let us study how well some of the earlier programs have been executed. The Jandhan Program was well delivered, but with gaping anomalies. Public sector banking did almost 95% of the program and several duplicate or multiple accounts were opened. The stated objectives were to ensure that the banking sector would connect with the financial outsiders and after the account relationship is established encourage the account holders to borrow from the banking system and also eventually distribute third party products including insurance for health and lives. There is no record available to the efficacy of the program. At its best it has enabled the direct transfers of subsidies. Then the execution of demonetisation by the banking system had some blatant gaps and the intended outcome did not address the menace of unaccounted or ‘black money’ in the economy. The worst one was the Fasal Bima Yojana (PMFBY) where the execution of crop insurance program was mishandled to the extent that the private sector insurance companies are gradually withdrawing from the program. The farmers dues are unsettled, for long years as the centre and the state governments have not released funds which then the insurance companies will transfer to the farmers. The underlying premise with the governments, both the centre and the states that the insurance companies will make money from the program at the cost of the system is a false one. And to top up the problem, there are innumerable agencies involved to complicate the weather and yield indicators.
If the stimulus program recognises the importance of credit flow, it should empower the public sector banking and encourage the private sector banking companies to participate without red tapes around release of guaranteed funds when defaults happen. This requires a clear, unconditional and well drafted contractual process and respecting the evidence and process conducted by the banking system. The processes should be simplified and unambiguous for the borrowers, the banks and the government. There is also a need to have some agency to resolve issues faster and ensure smooth liability payment of government.
The government should also provide support to the banks, particularly public sector banks to strengthen their digitalisation programs, both in the area of lending and subsequent monitoring and recovery where required. The public sector perhaps have made little effort as compared with the NBFCs and private sector banks in getting closer to customers with the exception of SBI and perhaps one or two more public sector banking companies have inadequate understanding of agriculture and small business lending. The public sector banks have consistently failed to achieve the policy targets on priority sector lending. For those who have strived to perform in this area, the quality of their portfolio is way different from those of private sector banks.
In the consolidation or merger process of the public sector banks, there is a further challenge. They need to integrate the technology within the group or amalgamated entity as well as integration of process and people. Their bandwidth is presently preoccupied with it and will have additional challenges under the stimulus program and evolving work from home conditions.
Finally, one recognises that there is a need for a monitoring agency to continuously oversee the program, its efficacy and attempt removal of obstacles in the way of effective execution of the program. There is underlying hope and trust that this time we may set it right.
The writer is Managing Partner, Ashvin Parekh Advisory Services LLP and Retd. Chairman of the Pension Trust.
Views are personal.
e-mail: editor@thebillionpress.org
