Bank is an intermediary between those who have surplus money and those in need of money for their economic activities. In India, banks are recognized under Banking Regulation Act 1949, Reserve Bank of India Act 1934 and Companies Act 1956. This recognition makes people to have confidence on banks to save their hard earned money. Similarly people are willing to borrow money from institutions as these loans are hassle-free in the sense that banks rephase the repayment schedule in case of genuine difficulties to the borrowers.
Banks are privileged borrowers as they mobilise deposits at their doorsteps. Demand deposits (current accounts and saving deposits) and time deposits (fixed and recurring deposits) are demand and time liabilities for bankers. For those deposits (except current accounts) bankers pay interest. From out of the deposits, a portion is kept as cash reserve and statutory reserve. Rest is given as loans by the bankers for productive activities. These loans are assets for bankers as they earn interest. In the process, bankers have both interest receipts and interest payments. The difference between the two constitutes Net Interest Margin (profit in common parlance). The economic viability of a bank depends much on net interest margin. Hence bankers are inclined to make more advances through fast recycling of funds at their disposal. This is possible only when loan assets are properly monitored by bankers.
In a developing country like India, bankers have social responsibilities. Such responsibilities include extending banking facilities in remote rural areas where the service is not cost effective, lending to the deprived sections of the society at a rate lower than the cost of funds, and earmarking a portion of the total credit in favour of priority sector where the return is moderate. To be precise, social responsibilities act as a hurdle to improve the profitability of the bank. In other words, one has a bearing on the other. Balancing these two is the need of the hour.
Socially Responsible Banking
Social responsibilities are common to all business houses. Banks are not an exception. By interacting with the cross-section of the society and field level bankers, the author could identify the ways and means to make bankers socially responsible.
They are listed below
- It is not sufficient to provide access to banking to urban population only. Rural population requires exposure very much as rural India is vibrating today due to emerging economic endeavours. Wherever feasible, banks have to offer brick and mortor outlets to create confidence in the minds of prospective rural customers. Unviable rural pockets should be given banking exposure through continuous servicing by business correspondents (BCs). These BCs are the ambassadors of banks and their involvement paves way for financial inclusion – a society friendly measure.
- Capital is a scare factor in India. Pooling of small and scattered savings facilitates capital formation. Indian banks withstood to the external pressures due to the saving culture of the people. Now there is a slight change in the saving attitude of the people. Then, expenditure was the result of income minus savings. Now the quantum of savings is the resultant factor of income minus expenditure. This trend is not healthy and for the reversal to the earlier attitude, banks have to motivate the people to save more by offering hassle-free banking facilities and remunerative rate of return to offset the impact of inflation. Otherwise, savings may move towards unproductive endeavours or ponzi schemes.
- India needs promotion of productivity. Though the contribution of the corporate sector in this regard is unquestionable, relegating priority sector is unwise. Priority sector consists of agriculture, allied activities of agriculture, micro, small and medium enterprises, village industries, self-employed, professionals, exports and the like. The target of priority sector (40% of the net bank credit) should be achieved not only at the bank level but also at the branch level of facilitate optimum utilization of locally available resources, generation of employment opportunities, promotion of productivity and a rise in the standard of living of the community.
- As bankers deal in public money, their primary duty is to protect the funds deployed in very many ventures. Their experience says whenever loans are given to group of people engaged in a similar type of venture, recovery may not be a problem due to peer group pressure. In short, banks prefer to lend to Self-Help Groups (SHGs). No doubt, a wise idea. But majority of these SHGs are formed through the initiative of Non-Governmental Organizations (NGOs). Because of the intermediation by NGOs, members of SHGs are not enjoying the funds at the rate at which bankers are lending. This problem can be mitigated when SHGs are formed by bankers themselves. Though it is an additional responsibility to bankers, this has to be assumed by them to pass on concessional interest benefit to ultimate borrowers viz., members of SHGs.
- People love gold jewellery and they invest in it periodically. At times of emergency, people especially those living below the poverty line avail the required financial support by pledging the jewels with banks. It is a win-win situation in the sense that both the segments are happy as borrowers are assured of institutional support and the banker has security behind lending. The author is of the opinion that this service has to be given by all banks on all days to the needy people. Extending agricultural jewel loans for non-agriculturists should be stopped forthwith. Curtailing the quantum of jewel loans by banks indirectly assist the money lenders to flourish.
- There are two areas where the awareness level of people is not encouraging in India. One is insurance and the other one is mutual funds. Insurance is a risk-mitigation tool and mutual funds attract investments towards corporate sector. ‘Insurance’ as a social welfare measure, and ‘corporate investments’ for the nation’s welfare, are equally important. By marketing insurance policies and distributing MF units, bankers are rendering invaluable service to the society. Unfortunately, both the services are urban biased in India. These services are to be extended to rural India by appointing exclusive personnel to disseminate information concerning life cover, health cover and investment in corporate securities via mutual funds.
- Customer is one who makes it a custom to transact with a particular banker. Building customer base is a daunting task to a banker as all those visiting the bank branch should go back with satisfaction with the mind to approach the same banker whenever they require banking services. Qualitative customer service results in customer satisfaction. Once a satisfied customer need not necessarily be a satisfied customer for ever. At times, they may have some grudges. Such grudges can be identified only by listening to them. Periodical customers’ meets give an opportunity to them to vent their feelings. But in majority of the bank branches, customers are unaware of such meets and wherever these meets are held they are conducted as a ritual. Customers’ meets are to be organized at regular intervals in all the branches with the implicit intention of collating their views and expectations to retain them.
- Indian banking industry is expanding by leaps and bounds. The industry requires right personnel to undertake multifarious responsibilities to satisfy a variety of clientele. Banks have their own recruiting mechanisms. The Institute of Banking Personnel Selection is acting as a nodal agency for the recruitment of people for the major banks in India. The State Bank of India and private sector banks have their own recruitment mechanism. Whatever be the recruitment procedure, all banks have to imbibe the required skill as they are untrained at the time of selection. Banks can overcome this difficulty of absorbing those students pursuing commerce and management programmes at the graduate/post-graduate level as trainees for a continuous period of two months. By undertaking this social responsibility, banks are not only sharpening the skills of students but also shaping the students to take up the assignment in banks from day one of their assumption of office.
Commercially Viable Banking
Assumption of social responsibilities should never be construed as a ‘pull down’ factor of economic viability. In other words, by undertaking social responsibilities banks can protect themselves as saviour in the minds of common people. This in turn boosts the economic viability of banks. For enhancing the economic viability, the author has identified the following ways in consultation with field level bankers:
- Bankers have to mobilise more ‘low cost’ funds consisting of saving deposits and current accounts. By mobilising more low cost funds, banks can improve the net interest margin. Rural segments have potential for mopping up saving deposits and business people are the source of current accounts.
- Interest is the major source of income for bankers. The quantum of this income can be increased by lending more. Hence bankers are liberal in lending. Liberal lending fetches more interest income only when the quality of loan assets is good. In order to ensure quality of loan assets bankers have to take up pre-sanction appraisal and post-sanction monitoring very seriously. Enquiries, past-performance and documents verification make pre-sanction appraisal a near perfection. Closely observing the account operation by the borrower, adherence of repayment schedule, and frequent visits to the borrowers venture are the ways through which a banker can make post-sanction monitoring a scientific one. Accumulation of non-performing assets is a threat to bankers. Hence bankers have to take all out efforts to make it minimum, if not zero.
- Bankers’ business is the composition of both fund based and non-fund based. Borrowing (deposit taking) and lending (granting loans and advances) constitute fund based business for a banker. Non-fund based business is otherwise known as fee based business. For the services rendered (collection of instruments, giving guarantee, issuing letters of credit, providing safety locker facilities and the like), bankers charge. Of late, bankers earn considerably through fee based business. As the scope is good, bankers have to explore these possibilities to raise their earning potentials.
- Rural India is transforming today. Government policies and the necessity are aiming at exploring rural resources for the promotion of productivity. Banks play a major role in rural transformation. Decades back people use to say rural banking is a nonviable proposition. But today, it is not the reality. News reports confirm that the rural branches are making profits in the first year of their operation. When the makers of fast moving consumer goods like Hindustan Unilever Limited, Colgate-Palmolive and Dabur India to penetrate into rural markets, why not bankers? By adopting customer-friendly approach and by offering products/services to their requirement, rural branches can be made as viable business points.
- Bankers never consider themselves as mere sellers. They are the marketers. Marketers journey starts from the need assessment of buyers and ends with the provision of satisfactory after-sales service. A successful banker can convert a visitor into a customer. A satisfied customer is an ambassador for banking business. By adopting a customer-centric approach, bankers can make their business as a viable one.
- Government intervention is fair to ensure smooth flow of credit to deprived sectors provided those sectors contribute for the balanced regional development of the nation. But political interference should never be encouraged by bankers at all levels.
To conclude, ‘socially responsible banking’ and ‘economically viable banking’ are not water tight compartments. They are complementary and supplementary to one another. In short, social responsibilities cannot be undertaken by a banker in the absence of economic viability. Similarly economic viability cannot be improved by ignoring social responsibilities.
Research Advisor, P. K. R. Arts College for Women,
Gobichettipalayam 638476, Tamil Nadu