Can Banks Survive Fifty Years ?

Banking has been an integral part of life. As empires expanded, the concept of ‘Collection Centres’ evolved to collect taxes and distribute wealth. Coins of precious gold and silver were issued. The temples were the earliest banks as the same were headed by Priests, whom king and the commoner trusted alike as embodiment of honesty, integrity, trust and truthfulness. Lack of steel safes and residential security forced people to keep coins in the temple basements. At the instructions of coin owners, the priests started circulating coins to the needy people on loan and collected back with interest in the shape of larger numbers of coins. This saga of operations through a third party trust gave birth to banking. 

Initially the banking was very fragile. The kings and the mighty frequently took away the savings of people from priests to utilise in aspirational wars and ostentatious constructions of forts and rarely returned the funds back. This led to search for a legal umbrella to fix answerability and sanctity to banking.

Banks came and vanished from the Roman Empire in Europe. The earliest functional legal edifice to envelope the banking system in its protection and work as a transparent financial watchdog, shaped in 1907 with the setting up of the Federal Reserve in the USA. Then the US was the richest nation holding 75% of the world's gold. 

The Federal Reserve established deposit Insurance to instil confidence against bank failures from frequent dacoities which emptied banks to the brink of failure. With World War 2, the busy US factories grew in size and consumed large scale of finance from banks to meet enhanced demands. Loans were repaid with interest as per sanction terms stabilising the system of recycling of funds. This reverberated into a big blast of growth for the banks which became trusted destination points for depositors and borrowers across the world. The banking industry has not looked back thereafter.

 A world without banks is inconceivable because they are so visible. A walk down the majestic Mainzer Landstrasse, the banking street of Frankfurt, with imposing tall buildings carrying name plates of 136 banks or a stride around the BKC and Nariman Point banking lanes of Mumbai gives an impression of omnipresence of banks. Their elated poise in towers reflects aura and invincibility. Many aspiring economists dream of working as  bankers.

Ironically, the reality is very distant from the perception of reflected grand stature of Banks worldwide.  Banks today are more fragile than ever before slipping on a quarter to quarter basis after the implementation of Basel III accord and imposition of 90 day norm for asset classification.  The banks are not able to maintain a pure equity  as a replacement fund for risk weighted loans. Similarly if the loan is not serviced by the borrower in 90 days, banks are unable to write-off a portion of loan due to low profits in the P&L account towards provision.

State owned banks have been booking losses quarter on quarter and writing off the same by debiting their share premium account. Most of the Indian banks in the private and public sector have failed in their business model. Due to fear of default, a policy procrastination has resulted in acute escalation of cost of operations as overheads are heading northwards. Bankers are content to subsist on 3.35% interest income out of reverse repo operations by investing funds in RBI rather than lending to the public.

Government has permitted 100% Foreign Direct Investment in NBFC sector as compared to 74% in Banks, resulting in neutralising the advantage of cheaper liquidity of CASA enjoyed by banks. 

Pensioners are shifting funds to high yielding NBFC products, stock market, gold and real estate. High inflation has confirmed the fears of zero or negative interest income on deposits as a reality, leaving senior citizens wondering, the utility of banks in their lives.

The lucrative business of remittances has been taken away by the payment intermediaries like Paytm and Google Pay, leaving a big hole on the P&L of banks under the non-interest income as well. Leading NBFCs are ahead of banks in channel financing and bill discounting on domestic and export front on e-trading platforms disbursing loans within minutes of uploading the invoice by Corporates. 

A cheaper alternative white label ATM market owned by the private sector, has brought down the Bank income from ATMs and made their expansion unviable. Number of ATMs is coming down.

Rating Agencies have replaced banks in ascertaining net worth of borrowers. Banks depend on external ratings for all loans above Rs.5 crore, ignoring their internal credit rating system which is reduced to a mere pricing tool for loans. Overt use of CRISIL rating by banks has chased out cash spinning MSME who are flocking to NBFCs generating remunerative non fund based income as well.

Grey market price of single share of payment intermediary Paytm is Rs.22000, SBI Rs.430 and Blue chips HDFC, Axis and ICICI around Rs.3000, revealing disenchantment with sluggish performance and bleak long term viability of banks.

The colossus write-offs of impaired assets has been passed on to depositors through low interest rates who cross subsidise bank losses by paying charges for ledger folios, cash counting, cheque books, ATM transactions  and account statements. 

Banks incentivise Recovery Agents abdicating laws of persuasive debt monitoring. People wonder whether bankers are only competent to lend. Banks are mobilising deposit and loan accounts through agents and do co-lending where loan is given by a bank in alliance with an external agency that performs due-diligence and follow up on a profit sharing basis. The decimated role of bankers in various facets of banking is of their own making.

On top of the above surrender of banking activities, the worst is high susceptibility to frauds due to callousness, impacting  safety and morale of stakeholders. Bankers are clueless in controlling safety standards of their deliverables which fail to safeguard and mitigate day-to-day operational risks. The hastily innovated internet banking continues to heap miseries from hackers. The banks have become a soft target for fraudsters and with deposit insurance cover being low, are not the first priority for investing large savings.

Given the scenario, banking is losing sheen and yielding space to non banking players. It appears headed towards catastrophe. Agile alternate players are targeting its CASA by selling the concept of zero interest pre-funded wallets for online payments. Fintech agencies have also commenced paying loan EMIs, LIC premium, utility bills, children fee and credit cards through wallets which do not carry any SLR or CRR compliances and costs. Once further CASA is lost, Banks will lose deep pockets forfeiting lending margins.

It is time to stand up and vindicate the trust by stretching fully  to save the public from clutches of smart, risky and unsafe competition. Let Bankers empathise, strategise, arise & awake. Let the operational efficiencies create pull values to bring customers back laughing to the bank and make the towers taller. Otherwise, the skyscrapers across the world would become banking museums in the next fifty years.

“People no longer accept the things they can’t change, they change the things they can’t accept.”

(Mr. Hargovind Sachdev has over 39 years of banking experience having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe.)