It is very important to understand the current banking industry’s way of working. Major banks in the country are under the ownership of the Government post nationalisation. These are public sector Banks having highest exposure to lending and sourcing. Such Public Sector Banks are around 28 and some financial institutions too which are all placed in a ring of fighting with each other to grab the business. Then there are some private and foreign banks giving tough competition to the PSBs. Like this in a basket of around Rs. 90-100 lac crores there are approx. 60 players who source money by way of deposits and lend to the entrepreneurs.
These 28 PSBs fighting with each other to grab more and more business just to prove oneself better than other. There is severe competition due to continuous flow of money in their kitty by way deposits from public and government. With huge infrastructure, large army of bankers, luxurious and respectable life, these bankers carry huge money power all at the cost of the public money. Although they are trustees of the public and government money but this is only theoretical principle nothing really visible in practice. The fierce competition to prove one up and move further in the career has pushed the banks in bad lending. These bankers lent money left right and centre without proper analysis and viability checking. Now suddenly all fall down. One of the key reason is that they were not expert enough to lend like this into all sectors. Out of large number of borrowers some about 5-10% defaulted. These bankers were presuming that they are expert in lending to every sector as they understand the sector better than any body else.
Had there been skill development sector wise and the focus approach, the competition would have been very healthy and such huge loss of billions of rupees could have been avoided. Since all the banks are government owned the basic structure need to be modified. Lending and sourcing of funds should be segregated. After all the banks are trustee of public money. Even lending can be further divided into two segments i.e. a) Sanctioning & monitoring of loans; and b) disbursement of loans. This way the banks can play active role in sourcing of funds by way of accepting deposits, operating the banking accounts and also in disbursement of funds. The other segment of sanctioning of loans and monitoring may be handled by sector specific arms of the government who will have better focus and knowledge of specific sector.
The fund allotment to various sectors can be monitored by government under the guidance of experts from various sectors, Government policies, Planning and priorities. This way the banking scenario can not only be changed drastically but we can have strong and vibrant banking system in the country.