CHALLENGES BEFORE THE INDIAN BANKING SECTOR
(Talk delivered at BECON on 16.01.2002, Calcutta)
N. Vittal, Central Vigilance Commissioner
As we gather here in the Banking Economists Conference to take a look at the Indian
banking sector, I wish you all a very Happy New Year! A new year is a time for looking
forward and that too with the spirit of hope. I would therefore look at the Indian banking
scene in that spirit. In fact, the Financial Express in December 2001 came with a survey of
the India’s best banks and pointed out very clearly that monetary and credit policy, macro
economic policy, foreign investment policy and overall market environment are all exerting
pressure on the bank’s margin. CVC must expect all banks to survive this pressure. Hence,
policy should focus on dealing with potential problems.
2 One of the problems generally raised about the public sector banks is the role of the
CVC and whether CVC comes in the way of effective decision making in the banks. In fact,
after taking over as the CVC, one of the first steps I did within three months of my taking
over was to bring out a Separate Chapter in the Vigilance Manual for the Banks. I think, this
Separate Chapter had, at least, raised the requisite confidence in the minds of the banking
community that so long as they follow prudential banking norms, they have nothing to fear
from vigilance. In fact, to give double assurance to the public sector bank employees, we
also created, under the chairmanship of a retired Deputy Governor of the Reserve Bank, the
Advisory Board on Bank Frauds. The performance of the Board has, at least, shown that
even though legally the CBI is not obliged to go by any directions given by any agency so far
as investigation of criminal cases are concerned, they have respected the advice of the
Advisory Board. In the year 1999, 14 cases were referred to of which in 7 cases the
Advisory Board said that investigation need not be carried out and this was complied with
the CBI.
3 Another major area is the culture of blackmail which prevailed in many public sector
undertakings. The order of the CVC of 29th June 1999 that no action to be taken on
anonymous / pseudonymous petition is a measure which would give confidence to the
honest people in the banking sector. I also get complaints sometime that in spite of this
order, anonymous petitions are being inquired into. If this is so, it is totally against the CVC
guidelines and, at least, the banks concerned should not blame the CVC for honest officers
being harassed on the basis of the inquiry started by the anonymous complaints. In fact, the
Chief Vigilance Officers must be courageous enough to bring to the notice of the CMDs in
case there is insistence on inquiring into anonymous / pseudonymous petitions.
4 The vigilance function should also be looked upon not from a negative point of view
but from a positive point of view. If eternal vigilance is the price of liberty, eternal alertness is
the price of vigilance. Eternal alertness can make the banks ensure that they do not lose
financially. After all, many a time the frauds are committed by insiders. I have heard a
banker say that they are more worried about the dedicated worker than the sincere worker.
The sincere bank worker comes to the office at 9 o’clock, works the whole day and goes
back whereas the dedicated worker not only works for long hours, he does not take leave
also. Only when he falls sick or he is not able to come to the office, some of the frauds
which he might have been committing over the years come to light. Even in the era of
information technology, organisations like KPMG who study such frauds point out that the
majority of the frauds are committed by insiders. Probably because of the nature of the
work, a majority of this fraud is also not publicised.
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5 Sometime back the CVC made a study about the vigilance cases which come to
CVC from the banking sector, the findings of this are interesting.
The present study further shows that the psychosis if it exists at all is without basis;
first, only 18.47% of the officers appear to come with the Commission’s jurisdiction
(44,525 out of 2,41,120 officers). The number of individuals whose cases were
reported during 1999, works out to paltry 2.08%. Out of this figure, the number of
officers who may reasonably be expected to end up with a major penalty would be
only about 251 or about .58% of the statistical universe. This is surely too small a
figure for creating any psychosis.
Secondly, the Commission tendered advice in only those cases where the Banks
concerned were themselves convinced that lapses had occurred. The Commission’s
role was limited to tendering advice.
Finally, there was an overall agreement to the extent of 93% between the
Commission and the Banks on the further course of action to be taken. 134 cases
were referred back to the Commission for reconsideration; the Commission agreed
to the Bank’s point of view in 60% of these cases. After such reconsideration
proposals, there appeared to be 97% agreement between the Bank and the
Commission as to the future course of action to be adopted.
These facts do not appear to suggest that the Commission has been over-zealous in
the performance of its functions or interfered in the commercial decision making of
banks. It is, however, concerned, as the Banks themselves should be, over the lack
of professional skills reflected in the cases that were referred to it.
6 It may thus be seen so far as the CVC and the banks are concerned, the CVC
should be looked upon not as an organisation that discourages decision making. In fact, we
appreciate the sensitive nature of the work being done by the banks and therefore we came
up with the separate chapter on the banks. We have further created assurance by setting
up of the Advisory Board on Banks Frauds. We have also ensured that the honest officers
do not become victim of blackmail.
7 Looking to the Indian banking industry as a whole, the main problem is that of non-
performing assets. I have been arguing that non-performing assets can be effectively
brought down if there is greater transparency in the system. I hope, on the suggestions
made by the CVC in late 1998, the practice of the banks at least exchanging information
about wilful defaulters of more than Rs.25 lakh is in practice. In fact, there is need for
amending the Banking Secrecy Act and publish the names of the defaulters just as CVC
published the names of the charged officers in the web site. Such a transparency will ensure
that unscrupulous and influential people do not exploit out banking system.
8 The same logic would also apply to the Sick Industries Companies Act. It is
originally the Act which was drawn on the basis of an experience in Germany where when a
company loses its capital, it becomes the property of that creditors. In our country, on the
other hand, the SICA in the initial years operated in such a way that the industries were
afraid of being a reference made to the BIFR. Subsequently, they have discovered in the
BIFR that there is a convenient alibi available for getting away with their responsibility. The
Finance Minister announced in the Budget Speech of 2001-2002 that the SICA will be
abolished but apparently no action has been taken. There is no reason why this should not
be done without further delay.
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9 That brings me to the need for strengthening the legal framework of our banking
system like we should be able to have on the model of the United States laws relating to
four closure and Chapter 11 proceedings so that the banks are able to perform effectively.
Unfortunately, our banking system especially the public sector are the legacy of the
vestitudes of the policies followed in the past and it is high time that we come out of this
legacy by making our banks operate in conditions similar to the global environment. In fact,
the observations made by the Shri Krishnamurthy, Chairman, State Bank of India in the
Indian Banks’ Survey of Financial Express of December 2001 is worth noting.
10 Shri Krishnamurthy says: “Who created this operating environment. First, you had
loan melas then waivers. Then we are chased to our non-performing assets. You ask banks
to be all things to all people and then you see that there are NPAs and that recapitalisation
is bad. Let me tell you that recapitalisation is a price that we have to pay for what we did all
along”.
11 While NPAs may be one aspect of the banking scene today, equally important is the
role which the banks will play in the years to come. If more and more multinational banks
are coming and operating in India, what will happen to our Indian banks? It is interesting
that in the Financial Express survey of 2001, among the top ten banks listed in terms of
performance, there is only one public sector bank namely, the Corporation Bank at rank 9.
Other ranks are CITI Bank, IDBI Bank Ltd., Dovish Bank, Hong Kong and Shanghai Banking
Corporation Ltd., Standard Chartered Bank, Bank of Tokyo Mitsubishi Ltd., Development
Bank of Singapore Ltd., HDFC Bank Ltd.
12 With the greater liberalisation of the banking sector, how are our banks going to
survive? One approach I find is some of the financial institutions have started talking about
universal banking. One of the important features of the last year was the VRS which has
tried to reduce the wage bill. Universal banking on the one hand to cover a wider range of
risks and at the same time reducing the wage bill may be two strategic step which probably
other banks also would consider. But then the question arises about the role of the size of a
bank in the emerging global scene. If greater liberalisation in the financial sector means that
we will see large banks, particularly multinational banks come and operate in a more
aggressive way in our country, what is going to be the future of the banks of Indian origin?
Perhaps strategic thinking among the Indian banks themselves under the auspices of Indian
Banks’ Association may be required so that at least for the next three to five years the Indian
banks have a broad strategy which they can adopt and survive in the new environment. In
this context, I must complement the banks for taking seriously the CVC’s directive to
computerise at least 70% of their business. Today, I understand 74% of the business of all
the public sector banks has been computerised. We should now aim for not branch wise but
bank wide computerisation. Bank wide computerisation with the capacity to focus on the
customer and develop a culture of customer focus services mindset is perhaps needed in
today’s context for facing the future.
13 In this context, I would also invite your attention to the need for thinking originally and
what the authors Sumantra Ghoshal, Gita Piramal and Christopher Bartlett say in their book
‘Managing Radical Change’ is worth recalling:
14 Sumantra Ghoshal, Gita Piramal and Christopher Bartlett in their book have shown
the way of about what Indian companies must do to become world class. We are today in a
state of “satisfactory underperformance”. What we need is radical change. To borrow the
words of the authors, the problem of Indian industry “lies in a corporate disease called
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satisfactory underperformance. It is a pervasive disease – we have confronted it in
companies all over the world. It is a disease that is very easy to catch – indeed, finding a
way to avoid it is the difficult part”.
15 The dynamics of satisfactory underperformance is also traced by the authors.
By luck, chance or foresight and courage, a company develops an effective and successful
business strategy. The strategy fits the market demands, and matches the company’s
strengths. As a result, the company becomes highly competitive, with growth and profits as
the ensuing rewards.
With growth and profits come recognition and celebration. Top managers of the company
start seeing their face on the covers of business journals. The Harvard Business School
writes a case on their success. Soon they start believing all that is being said of them – they
are the best. It is their brilliance that caused it all. They go on the lecture circuit to tell others
how they did it, despite great odds.
With growth comes the perceived need for better control. After all, if they did it all, then they
must continue to do it all, to protect the success and build on it. As the company becomes
bigger, to do it all they need support to collect all the information, to bring all the important
choices and decisions to them. So, they hire layers of staff, as instruments to leverage their
own brilliance in the expanded organisation. The staff joins the business press in telling
them how good they are, and it all becomes a positive reinforcement cycle.
Being the best gives these managers the right to be arrogant, not only with their
subordinates, but also with customers and suppliers: ‘Why make a fuss if some little thing
goes wrong? Don’t you understand what a privilege you have, dealing with the best?’
External arrogance and a focus on internal control soon stifle all initiative and enthusiasm at
the operating levels of the company. Those who can manage the politics progress, those
who side with customers or employees or raise uncomfortable questions are seen as
obstacles and are soon sidelined or, better still, pushed overboard. Compliance and fear
take over from enthusiasm and passion. Gradually the company slips first into satisfactory
underperformance and, finally, into acute crisis. (Page 8-9)
16 I wonder whether such free thinking has been done by our banks either at the
individual level or even collectively under the auspices of the IBA so that new ideas are
explored and new strategies worked out.
17 Ultimately, in the emerging environment two aspects become important. One is the
aspect of better corporate governance and the second is innovativeness and developing
competitive edge through imagination. So far as better corporate governance is concerned,
what is needed is ensuring that there is transparency in the system of decision making and
this transparency in would lead to accountability, and accountability will be to the
shareholders and stakeholders. The basic for good corporate governance would be to see
that the decision making is ethical. In this context, I would invite attention to the book, ‘The
Power of Ethical Management’ by Norman Vincent Peale and Kenneth Blanchard. They
prescribe a three-way test to decide whether your action is ethical or not.
18 The first test is “Is it legal?” If decision taken is not legal, it is not ethical. The second
test is, “Is it fair?” Being fair means that it provides equal advantage / disadvantage to the
parties concerned. If it favours any particular party, to that extent it is not fair and therefore
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it is not ethical. The third is, what I would call, the eleventh commandment test. Cynics say
that there are ten commandment in the Bible but there is eleventh commandment, “Thou
Shall Not”. You can violate all the ten commandment but “Thou Shall Not Be Found Out”.
The third test is, if the decision taken is known publicly in the media, will you feel ashamed?
This is a basic test for propriety so that when we take decisions in the banking sector, we
ensure that the decisions are all ethical.
19 The significance of ethics in the context of competitiveness has been highlighted by
many successful managers. I would mention three. This is what Jack Welch, the
management icon of the 20th century says:
“Excellence and competitiveness are totally compatible with honesty and integrity.
The A student, the four-minute miler, the high-jump record holder – all strong winners
– can achieve those results without resorting to cheating. People who cheat are
simply weak”.
“A professor gave a hypothetical case to his business school students. He said, ‘If
you were running a business for a larger company and were about to book a $50
million order, but to do so, you had to deposit $1 million in a Swiss bank account to
an agent, would you do it? Approximately 40 per cent to 50 per cent said they
would. I was shocked! Shocked! I told the students someone was teaching them
the wrong things. This was not one of those cases where you had to interpret the
law; this was a simple bribery case”.
“In the end, your integrity is all you’ve got”.
20 Shri Narayana Murthy of Infosys who underlined the principle of Infosys while
addressing the Students at Wharton School of Business is worth noting:
“The Infosys value system can be captured in one line – the softest pillow is a clear
conscience. A company’s value system is the guiding light in its hours of darkness.
It builds confidence, peace of mind, and enhances enthusiasm during tough times.
The importance you attach to your value system is reflected in the cost you are
willing to incur for your belies and convictions. At Infosys, we have stood firm
whenever our value system was tested. We knew that talking short cuts that
compromise our values would be detrimental.
One of my strongest beliefs is that corporations have an important duty to contribute
to society. No corporation can sustain its progress unless it makes a difference to its
context”.
21 Azim Premji of Wipro, who as built a world class institution, said that in building a
world-class institution, five factors are important. These are:
i. Vision
ii. Values
iii. Innovation
iv. Leadership
v. Social Commitment
22 We therefore find that successful managers face competition have not given up on
the ethical and the value dimension. Corporate governance only emphasises this aspect.
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23 That still leaves the second important aspect I said in the context of imagination.
This will mean that we must be able to get the best out of every individual in an organisation.
Here again, I would invite attention to what Jack Welch says about human productivity.
“The world of the 1990s and beyond will not belong to ‘managers’ or those who can
make the numbers dance. The world will belong to passionate, driven leaders –
people who not only have enormous amounts of energy but who can energize those
whom they lead.”
“I simply dislike the traits that have come to be associated with ‘managing’ –
controlling, stifling people, keeping them in the dark, wasting their time on trivia and
reports. Breathing down their necks. You can’t manage self-confidence into people.
You have to get out of their way and let it grow in them by allowing them to win, and
then rewarding them when they do. The word manager has too often come to be
synonymous with control – cold, uncaring, button-down, passionless. I never
associate passion with the word manage, and I’ve never seen a leader without it.”
“Somebody who can develop a vision of what he or she wants their business unit,
their activity to do and be. Somebody who is able to articulate to the entire unit what
the business is, and gain through a sharing of discussion – listening and talking – an
acceptance of the vision. And [some on] who then can relentlessly drive
implementation of that vision to a successful conclusion.”
“Too often we measure everything and understand nothing. The three most
important things you need to measure in a business are customer satisfaction,
employee satisfaction, and cash flow. If you’re growing satisfaction, your global
market share is sure to grow, too. Employee satisfaction feeds you productivity,
quality, pride and creativity. And cash flow is the pulse –the key vital sign of a
company.”
GE leaders always with unyielding integrity
• Create a clear, simple, reality based customer focussed vision, and are able to
communicate it straightforwardly to all constituencies
• Reach, set aggressive targets, recognize and reward progress, while
understanding accountability and commitment
• Have a passion for excellence, hate bureaucracy, and all the nonsense that
comes with it
• Have the self confidence to empower others and behave in a boundaryless
fashion; believe in and are committed to workout as a means of empowerment,
are open to ideas from any where
• Have, or have the capacity to develop, global brains and global sensitivity, and
are comfortable building diverse and global teams
• Have enormous energy and the ability to energize and invigorate others,
stimulate and relish change and not be frightened or paralysed by it, see change
as an opportunity, not a threat
• Possess a mindset that drives quality, cost and speed for a competitive
advantage
“Growing productivity must be the foundation of everything we do. We’ve been
chasing it at GE for years. We once thought we could manage it into business
operations, with control and hierarchies and vinyl books with charts. All we did was
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stifle people, sit on them, slow them up, and bore them to death. In the early 80s we
fell in love with robots and automation and filled some of our factories with them as
our employees looked on sullenly and fearfully. It didn’t work.
We now know where productivity – real and limitless productivity – comes from. It
comes from challenged, empowered, excited, rewarded teams of people. It comes
from engaging every single mind in the organisation.
When a business becomes productive it gains control of its destiny.”
“Productivity is not the squeezing our of a rag. Productivity is the belief that there’s
an infinite capacity to improve anything.”
“What we have done has barely scratched the surface. It turns out that there is, in
fact, unlimited juice in that lemon. The fact is, this is not about squeezing anything at
all; it is about tapping an ocean of creativity, passion, and energy that as far as we
can see, has no bottom and no shores.”
“Just as surely as speed flows from simplicity, simplicity is grounded in self
confidence. Self confidence does not grow in someone who is just another
appendage on the bureaucracy… whose authority rests on the bureaucracy…..
whose authority rests on little more than a title….. people who are freed from the
confines of their box on the organisation chart, whose status rests on real world
achievement…. Those are the people who develop self confidence to be simple, to
share every bit of information available to them, to listen to those above, below and
around them, and then move boldly.
24 Ultimately, therefore, we can succeed if we practice the standard advice given in the
Taitreya Upanishad. Let us come together. Let us enjoy together. Let our strengths come
together. Let us move from darkness to light. Let there be no poison of misunderstanding or
hatred. That way is the path to progress.
Sahanavavatu sahanaubhunaktu sahaviryam kara va vahai
Tejasvinam aditamastu ma vid visha vahai, om shanti shanti shanti
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