Banking practices and its norms
This is a research paper to study and suggest improvements in present Banking practices. All concerned people are requested to read it and send their suggestions on email: ashokkothare@yahoo.co.in.
I request honorable governor of Reserve Bank Mr. Subba Rao to take a note of these suggestions and help this research further. This is a private attempt to solve many problems those plague our banking system.
Subjects studied in this paper
1. Inter relations between banks
2. Lending policies
3. FD policy
2nd October 2009.
Banking practices and its norms, some suggestions
We shall try to understand the original norms practiced in banking business primarily guided by the needs of the market. The discussion is based on natural economic dictates. Artificial economics (neoeconomics) adds to it to make it more complicated. Let us read the findings. Banking practice has two principal blocs. First bloc is concerning the depositors and their types; second bloc is concerning borrowers and their types.
In this paper I am suggesting some corrections to help streamline the business of banking without competition amongst big banks and small or medium sized banks. We shall consider the second bloc in detail to understand its requirements; and how a bank can satisfy them, through banking practice. Broadly let me put the borrowers classified in three groups and they are big borrower, medium borrower and small borrower. Similarly banks are also classified in three groups and they are big bank, medium bank and small bank. All divisions are arbitrary and the concept is to separate the banking business in these three groups in such a way that banking business is protected so that unhealthy competition is avoided. Today we see that because this classification is not categorically earmarked; big banks compete with medium and small banks and working becomes difficult for these banks. When this division is made compulsory, business of medium and small banks is safeguarded. How this arrangement will help all concerned, which includes depositors and borrowers, and the banks themselves we shall see in due course.
Based on finance requirement -
Other method to divide this banking activity is based on finance required. Companies with proposed capital from 200 crores onwards will be financed by Big Banks; companies with proposed capital from 2 crores onwards up to 210 crores will be financed by Medium Banks and rest small companies will be financed by small banks. With this clear demarcation we can avoid big banks eating into the business of smaller or medium banks, which is some times the problem of these banks. Please understand that the margins recommended here are arbitrary and can be set on experience.
Interest rates -
There are interest rates on fixed deposits and those on the borrowings. At big banks both these rates will be at the lowest level such as saving interest rate will be about 1.5% pa and FD interest rate will be of the order of 2 to 3% pa. On loan interest rates will be 5 to 7% pa. This will help big industries in working and since the amounts involved are very big banks will be able to work even at these low rates. For medium Banks comparatively lesser amounts are worked with and so as savings interest will be about 3 to 4.5% pa, FD interest will be of the order of 5 to 8.5% pa and loan interest rates will be 9 to 20% pa. This will depend upon the amount of loan given and bigger the loan lesser the interest rate should be the guiding policy. For small Banks savings interest rate will be about 6% pa, and FD rate will be 10 to 15% pa. On loan interest rates will vary from 10% to 33% depending upon the purpose and amount for the loan.
Present policy of setting interest rate on the basis of availability of money needs to be reviewed since it is proved that borrowers do not borrow because the lending interest rate is low but they borrow when they need and that is irrespective of the interest rates. It is clearly shown by the graph of interest rate versus borrowings that interest rate has no effects on the borrowing pattern but that pattern is more influenced by the sells. More sells encourage more borrowings and vice versa. Corollary of this finding is that purchasing power of the customers directly influences borrowings; bigger PP causes more borrowings and so more business to the banks.
These variations will help banks to manage their works on the basis of the amounts put as deposits and the loan amounts. Small banks having small loans amounts to manage have to incur larger expenses to be covered by comparatively smaller investments. And this requires that they charge more interest on the loans and then pay the share to the depositors by way of interest on their deposits. Time duration of these loans is much less as compared to that where medium and big banks lend. Lower the lent amount higher the interest; should be the policy for deciding the interest on the loans. Banks should have liberty to charge the interest that they consider proper and Reserve bank under no circumstance shall interfere, so long as the recovery is in order.
This demarcation will bring about harmony in this banking business and any overriding by bigger banks on the smaller one will be stopped giving security to those banks.
Network of Banks -
For better management between the banks of these three groups it is suggested that a big bank can have setting with one or more of medium and small banks so that they shall work in unison better. Similarly a medium bank can have setting with one or more of small banks and a small bank also can have setting with one or more of medium or and big bank. This shall create a network of banking facility and this will help manage the loan liabilities more efficiently. By this arrangement we can avoid failure of a bank due to defaults of loan payments. Through this arrangement small banks can take loans from elder banks to do their work if need be. Elder banks shall keep track of loans proposals done by smaller banks to see if any wrong lending is done to avoid future troubles. This way many problems due to favoritism causing bad debts can be avoided as the elder bank will object to such lending. This way Reserve bank monitoring can be reduced. Through this net work big banks can give loans to smaller businesses using their link with a small bank. There are many advantages to his arrangement and more benefits can be discovered as we implement this net-work.
More details can be worked out on further discussion with concerned people.
Suggestions from Bank officers updated until 2nd November 2009-
1. The limits of different Banks are recommended to be:
Up to 800 Cr. Deposits small Bank,
From 800 to 50000 Cr. Medium Bank and more than that will be Big Banks.
2. Net work of Banks will be monitored by vigilance officer of upper Bank for loans given by lower Banks. All loans granted by lower Bank must be certified by this vigilance officer or department before disbursement of funds is executed. In case of any dispute decision of the higher Bank (All big Banks come under Higher Banks) will be binding on all lower Banks. When a lower Bank is attached to more than one upper Bank and in this situation lower Bank having given a loan proposal to any one upper Bank then that loan shall not be shifted to any other Bank for certification; in case it is preferred to be done by the lower Bank, that Bank shall have to intimate about how many other upper Banks have been referred to; for certification.
3. Interaction amongst the Banks in the net will be encouraged for better Banking management.
4. Transfer of loans (recovery management) should be possible within the net Banks for better finance management.
5. Banks within the net should be allowed to join together to finance loans under advise of Big Bank.
6. Co-operative Banks will not give loan to their 'connected people'; this is one factor that the vigilance officer has to certify to avoid misuse of contacts, which is one cause for failure of these banks. Phrase 'connected people', to be defined.
Suggestions from Bank officers updated until 2nd December 2009-
7. Only big banks will give loans to housing. Since, housing is considered as a basic product.
8. Housing loans will not be given to buyers of flats but to the builder with the understanding that builders will give the installment facility to the flat buyers in turn; if buyer demands installment facility to pay the price.
This will make housing loans more secured for the banks and the liability of default by the buyers shall fall on the builders. Builders must take the risk of such nature; why should banks take the risk while builders enjoy the comforts of getting all the payment in one piece.
One example to justify this provision; one person took a loan of 2.5 crores to purchase flat in Mumbai. As per rules, if slabs are put of a construction then, bank can give the loan on that structure; as per this provision bank gave money to the buyer of the flat. That money was paid to the builder by the buyer under required legal documentations. The builder instead of putting money for construction spent it on stock market and in that lost it all. Now bank is after the borrower for loan repayment while the buyer is refusing to pay as he has not got any flat, the construction is as yet not completed, when buyer tries to contact builder; he is not available! In such a situation the ultimate looser is the bank. If the said correction as given here was in practice such a situation would not arise.
9. Banks will have permission of RBI to float subsidiary firms to own shopping centers, godown and markets. This will include wholesale and retail markets. All business establishments in such places will be loan financed by that bank only. Rent and such other relevant earning of that subsidiary will sustain that firm. It is expected through this arrangement that banks get sustained business.
10. Banks will have access (monitor) to the way the funds for housing are being spent. In case these funds are spent on non-housing (particular) activity bank will take punitive action against that builder. This better done by bills payment through the financing bank rather than giving cash funds to the builder.
11. Banks will invest money in IPOs of new issues provided they are excused from paying the premium that is charged on such shares for reason, companies do not disclose how and where that money is spent or that deposit is not accounted for at the audits. Banks invest money of depositors and so it is mandatory for the bank to know how and where that money is spent. At present no such control is applied and that is wrong, so it be corrected.
Suggestions from Bank officers updated until 2nd January 2010 -
12. Credit to players in the security/stock market cannot be given by normal commercial banks. Separate Investment bank is created to do that; this is in accordance with suggestions based on Glass-Steagall Act 1933-1999 from U.S.A., just as HDFC is developed for financing housing loans the Investment bank shall finance all loans to speculators.
13. Small banks shall not give loan for security market activities (purchase of shares and derivatives etc.).
14. Inter banks net-work to be used to avoid inter banks competition for business.
Suggestions from Bank officers updated until 10th November 2010 -
15. To simplify lending process three margins should be set to three Banks and they will be irrespective of purpose of loan; all loans below 2 crores shall be managed by only small banks such as co-operative banks that are not as yet included in scheduled class. 10 crores for medium banks and above that to big banks should be the limit. This will protect interest of smaller banks, since as on today all types of loans are taken up by all banks, particularly co-operative banks are not in a position to face competition with big and medium sized banks for small loans, that problem will be solved with this restriction.
16. To continue with the suggestion on 15, all loans granted by big and medium banks falling in these limits shall be transferred to the respective bank in the network, as recommended in above given paper. This shall be possible due to net developed according to above suggestions. With this arrangement small banks can collect loan proposal of big limit and pass it to the related bigger bank and may get commission for that.
17. Co-operative banks should be allowed to invest in micro finance activities.
I invite you to visit my other blog if you are interested in stories.
You may visit Ideas and tips on any subject for intelligent discussions.
|
|
