Following is the news item published in Business Standard on 14th of April 2013 :-----
The government’s attempts to restrain public sector banks from rushing for business towards the end of the financial year to meet targets proved futile, with a third of the deposits in 2012-13 accumulated in March.
According to data released by the Reserve Bank of India (RBI), for the year ended March, deposits stood at Rs 10.27 lakh crore, recording a rise of 17.4 per cent year-on-year. In March, banks mopped Rs 3.75 lakh crore.
Total bank credit in 2012-13 stood at Rs 7.8 lakh crore, a rise of 17 per cent. Of the total credit, Rs 2.7 lakh crore was disbursed in March.
Incidentally, banks have raised Rs 1,84,600 crore of deposits and disbursed Rs 1,33,490 crore of loans in the last week of March alone.
This is the first time since 2009-10 that annual deposit growth outpaced credit growth. For 2012-13, RBI had projected credit growth of 16 per cent and deposit growth of 15 per cent.
The finance ministry had taken several steps to restrain government-owned banks, which control 70 per cent of the market, from rushing for funds towards the end of the financial year. In March 2012, a rush for funds had resulted in a steep rise in short-term rates, with rates for three-month certificates of deposit exceeding 12 per cent. This had increased the cost of funds for banks and exerted pressure on margins.
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Guidelines Issued In May 2012
Finance ministry drops deposit &
lending growth from performance target list for PSU banks
Sangita Mehta, Economic times News Mar 5, 2012,
MUMBAI: CEOs of public sector banks can no longer rake in bonuses by
window dressing year-end deposits and loan numbers. For years, banks have been
mopping up bulk deposits from large clients in March only to return the money
in the first week of April - transactions that prop up total deposit figures
for March 31.
Similarly,
deals are cut to give out loans to borrowers with an understanding that they
would be repaid a month later. Smart customers borrow from one bank and park
the money as a deposit with another PSU bank. The circular game helps banks
dress up numbers and meet targets.
This practice will now
come to an end. The finance ministry has dropped annual deposit and advance growth from the list of
performance targets laid down in the annual MoU that all PSU banks have to
enter into with the government. From now on, banks will have to focus on the
remaining parameters like net interest margin, return on assets, NPAs, fee
income, priority sector loans, financial inclusion,etc.
If
a bank meets all targets that are set in the beginning of the year, then the
chairman and CEOs receive a bonus of 8-lakh each. According to a senior banker,
the finance ministry, in a letter to all PSU banks, said, "It has been
felt that banks are under pressure to mobilise deposits to meet the statement
of intent targets and this may lead banks to secure high cost deposits which
may affect the health of banks."
The exclusion of deposits and loans from the list of performance
targets will impact the money market as well. AMCs that make a killing by
parking bulk money with banks at higher rates will have to look for other investment
avenues. Last week, a number of banks raised money in the range of
10.85-11.10%.
P&S Bank agreed to pay 11% for a 700 crore 3-month
certificate of deposits. IDBI Bank raised 4,000 crore at 11.10-11.15% and Corporation Bank raised 2,500 crore at 11.10%. Such
interest rates for short-term bulk money rose 125 bps since the RBI cut CRR in January.
"Banks
have been doing this for decades. It's a customary practice and an open secret.
The government has raised the issue when banks are battling liquidity crunch
and a rise in sticky loans," said an analyst.
The
ministry seems to have taken the issue seriously. The letter adds: "Also,
it is felt that banks are compelled to go all out to achieve target on credit.
Sometimes
PSU banks may compromise on quality of the loan proposal to achieve target for
the advances which may result in higher NPA leading banks to make high
provision.
It
has been decided to drop the percentage growth in deposit and advances and
market share parameter from the SOI."
Some bank treasury heads are happy with the directive.
Among other responsibilities, the treasury department has to manage a bank's
net interest income, interest rate risk and asset-liability mismatch. In the
past, treasurers had objected to top managements' decision to meet targets at
the cost of margins.
My Views on Tuesday, March 06, 2012
Performance Assessment of Banks
After 43 years of bank’s nationalization and 21 years of adoption of policy of liberalization and reformation launched in the year 1991,our government and our learned Finance Minister has realized for the first time, the bad consequences of imposition of targets for deposit and advances on CMDs of banks. It is undoubtedly and undeniable true that due to unrealistic targets there used to be unbearable pressure from seniors on field functionaries for its achievement.
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Window-dressing of deposits by banks: Some truths
September 23, 2012:
Window-dressing is one of the uncomfortable phenomena in the Indian banking system. The financial status of banks is evaluated every quarter (March-end, June-end, September-end and December-end).
At these points of evaluation, banks try to boost their deposit figures through artificial means. However, the make-up does not last long. The deposit figures start dropping in the ensuing weeks till the attainment of a natural height. The paradox to be noted is that window-dressing is artificial, whereas window-undressing is quite natural.
In spite of being transitory, window-dressing has become a common and normal practice among bankers and an integrated feature of the system so much so that the quarterly figures of deposits are always accepted with a pinch of salt.
All banks window-dress; only the degree differs.
RBI’S CONCERN
The phenomenon of window-dressing continues despite the RBI’s warningsand suasion. The RBI’s concern is evident from its Business Season Credit Policy, 1995.
To quote, “Banks have been repeatedly warned to eschew window-dressing and it is unfortunate that despite strong suasion this warning has been ignored. Banks are cautioned once again against the recurrence of such a phenomenon and I am constrained to say that we may have to evolve certain arrangements, including punitive action, to prevent the recurrence of such a phenomenon.” (Paragraph 5 of the RBI Governor’s letter to SCBs on September 29, 1995 detailing the Busy Season Credit Policy)
The RBI Annual Report 1998-99 cited window-dressing of deposits as one of the factors contributing to the “hardening of call rates”.
The RBI Bulletin of May 2000 refers to window-dressing causing “year-end bulge”. In his speech titled, “The Evolution of Banking Regulations in India – A Retrospect”, one of the then RBI Deputy Governors, V. Leeladhar, characterised window-dressing as “prudentially undesirable.” (RBI Bulletin, May, 2007)
WHY UNDESIRABLE?
Window-dressing is undesirable because it introduces distortions in monetary and banking aggregates and, thereby, affects the process of monetary and banking policy and planning adversely.
Moreover, it makes the bank officials concerned complacent about making real efforts to mobilise ‘stable’ deposits. Of late, it is being realised that deposit mobilisation is often more effort-elastic than anything else. Window-dressed deposits are rather fickle.
REASONS
Over time, the Indian banking system has become more competitive. Not only there is stiff competition among banks to grab public deposits but also they have to compete against non-banks offering attractive returns. In contrast, the savings potential of the country has been varying in a limited range. The following graph illustrates that the country’s financial savings as a percentage of GDP at CMP has been hovering around 10-13 for the past seven years. (Source: Economic Survey 2011-12, pp.5, Table 1.4). A roller-coaster ride, indeed!
Thus, there is a classical economic problem: Limited resources and unlimited competitors. The demand for of the latter is not only high but urgent and swift as well. In such a situation, those who can plan and execute the plans effectively to get a major chunk of savings can actually increase deposits; but those ‘career-conscious’ aspirants who fall short resort to window-dressing.
In the above framework, one pertinent question arises. Why do bankers aspire for deposits and deposits alone, when there exist so many other performance indicators? Even if banking has come a long way, still the emphasis is on ‘growth’ and within ‘growth’, deposit figures are being focussed first because banks are basically ‘special’ financial intermediaries, and deposits are their raw materials for credit creation. This stark reality cannot be just wished away.
Banks sign a memorandum of understanding with the Finance Ministry, Government of India that benchmarks the performance of bank Chairman and Managing Directors (CMDs) against certain parameters, within which ‘growth in business (deposits and loans)’ figures prominently. If banks attain their targets agreed upon, CMDs get a bonus. This is the starting line for hounding ‘growth’.
The process is replicated at the micro-levels of the hierarchy where first and foremost, growth in deposits shown by incumbents at various levels is taken as a significant performance indicator.
In view of this, a blanket target-oriented approach is followed in mobilising deposits. The targets are fixed from the top on an increasing trend basis irrespective of various endogenous and exogenous changes the operating area might have undergone or might be experiencing during the time interval of the last and forthcoming evaluation points.
Generally speaking, there is a lack of gradual, continuous and systematic efforts to mobilise deposits because of stationary nature of the evaluation points.
Towards the evaluation points of time bankers receive a spur and run around to get deposits. And haste makes waste.
THE ULTIMATE TRUTH
Like risk, window-dressing can only be minimised, but not eliminated. Let us accept the reality that so long as ‘growth’ is focussed in evaluation of financial status of banks, window-dressing will continue. All the stakeholders in the process of evaluation should be ‘deprogrammed’ from their obsession with ‘growth’.
Evaluation should include other parameters pertaining to a bank’s efficiency, safety and soundness, staff productivity, financial inclusion, technology and the like as determinants of achievements and a simple, weighted index needs to be developed to calibrate a bank chief’s performance. This is a challenge for the Finance Ministry which should constitute a committee with representations from stakeholders to devise the index.
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