Speeches

Speech delivered by Kishori Udeshi, Chairman, BCSBI at a meeting organised by 
the Reserve Bank of India at Kochi on July 22, 2008

While the banking system has for decades been paying attention to customer service, specific work undertaken in recent years has thrown into bold relief that customer service to the common man leaves scope for improvement. It was recognised that apart from redressal of customer grievances by Customer Service Committees of banks and the Ombudsman Scheme, there was an imperative need to address systemic issues in deficiencies of service. To this effect, through a collaborative effort of Reserve Bank of India (RBI), the Indian Banks’ Association (IBA) and the banks, a dedicated institution viz. the Banking Codes and Standards Board of India (BCSBI) was set up in February 2006.

2. The subject of to-day’s talk has been chosen because this is the basic objective of the two Codes – the Code of Bank’s Commitment to Customers (July 2006) and the Code of Bank’s Commitment to Micro and Small Enterprises (May 2008) which have been evolved by BCSBI in collaboration with IBA. The central objective of these Codes is promoting good banking practices, setting minimum standards, increasing transparency, achieving higher operating standards and above all, promoting cordial banker-customer relationship which would foster confidence of the common man in the banking system.

3. Credit expansion in the last few years has been significantly higher than in earlier periods. On the pattern of bank financing, RBI Deputy Governor (Dr. Rakesh Mohan) states :

• “First, the pattern of funding from banks is predominantly to the urban and metropolitan sectors which account for the overwhelming share of credit. The share of metropolitan areas, in fact, has risen further in the current decade, with that of rural areas declining.

• Second, the pattern of funding by the banks remain skewed towards larger firms. The problem for the banks, however, is that profit growth in the corporate sector has been so high in recent years, that they do not need much bank borrowing, and ---- in view of the reduced need of large firms for bank funding there is great competition among banks to fund the larger firms, leading to lending rates levied on them becoming much lower than the declared benchmark prime lending rates (BPLR)”

This in a sense is a uniquely Indian situation wherein banks compete to lend subprime.

• Third, the pattern of continuing low share of credit to Small and Medium Enterprises (SMEs) – in fact the lowest among all the segments. This is also borne out by the results of the Third Census of Small Enterprises conducted by the Government of India in 2001-02, which revealed that 95.5% of Micro and Small Enterprises (MSEs) have been outside the purview of the banking system.

4. If the above pattern of funding existed when GDP growth was buoyant at 8-9% and inflation was at 6-7%, there is legitimate cause for concern about the availability of bank finance to MSEs in the current scenario of macro economic concerns of high inflation and deceleration in growth and socio-political tensions.

SMEs – International Context

5. The experience of Asian Tigers suggests that SMEs, particularly the small ones, are crisis shock absorbers that not only help provide employment during difficult times but also prepare new entrepreneurs for graduating to run larger firms when the economy recovers.

6. In China, for example, in addition to ensuring risk compensation through various guarantee funds, the Government has issued special and specific schemes subsidising heavily both interest and loan losses of those small enterprises which either employ laid-off workers or are started by retrenched labour.

7. Countries in the Asia Pacific region have adopted policies and programmes that are designed to support SMEs and make them more globally competitive. These economies strongly focus on 3 areas – finance, technology and HRD. In Singapore, SMEs are not that significant in number but are treated as being important for attracting Foreign Direct Investment. In Australia, SMEs see globalisation as a great opportunity for expanding their business rather than as a threat. An Australian Business Report says that more than 25% of Australian SMEs had increased their business through China and that the number of exporting SMEs in Australia has doubled in 2 years (a process which would normally have taken a decade). These exporting SMEs are mostly in services – education, tourism, personal and professional services. In Thailand and Vietnam, SMEs contributed around 40 to 45% of the GDP in 2006. Loans to SMEs are extended on commercial lines and collateral free loans are granted, not out of compulsion, but based on credit scoring of the unit. Banks in Thailand and Vietnam do a lot of hand-holding at the application stage and importantly, their credit assessment is based on the prospect of the survival of the unit during the initial years of set-up, rather than the unit’s profitability. Also, banks continuously engage themselves actively in providing advisory and planning services to their SME clients.

8. In India, MSEs have contributed to development and growth of the economy by generating employment and boosting entrepreneurship. They are less capital intensive and produce a wide range of items using technology ranging from the traditional to the state of art. It is regrettable, therefore, that the availability of bank finance to this sector has not grown commensurate with the growth of gross bank credit.

9. Anecdotal evidence reveals that MSEs are the ones who are unable to reap the benefits of Government schemes because of their inability to access bank finance and receive fair and transparent banking services. Keeping in view the concerns of the Government and the RBI in ensuring easy accessibility of bank finance to the lower strata of society the BCSBI in collaboration with banks and IBA has evolved a Code of Banks’ Commitment to Micro and Small Enterprises (MSE Code).

10. The MSE Code reflects the banks’ positive commitment to their Micro and Small Enterprise customers to provide easy, speedy and transparent access to banking services in their day-to-day operations and in times of financial difficulty. Banks are committed to make this Code available to MSEs, free of cost. Some of the other commitments enshrined in the MSE Code are as follows:

• There will be a standardised application form common to all banks which will be available to MSEs free of cost.

• MSE customers will be provided with a check list indicating all that is required to be submitted along with the application form.

• All information about interest rates, fees and charges will be made known to the customer upfront so that a meaningful comparison with those of other banks can be made and an informed decision can be taken by the MSE.

• Banks will endeavour to provide facilities through a Single Window Mechanism.

• The bank’s policy relating to MSEs will be in the public domain.

• Specific time frames for disposal of the application for credit limit have been committed to. For example, an application for a credit limit or enhancement in existing credit limit upto Rs.2 lacs will be disposed off within two weeks.

• Banks commit to share the parameters of the rating system to be followed by them.

• Banks will ensure disbursal of the loan sanctioned, within two working days from the date of compliance with the terms and conditions governing such sanction.

• Banks will grant increase in the drawing power within 24 hours of lodgement of security.

• The MSE customer will be kept informed of the debits to his account arising out of interest application, fees and charges.

• In the case of sick units, banks will assess whether the unit is viable and if viable, work out a rehabilitation package and implement the same within a maximum period of 60 days.

11. These and several other commitments which have been made voluntarily by banks are expected to benefit both banks and MSEs.

12. Banks, through this Code, have committed to endeavour to provide credit counselling services to their customers in dealing with their financial problems. Nevertheless, it is essential that MSEs are provided with a facility of undergoing a minimum 2 days orientation to understand cash flow cycles, financial products, etc. It is understood that the National Institute of Design (NID), Ahmedabad has created an outreach programme for SMEs through which they deliver short-term courses on design and engineering to professionals employed by SMEs. Similar programmes could be organised by banks with the assistance of RBI or SIDBI in the area of banking and finance for MSEs.

13. Similarly, although time-frames have been committed to by banks in the Code, banks will need to ensure that their staff is adequately trained and sensitised through customized training programmes, to the diverse needs of, micro and small units. Dealing with this strata of society requires a different mind set and one would need to rely heavily on developing personal relationship with customers in order to collect information and foster confidence in the banking system. This can be achieved through effective communication with their MSE customers which is one of the objectives of the Code to which banks are committed.

• Banks need to recognize the potential in lending to MSEs, especially when there is a credit guarantee scheme in operation to offset the risks involved in such lending. A word of caution here is necessary. Banks need to remember the lessons learnt from irresponsible lending and ensure that not only is there due credit assessment but also continuous post-sanction monitoring so that the unit is enabled to survive the initial set-up period and become viable.

14. In response to their voluntary commitment to provide transparent and efficient banking services of a minimum standard to their individual customers, banks have initiated positive measures to comply with the provisions of the Code of Bank’s Commitment to Customers (Code). All banks are now systematically distributing copies of the Code to all their customers. Since this Code is, in a sense, a Charter of Rights of the individual vis-a-vis his bank, this is an important action on the part of the bank to voluntarily empower the individual customer. Also, banks have adopted Model policies for Cheque Collection, Grievance Redressal, Security Repossession and Compensation and these are in the public domain. Transparency with regard to charges, fees and interest rates is now apparent and all banks have a tariff schedule which is in the public domain. All banks now have a set of Internal Grievance Redressal Procedures for handling of complaints within a specific time frame, consistent with External Grievance Redressal Mechanism such as the Banking Ombudsman Scheme. The Code even provides that if customers are not satisfied with the bank’s response, they should be helped to take up the matter with the Banking Ombudsman. Individual complaints are also dealt with by the Customer Service Department of the RBI and to the extent complaints involve systemic issues, the BCSBI pursues the matter with the banks for rectification of these lapses. These are some of the positive features.

15. There are, however, issues of banking practices surfacing which, while satisfying the norm of transparency can hardly be deemed to be fair or reasonable. These banking practices are bank-specific and not systemic e.g. when a bank issues only multicity cheque books whereby the hapless savings bank account holder, say in Delhi has to pay Rs.50/- (minimum charge) if the payee chooses to encash it out side the local clearing zone. Since the account holder has no option but to bear this charge how fair and reasonable is it to charge an account holder for actions of the payee which are unknown to him. Similarly when a bank levies a charge for paying your credit card dues in cash, is it reasonable, considering that a bank’s function is to receive and make cash payments.

16. What is reprehensible is the practice of rigid and mechanical application of KYC rules which do not apply to individuals who wish to open No Frills Savings Bank Accounts. This is not only blatant mockery of the bank’s public pronouncements of financial inclusion but is plain and simple harassment of the poor and weaker sections besides making them lose a day’s wages in the bargain. But, this is set to change, as a couple of big banks have harnessed information technology to turn the No Frills Accounts into revenue earners.

17. Another common complaint from individuals is that banks do not tell them about filling in Form 15G/15H in case they are not liable to pay tax. The customers find at the end of 3 or 5 year term that tax has been deducted on their fixed deposit interest earnings even though they are in the tax-exempt category. To add insult to injury, the bankers ask the customer to file an Income Tax refund claim – which the senior citizen or pensioner hardly has the wherewithal to do.

It is imperative that banks undertake immediate remedial action.

18. On concluding, it may be said that BCSBI has got the MSE code translated into ten regional languages (2 more are in the process) and these are available on the BCSBI website www.bcsbi.org.in Taking a cue from the positive experience of lending to SMEs by banks in the Asia Pacific region, banks in India must recognize the vast potential that exists in responsible lending to the MSE segment. The advantage of leveraging technology is enormous and banks can make big strides in lending to MSEs if they re-engineer their business processes and leverage technology to innovate suitable products for market outreach. One recognises that banks have taken steps to improve customer service but more remains to be done and BCSBI is in continuous dialogue with banks towards achieving greater compliance of the Codes both in letter and spirit. It is equally important that customers read the Code and ensure that they fulfill their obligations to their bank also.

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