The Hindu Business Line : Harness banks to power the CMP

THE Common Minimum Programme (CMP) has no ordinary task on hand. It seeks to accelerate economic growth even while ushering in distributive justice. More specifically, the CMP seeks to keep the economy growing at 6-8 per cent per annum and at the same time generate more rural income, create more employment, spread education and health and generally bring down poverty.

The dichotomy between growth and distribution has plagued the economy right through the planning era as well as the current liberal era. The CMP is seeking to bridge or at least narrow this gap in the next five years.

How does the Government propose to do that? There is no clue as yet. Presumably, a blueprint is under preparation and likely to be announced in the Union Budget for 2004-05 on July 8.

Apart from a determined leadership and a cooperative, if not committed, bureaucracy what a gigantic and ground-breaking task like this requires is the active involvement of the economic and social institutions in the country, both in the government sector and non-government sectors. In this context, no other organisation has the reach, network, funds, manpower, expertise and experience as the Indian banking industry. Harnessing its resources and capabilities can surely give the CMP a leg up.

Notwithstanding the critics, Indian banks, particularly the public sector banks (PSBs), have in the last three decades made a substantial contribution to economic growth, regional development, employment generation, and redistribution of income. Bank branches have travelled to corners where even a school or a post-office is lacking. Indian agriculture owes its modernisation largely to the banks.

The concept of priority sector lending has given birth to hundreds of thousands of small-scale units, self-employment enterprises and small businesses across the country, generating income and employment. By cross-subsidising their loans and services, banks have been a conduit for the transfer of wealth and income from the organised urban sectors to the unorganised rural areas.

The banking sector's crucial role at times of major shifts in economic policy has been demonstrated in the past. For instance, bank nationalisation and subsequent accent on agriculture and rural credit was a major factor behind the successful launching of the Green Revolution in the 1970s. In the 1980s subsidised bank credit was instrumental while shifting from a regime of import substitution to export promotion. In the 1990s, again, banking reforms became the forerunner of the wider economic reforms.

Indian banking industry today is more diversified, competitive, sound and can boast of international standards in several areas. For all the complaints against their working, the PSBs have been growing from strength to strength in the post-reform years. They have adopted the Basel I norms of prudential lending effortlessly and are well on their way to adopt the more stringent Basel II norms, even though many advanced countries have dithered.

The new government has no plans to roll back any of these reforms. There is a popular American saying which goes: "If it is not broken, don't repair it". That is, as long as a thing is working, leave it alone. That seems to be the stand of the CMP on the status of PSBs. It has ruled out any move to privatise these banks, though it will keep an open mind for continuing the reforms.

The Budget ought to inspire, motivate and activate the mammoth Indian banking industry to play its due role in the implementation of the CMP. The Budget's primary task would be to restart credit growth in the economy. A combination of factors, both from the supply as well as the demand side, has kept the growth of credit flat in recent years.

Even the impressive growth of retail credit, particularly in housing and education, in the recent past seems to be tapering off. In the circumstances, mere tinkering with interest rates or relaxation of restrictions may not be enough to accelerate credit growth.

At the same time, there is a school of thought which holds that credit growth by itself may not result in economic growth in a country like ours. A recent study of the relationship between the financial sector and economic growth in 25 transition countries by measuring the qualitative development in the banking sector seems to support this view.

The results of the study show that the interest rate margin is significantly and negatively related to economic growth. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The study concludes that growth in credit has not always been sustainable and in some cases it might have led to a decline in growth rates.

Therefore, for bank credit to accelerate and sustain economic growth, it should be related to a clear plan of action in the real economy. In other words, everything depends on how the Budget conceives the annual Plan for 2004-05 and what it proposes by way of fiscal and monetary measures for the successful implementation of the Plan.

It is anticipated that the annual Plan will show a marked shift in allocation in favour of agriculture, small industry, education, health, employment, anti-poverty programmes and infrastructure. But that is not enough. The allocations have to be translated into successful, preferably bankable, projects and programmes.

For the banks, what this means is that the focus will be back on priority sector lending. It is possible that the coverage of the priority sector will be enlarged and the various targets under it made stiffer.

Given the comfortable profitability of the banks, the targets may also be accompanied by concessions in interest rates. The debt relief package for farmers just announced is a pointer to the things to come.

The banks will have to draw on all their skills and experience to combine prudential lending with social lending. Chasing targets in the post reforms era will be a different ball-game altogether as the banks cannot afford any slip-up in recovery.

There have been indications that the Budget would fine-tune the Sarfaesi Act so that defaulters do not try to gain undue advantage from the recent Supreme Court judgment. It is also likely to streamline the Debt Recovery Tribunals (DRTs) to speed up disposal of cases, particularly the high value cases.

At present, the agricultural sector is totally outside the ambit of the Sarfaesi Act. Bringing the big and medium farmers under the Sarfaesi net would greatly enthuse the banks to go for farm credit. It will also instil some much needed credit discipline among rural borrowers.

Banks' commitment to CMP will largely depend on the involvement of the bank staff. Can the Budget do something to secure the trust and cooperation of the bankers, especially those in the PSBs? The average PSB staff is now close to 50 years of age and not too healthy. His risk profile has gone up sharply in the wake of the reforms. Following the voluntary retirement schemes, he now works longer hours and takes bigger risks in every transaction.

In short, the PSBs are close to reaching global standards in their operations but the pay-scales and working conditions of their staff are still at the municipal level, hardly keeping pace with their new responsibilities. Witness, for instance, the haggling over a pittance in the ongoing negotiation on wage accord for bank staff.

The Budget should seek to end this anomaly. Human resources management is not just about recruiting personnel. It is about caring and nurturing of the staff to get the best out of them.

The bankers should be duly compensated for the risks they take, for the responsibilities they take and for the hardships they under go. It would be small price to pay considering the immense contributions they can make to the implementation of the CMP.

(The author is an economist with Indian Overseas Bank and can be contacted at dvenu@vsnl.net)

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