Multiple Banking: An
Indian Perspective

chillibreeze writer — Durgaprasad MV

>> Read more >> Check out more such India-centric e-books and reports

Multiple banking is a post liberalization phenomenon in India. Ever since India became independent, major thrust areas of the country’s development like economic, legal, education, commerce & industry were directly influenced by western practices. The British legacy of 200 years continued. After the Second World War, the world was polarized between leftist and rightist policies with the USSR and the USA heading these factions respectively. Communism was the buzzword and many countries which had to reconstruct after the war, or had got independence after the war had to align themselves with either one of these countries to keep their channels for inflow of aid open.

India, with its huge geographical spread, surging population, and need for tremendous amount of capital for development, tried its best to keep itself non-aligned and to take advantage of both the countries. The successive governments mainly led by Congress, tried to adopt socialism as its governing policy which was a go-between capitalism & communism. From this stemmed the concept of social-control of banks and their ultimate nationalization in 2 stages, once in 1969 and next in 1981. Having a large amount of public money in its kitty, the then governments proceeded with their various programs for alleviating poverty. Various schemas for agriculture, industry, and business were formulated and were thrust on the banks for liberal sanction of credit to these activities. The upper limit for a borrower under each category was fixed. Small was beautiful and economies of scale was frowned upon. Spread of wealth, opportunities for all and distribution of capital among its people were few of the avowed reasons for these policies of the then governments. Whenever cost of raising funds became prohibitive, the government resorted to deficit financing which speedily eroded the value of the Indian Rupee. The government had to repeatedly approach the World Bank to keep up its promises that it had made to its citizens.

More than 40 years of experimentation with communism/socialism had failed to deliver the so called fruits of progress to the needy. Legitimate wealth had given place to the illegitimate one, and the powerful and unscrupulous accumulated wealth and power. Productivity was at its minimum with everyone expecting all benefits from the governments either voluntarily or through coercion. All this came to an end with the collapse of the USSR in 1990s and the world became unipolar. With this, economic policies across the world veered towards faster capital formation which was possible only though better utilization of resources, both tangible & intangible, and thus achieve higher profitability. This increased savings and helped further investment.

The Indian Government finally shed its profile of socialism and married capitalism, though through a veil. Trade barriers were removed/reduced, foreign investments were welcome. To attract foreign funds/investments, Indian Government had to create investor friendly atmosphere, and ensure better credit facilities for the local entrepreneur. The days of solo banking & consortium banking were not insisted. Even though multiple banking existed in the form of consortium banking, it was more restrictive in the sense that entering or exiting from the consortium was not always easy. Consortium banking was more are less availed by large corporates and when the credit exposure by a single bank exceeded the prescribed limits. The idea then was to spread the credit-risk over more than one participant. To accelerate growth, Reserve Bank of India permitted multiple banking and also liberalized its policies with regard to opening of branches by MNC banks and their NBFCs, investments in Indian Banks subject to certain conditions. These banks with their deep-pockets entered Indian Banking Scene during 1990s and consolidated further with mergers & acquisitions. With overseas funding, these MNC banks/NBFCs never felt liquidity problems. Whenever they felt the policies of RBI were coming in the way of credit expansion and achievement of higher credit penetration, they floated NBFCs to lend to market segments which could not be financed by regular banks. A few Indian business houses also floated some NBFCs with the same agenda. With the mushrooming of such banking outlets, fierce competition was well expected, and with it came vigorous marketing of many loan products. The borrower was no longer tied to a single bank or a consortium of banks. Instead, he could borrow from as many banks as possible, as long as his capacity to repay was established, and he could provide the required collateral. The business community, professionals, and self-employed, who were earlier deprived of loans at reasonable rates in required amounts and on flexible terms by the nationalized banks, used this multiple banking facility to the maximum. MNC banks and their NBFCs also appointed direct-selling agents on commission basis to source prospective borrowers. After seeing their success, home grown banks also emulated them to increase their business. The commission was on the basis of loan disbursed. These agents in turn appointed field executives for this purpose. These executives were given stiff targets every month. In their eagerness to earn more and more commission, they started luring the borrowers with proposals which did not always keep the borrowers’ interest in mind. From the days when the borrower had to get a No Objection Certificate from his existing banker to borrow from another bank, he could now freely borrow from as many bankers as he liked. He was finally out of the clutches of the strict, authoritative banker and private money-lenders to a market friendly lender who would pester him with telephone calls offering him loans. These banks also built a database of borrowers which gave the detail of the borrowings of a borrower at any time. To beat competition and to prove their one-upmanship, these banks also devised innovative products like income-estimation programme and reverse-mortgage. It is now common to find businessmen servicing loans from as many as 10 banks at a time. It has now come to a stage wherein one who could not get a personal loan of Rs.5000 in spite of having the repaying capacity, can now borrow even Rs.20 lakh from these NBFCs, after establishing his repaying capacity, without necessarily providing any collateral.

These new generation banks/NBFCs found a novel way of earning higher income for the same amount of funds lent. They came out with the concept of structured-loans under which the repayment was made on EMIs basis. Borrowers could not comprehend the intricacies of its calculations and they meekly submitted to such terms. A few take-overs of loans between these institutions over a period of time made the borrower to pay interest through his nose, with the amount interest so paid making a mockery of the interest-rates of private money lenders. Indian psyche being what it is, its people were quick to grab the opportunity. Taking over of existing loans by one another also became a major activity. With the increase in value of mortgaged property, a bank/NBFC could always offer a higher amount of loan on the same property, after a lapse of some time. These institutions came out with innovative ways to tackle the scourge of take-over bids. They started levying penalty ranging from 1% to 4% on pre-payments

Credit cards were the new ways of wooing the customers. Initially they started with an enrollment fee with annual renewal charges, after which the banks started to issue lifelong credit cards with periodic increase of credit limits. They also tempted the card holders with add-ons for their family members. The Indian population largely consisting of the middle class who were always in some for of debt or other, due to social practices and non-availability of bank finance, fell hook line and sinker for these baits and many found themselves in the debt trap. The Indian legal system, being what it is the card holder took advantage of poor debt recovery-mechanism prevalent in the country. So much so, the banks had to offer a one-time settlement to its card holders to recover their debts. And some adopted strong-arm methods too. After it was exposed through the media, RBI had to came down heavily upon them and had to issue fresh guidelines for recovering the outstanding.

However this windfall of credit also has experienced its own pitfalls. In their eagerness to deploy funds, prove their mettle and increase earnings in the competitive environment, the banks are faced with proposals with high-level of risks like forged documents, missing borrowers, impersonating owners of assets which resulted in high-cost of collection and higher percentage of delinquency. With the advent of colour photo-copying machines, the borrower can now mortgage the same property with many banks after depositing the so-called original title deeds with all of them. With RBI insisting on IRAC norms, these institutions have to keep their NPA percentage at the lowest to reduce provisioning for bad-debts. The concept of securitisation of assets has started appearing in the Indian Banking Industry. Assets Management Companies are now operating in the financial markets. Delinquent portfolios are sold to these agencies by Banks/NBFCs so that the banks/NBFCs can keep their balance-sheets clean and can concentrate on healthy portfolios which are revenue-earning.

To sum up, multiple banking in the context of the Indian Legal System can prove to be a double-edged sword, if not monitored closely.

 

Chillibreeze's disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article.

Out of 5 “chilies”, our editorial team gave this article...

---

—About our writer: Durgaprasad says, "I worked in a nationalized bank for 26 years and opted for voluntary retirement in 2001. I then took a couple of assignments in the private sector and am currently working as financial analyst with a Chartered Accountant."

 

 

 

>> Read more articles written by Chillibreeze writers:

1. Articles related to Content and Outsourcing
2. NRI and Expat Articles
3. Potpourri
4. Travel Writing
5. Book Reviews and Interviews

More resources for Writers on Chillibreeze.com Chillibreeze offers Indian writers the opportunity to work on customer projects. We are also India’s biggest writer network and a one-stop shop for Indian writers and editors. The writers’ section on Chillibreeze offers freelance writers and editors a variety of tools to advance their careers. Resources for writers include: Assessment of your writing, editing and proofreading skills Writing courses Expert Feedback on your article An opportunity to promote yourself on our website Top websites for Indian writers Tips and resources for Indian freelancers Book Publishing services And more……………….. Explore our writers’ section using the links on our left-hand side menu.