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The Rediff Business Interview/ Prof Balachandran

'Banking in India is at least 20 years behind today's standards'

Professor Bala V Balachandran, professor of accounting, information systems and decision sciences, the Kellogg's Institute of Management of the USA, has been with the distinguished school since 1984. He did his Ph D in industrial administration from the Carnegie-Mellon University in 1973 and was an Ernst & Young Research Fellow in 1989 and focused on cost management, pricing, frauds and audit.

The Kellogg's professor was in Bombay this week to address a financial seminar organised by Tata Consultancy Services. Sunita Wadekar-Bhargava spoke to him to find out, among other things, if the Indian banking industry's financial practices are relevant or redundant.

Is the Indian banking strong enough to handle change especially when risks are growing?

The problem is the banks lack efficiency both on the credit and debit sides. First of all, there is a tremendous amount of NPAs (non performing assets). Why the heck do they keep on expanding NPAs more and more? If only a single person who defaults on payment is taken to task and put in jail!

What is going on here? There is no market pressure or market discipline. Unless you are able to ensure through the legal and enforcement means that if somebody defaults, he has to pay a price of whatever assets that have to be recovered, the NPAs will grow.

Then there is the accounting issue of NPA: If I'm aware of that thing, then why not mark it to the market and then write off the thing and show a loss? But nobody wants to do that. Because if they show a loss, then some vigilance committee is going to foreclose the bank, so why do you want to do that? So everybody is just avoiding the problem or postponing it.

What do you think this might lead to? A crisis of the Indonesian kind?

That's right. Also look what happened to the savings and loan industry in the USA. The bubble is going to burst. And that's exactly what happened in Bangkok.

What's the remedy? Will an overhaul of the legal and enforcement system help?

Yes. Absolutely. We need one enforcement division and then the legal reform. If the legal reform and the enforcement division don't exist, the banks are going to do the same thing and the bubble is going to burst someday. [A typical public sector bank seems to think], 'As much as possible let me postpone, let the next guy who is taking over the bank pay the bloody penalty. Let me enjoy.'

Why are the financial institutions not facing the same kind of problems like the banks? What is it that they are doing right?

Companies like ICICI and to some extent, IDBI, but not IFCI, are doing much better because they are able to take advantage of the bigger capital that they have. And they are efficient at targeting the customer as against doling out funds to everybody. These companies don't grow just like that but rather in a focused way.

Companies like ICICI have visionaries like K V Kamath at the helm. He is taking care of what's happening outside, the problems, the pitfalls, how to recover, not making those mistakes. That comes from leadership.

Or take the example of Deepak Parekh of HDFC. These are the kind of gentlemen who should create a team and then train the rest of the people. But training is only part of the problem. In my opinion, people's behaviour is based on two major psychological forces: greed and fear.

You have to exploit both greed and fear. You make money, you make millions. If a bank makes money, you have a share of it. That's greed. If the bank goes down, I will put you into jail. That's fear. You put these two together and then if you train the people they are going to listen.

But if you just train them, they are going to sit out there in the training period and continue to do the same thing because they don't have neither. Whether I work or not, I am going to get the same damn money and even if I fail, I am not going to escape. Where then is the incentive to work my rear end off?

What does this lack of incentive signify for the future of India's commercial banking?

Consumer services are not good but at the same time, people do not understand risk. There is a tremendous amount of risk (that can be taken). That is when you will have better commercial banks. Unfortunately, commercial banking in India is at least 20 years behind today's standards, they've become almost obselete, in my opinion.

Several recovery theories are being expounded for the ailing banks. But implementation seems distant.

If the theory has to translate into practice, we have to create a team of bright, insightful leaders, people who share their data, something that can be compared with developing countries like Latin America and also the US. We need people who can create a technology-oriented expert system, digital support system…. Of course, the legal and enforcement systems have to be in place. Provide the incentives for positive results. Theories will then work.

Talking of leaders, your institution (the Kellogg's school) is playing an active role in the setting up of the Indian School of Business in Hyderabad. Tell me more about that.

I was the person who started the whole idea of starting a business school in India. I have been in talks with McKinsey about it and Rajat Gupta, managing director, Mckinsey, is a good friend of mine. They even offered me to head the whole thing. But I don't want to do that because I feel I can do more for India by being with Kellogg than being in Hyderabad.

I am developing the curriculum, I am recruiting the faculty, I am doing everything for it. We want to make it much more broader, so apart from working with McKinsey, Kellogg and Wharton, we are also involving Harvard, Stanford, Michigan and the Chicago schools of business.

There are about 25 people called the International Academic Advisory Committee and that committee is going to different schools. Although Kellogg and Wharton will have the ultimate responsibility to certify and give the diploma with their signature and emblem, the proposed school will also have the support of the London School of Business.

People such as Sumantra Ghoshal will all come together and train the new management talent to be world class. This is to ensure that world class companies will go the ISB to recruit managers.

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