Apex Bank of India - Research Paper Example

RSEARCH PTOPOSAL APEX BANK OF INDIA Introduction Apex Bank Limited or the Co-operative Apex Bank Limited of India is basically an agricultural bank that lends money to rural farming communities under the active patronage of the Reserve Bank of India (RBI), the central bank of India. The network of branches spans across India in a number of states, including Tamil Nadu and Karnataka in the South to Arunachal Pradesh and Haryana to the North. 1.1. Problem statement India’s agricultural and farming communities form the backbone of the nation though the country still has the biggest technically qualified labor force and is the biggest outbound outsourcing destination in the world today. This paradox has created a series of problems for the country as a whole. Poor repayment or even non-payment of agricultural and farm credit by these communities is one of the most intractable problems today and will remain so for decades to come unless a well-coordinated national plan of action is put into effect soon. This paper addresses why, how and when of this problem. In other words why, how and at what time period in history does this problem persist? 1.2. Purpose of the research Next the paper seeks answers to these intricate issues with special focus of attention on the credibility of the existing system of rural agricultural credit in India, Apex Bank’s current level of insolvency and then examines its implications in the larger context of India’s market based economy. However the research effort would comprehensively analyze the inherent organizational deficiencies and inefficiencies at Apex Bank, its structural and systemic problems, underlying causes of poor and non-repayment of agricultural loans and finally propose some solutions. 2. Literature Review This literature review is focused on the system-centric, non-repayment/poor repayment of agricultural/rural credit by customers of the Apex Bank. It examines the existing literature on the topic with specific reference to recent spate of defaults by borrowers and the subsequent system exposure to adverse consequences. By and large agricultural loan schemes in India are tailored to meet the borrowing requirements of farmers and rural communities and Apex Bank has been performing this traditional banking task with the same degree of conventionality. As a result of this some of the system centric deficiencies and inefficiencies were not seriously taken by the management at Apex Bank. According to Ibrahim (2010) India’s rural agricultural communities depend on state/central government largesse on the premise that repayment of loans obtained under government sponsored schemes need not be taken seriously (Ibrahim, 2010). In other words Apex Bank’s current problems related to non-repayment and poor repayment of loans by agricultural farmers can be basically due to the fact that with the economy starting to slow down on the aftermath of the global economic recession, agricultural communities in India were compelled to request re-scheduling of their repayment terms and conditions. Yet again repayment was repeatedly defaulted finally resulting in the current level of negative cumulative impact on the banking system including Apex Bank. This research paper investigates this cumulative impact with specific reference to the problems faced by Apex Bank during the past few years, thus forcing it to redesign its lending policies and strategies. According to Soteriou and Zenios (1999) the negative cumulative impact has produced a clear set of positive and negative correlations between and among such variables as the state/central government’s rural credit policies, agricultural credit schemes, repayment terms and conditions, Apex Bank’s internal lending policy environment, the bank’s own structural deficiencies, attitudes of borrowers, and their ability or inability to repay loans as largely determined by the evolving global financial crisis (Soteriou & Zenios, 1999). As the quantitative element of this research paper would demonstrate a fairly larger percentage of agricultural farmers in India are unable to raise a loan through the existing formal banking sector. Thus co-operative banking has acquired a greater dimension against the backdrop of uncertainty of repayment and cost of borrowing (Demetriades & Luintel, 1996). It is in this context that Apex Bank plays a very significant role as a lending institution to the agricultural and farming communities in India. As the mission statement of the bank states the bank is committed to mobilize all available resources and serve all communities well. However, critics have pointed out that Apex Bank’s inability to predict repayment flow has affected its own operational environment so negatively. In other words as the research methodology of this paper suggests there is a gap between the bank’s professed policy and performance (Kisch, 1949). In fact the bank’s performance metrics are poor. According to some independent researchers Apex Bank has inevitably been forced by external circumstances beyond its control to come to terms with reality, viz. an evolving scenario of negative developments such as a steadily but surely rising percentage of defaults by borrowers and ever increasing pressure by the RBI to put in place very stringent lending policies so that a credit crunch can be avoided (Kumar & Gulati, 2009). The current level of lending by the bank for various agricultural and farming purposes has been affected by its own structural deficiencies which in turn have been worsened by its poor credit and fund management techniques. In other words the bank’s methodology of recovering loans has been poorly designed and executed. Despite a recent wave of defaults by agricultural farmers the bank relied on its old policy of rescheduling loans that finally became unrecoverable bad debt. The absence of clearly defined accounting principles for such write-offs and above all the very absence of credit ratings of its customers forced the bank to rely on makeshift ratios that were of very little importance in the context of agricultural credit management and the implementation of solvency programs (Saha & Ravisankar, 2000). A recent research paper points out that Apex bank’s structural deficiencies included basically the management hierarchy related functions and their professional inefficiencies. Apex Bank tends to identify itself with unparalleled agricultural loan schemes that are intended to empower the poor. Its support for basic industries in India has also been subject to some sound criticism because the bank invariably encourages borrowers to default on repayment when such repayment can be effectively worked out on a related agricultural credit insurance program. In other words some critics have pointed out that Apex Bank has little or no faith in agricultural credit repayment insurance (Bhattacharya, Lovell & Sahay, 1997). This situation has further worsened the bank’s recovery programs, because the staff of the bank is poorly trained. Lending policies of the bank are constantly influenced by the external economic environment. The central government’s fiscal and monetary policies have affected banks lending policy environment. In fact India is closely following the American Federal Reserve’s policy measures, so that the government can realign its own monetary policy regime with what Fed does. According to critics this in turn has created an anomalous situation within the India’s economy, thus leading to the current level of impasse in the monetary policy environment (Reserve Bank of India Report 2000). For instance, India’s central government has been varying its lending rate to achieve both growth and check expenditure. However these two policy regimes are fundamentally opposed to each other. Therefore, according to critics imposing stricter lending regulations on banks is unlikely to help to bring about expenditure cuts. In fact, such regulations force both lending institutions and borrowers to resort to other informal methods. The marketing aspect of Apex Bank has been in poor shape due to the bank’s inability to identify critical competencies such as creditworthiness of its customers, credit and performance ratios of relevance and significance, market performance metrics based on national and international standards and tailoring lending policies to minimize losses through default. Credit repayment guarantees according to critics are much less likely to ensure a default free recovery system because such guarantees might not be backed to the full amount lent by the state and central governments (Vyas & Math, 2006). Above all repayment guarantee schemes act like a compulsion on the borrower to default. The marketing dimension of the bank is highly characterized by a number of structural deficiencies such as the management hierarchy being skewed in favor of concentration of power, responsibility and decision making. As a result apex Bank suffers from some inherent management structure related shortcomings. The marketing function is centrally controlled. According to some research publications the bank failed in recovering agricultural loans basically due to a short sighted marketing campaign which depended on conventional banking wisdom, i.e. failing to diversify credit risk through a multi dimensional product marketing campaign (Zineldin, 1996). Critics of the Apex Bank argue that the bank did not put in place a marketing strategy to meet sales targets, especially its product marketing strategy was not align with the lending policies. In fact, most of its customers depended on commercial banks for other products like income-backed savings schemes. 3. Methodology 3.1. Research Outline 3.1.1. Primary research 3.1.1.a. Interviewing Data collection is one of the central challenges in any research project. It is the process through which the opinions of people are collected and categorised. There are many methods of collecting data such as interviews; questionnaires; documents and observations provide invaluable information that is used for policy decisions, marketing strategies, and academic studies. Interviewing is a data collection method in which the researcher asks for information verbally from the respondents. It is the way to access people’s perceptions, definitions, meaning, situation and construction of reality, where it involves discussing or questioning issues with people to collect data unlikely to be accessible using techniques such as questionnaires or observation. Interviews are suitable when in-depth information is desired and this type of information is required in order to fulfil the purpose of this research. Therefore the interviewing research method will be followed in this paper. 3.1.2. Preparation of questionnaire This is the most important part in the planning of a sample survey, because a poorly designed questionnaire may ruin an otherwise well conducted survey. At this stage it is always advantageous to think in advance what variables and tabulations would be required for later analysis. It is advisable that a dummy tabulation plan should have been prepared in advance, if possible. This would ensure the inclusion of the information, which would be needed for the questionnaire. While preparing the questionnaire the following points were kept in mind in order to overcome the related problems. (i) As few questions as possible were included. (ii) Individual questions were framed in a simple and straight language. (iii) Questions followed a logical sequence. (iv) Highly personal questions were avoided, and if necessary for some enquiry they should be kept at the end of the questionnaire. 3.1.3. Administration of Questionnaire Once the questionnaire is prepared it may be administered by three different methods. (i) Direct personal interviews. (ii) Email inquiry (iii) Telephonic conversation. In this case study the method of e-mail inquiry was used. This method was applicable because most of the respondents were educated and co-operative and they realised the significance and importance of such a sample survey. The problem of non-response due to carelessness on the part of respondents is expected to be very large, though in the current survey such negligence was minimal. 3.1.4. Survey Statistical surveys are often carried out to collect quantitative information about items in a population sample. While political and government related surveys of people and establishments are too common in health, social sciences and marketing, they are carried out with a particular purpose on mind, i.e. to investigate some facts or information. Many surveys are usually intended to administer questions to respondents. When a researcher administers the questions it becomes a structured interview. When the respondent himself administers the questions the survey is called a self-administered survey or a questionnaire. There are three types of interview: structured, semi-structured and unstructured interviews. This dissertation utilises semi-structured type of interviews due to the fact that it helps the relatively structured interview guide, which includes ratings as well as relatively open questions. This type of interview is the most appropriate choice to gain the data necessary since it allows the researcher to lead informal conversation based on predetermined topics. Generally speaking, an interview is social interaction between two people, with one person gathering information from the other. The interaction is what differentiates the direct methodology from indirect methodology. Structured interviews enable the interviewer to ask each respondent the same questions in the same way. A tightly controlled structured schedule of questions and format is used, very much like a questionnaire. The questions contained in the questionnaire were planned in advance. The interviewer has some discretion how these might be elaborated/explained but the aim is to standardize data as far as possible and to eliminate biases due to different wordings. The questions in a structured interview may be phrased in such a way that a limited option response is elicited. The possible answers are defined in advance so that the respondent is limited to one of the pre-coded responses and thus data analysis becomes relatively easier. Interviews must be well prepared and must have clear objectives for each interview. Interviews can be conducted after the team has established the topical areas to be covered in the interviews and after the lead investigator has reviewed with the board the objectives of the interviews and strategies for obtaining useful information. In many research situations permission requests should be received before the interview takes place. The interviewer should consider the length of the interview to cover his aims, normally between 15 minutes to an hour. Provide contact information of the interviewer and it must be determined whom to interview, in what order, what interviewing techniques to employ and what method of record to use. The following aspects should be considered when defining a strategy for the interview The questions should make sense and be meaningful to the interviewee. The questions should be related to the interviewee experiences based on what is already known about them. The interviewer must take care to be sensitive to the needs of the interviewee. The interviewer should be aware of the flow of the interview interaction by attempting to move seamlessly between topics and questions. The interviewer needs to focus on issues and topics that are relevant to the research problem and questions. Interview questions have been compiled from the existing literature and detailed in relation to the research topic, aim and objectives, and focused on the main areas described above. The researcher noted all the replies to interviews and then transcribed the data of each interview. Although this was a time consuming process, the richness of interviews’ contents warranted such an effort. 3.2. Secondary data Secondary data would be collected through an extensive research effort conducted both online and in libraries. The researcher extensively used the books written on the topic and also studied research journals, reports, graphs, articles, newspaper articles and so on. References were taken from most of the research material available in the field. This study depends mainly on the secondary material, because theoretical analysis is much well facilitated by it than primary material which is basically limited to responses in the questionnaire and the survey. This researcher has tried to show the most important aspectual overview of the research in the Literature Review. Also there is considerable reflection on the state and relevance of current research. Future research possibilities in the field are discussed in depth to show how theoretical underpinnings evolve with time and space with specific reference to Apex Bank. Conclusion Apex Bank has been performing poorly in a number of banking barometers and benchmarks. Above all its current level of repayment defaults by its predominantly agricultural customer based can be attributed to its own failure to initiate proper marketing strategies. In the first instance Apex Bank did not adopt the kind of strategic initiatives and policies to face off adverse consequences arising from its lending policy environment. The latter is characteristically failure prone in cooperative banking sector which basically caters to rural agricultural communities. The structural deficiencies of Apex Bank have to be analyzed with reference to both its customer base and its marketing strategy. Its conventional banking practices have been a hindrance against proper marketing strategies based on sound, sales, creation and growth strategies. As a result its product diversification and customer value creation processes have suffered a setback. As some independent researchers have pointed out the bank has been experiencing a rising tide of defaults by its poor customers basically due to its inability to orient its marketing and sales strategy to meet the challenges of a rapidly transforming rural economy. Finally, Apex Bank requires a strategic shift from its current risk from credit granting convention to or more revolutionary approach in which the most negative systemic and structural shortcomings can be ironed out to produce positive banking synergies. In other words cooperative banks like Apex Bank need to focus attention on their backward antiquated management structures that invariably promote a culture of power concentration, directionless responsibility and lack of power delegation for decision making. Recommendations Apex Bank ought to identify the most pressing problems, especially how and why its customers like agricultural communities have been defaulting in their repayment commitments. The bank must put in place some system related reforms. For example, the existing lending policy highly favors potential defaulters on the ground that the system requires conventional banking practices to be promoted at the expense of practical and more efficient initiatives. Therefore, it is necessary for the Apex Bank to introduce a secondary tier of banking practice involving repayment guaranteeing insurance and reinsurance. Apex Bank also ought to adopt some far reaching credit risk management practices that involve reorganizing the existing operational environment away from the conventional approach. For example the bank should identify risk factors by using loan performance ratios so that loans made out to farmers would be repaid on the pure strength of performance based utilization. In other words bank must adopt a system of verifiable metrics to reduce the risk element associated with default. Apex Bank must abandon its age old credit requirement guarantee programs. This must be carried out in conformance with central and state governments’ policy initiatives. The bank ought to align its credit/lending policy with the loan current recovery policy. For instance the bank must give up lending for the sake of lending such as in the case of lending to farmers whose seasonal demands for the purchase of paddy seeds create demands for credit without paying attention to credit repayment capacity. Credit must be granted on individual merits of each borrower. REFERENCES 1. Barr, R, Seiford, LM & Siems, T 1994, ‘Forecasting Bank Failure: A Non-Parametric Approach’, Recherches Economiques de Louvain, vol. 60, pp. 411-429. 2. Bhattacharya, A, Lovell, CAK & Sahay, P 1997, ‘The Impact of Liberalization on the Productive Efficiency of Indian Commercial Banks’, European Journal of Operational Research, vol. 98, no. 2, pp. 332-345. 3. Cetorelli, N 1999, Competitive Analysis in Banking: Appraisal of the Methodologies, Economic Perspectives, vol. 23, pp. 2-15. 4. 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