Public Sector Banks
By Dhurjati Mukherjee
Public sector banks are underperforming and are mostly in the red due to increase in non-performing assets. Even the largest bank of the country, the State Bank of India (SBI) reported its largest ever quarterly loss of Rs 7718 crores for January-March 2018, more than double the Rs 3442 crores reported for the last quarter in 2016-17. Though the banks have been plagued with NPAs for a few years, the situation has turned critical in the past three years or so.
In fact, losses for PSBs of the last quarter may be a whopping Rs 50,000 crores, more than double the losses of Rs 19,000 crores in the preceding quarter ended December 2017. The huge losses are possibly a fall-out of the new Reserve Bank of India norms scrapping all loan restricting schemes. Of the 15 such banks that announced their results, 13 reported losses and only two — Indian Bank and Vijaya Bank — reported profits. The consolidated earnings of these 15 banks added up to losses of over Rs 44,000 crores.
Obviously, the losses have been triggered by higher provision for bad loans. According to a study by CARE, the ratio of non-performing assets to total loans had been stable in the range of 11 to 12% in the first three quarters of 2017-18 but increased sharply to 13.41% in the fourth quarter. Meanwhile, the decision of the Central government to providing capital to the better performing banks may put the others in a critical situation.
There are three important developments in the banking sector: recapitalization of banks, aligning the stressed asset resolution process of the Insolvency & Banking Code (IBC) as in other countries with transparent bankruptcy laws as in the US and establishing a separate Enforcement Department within the RBI.
But the question remains how effective has the IBC been as the panacea for the NPA epidemic? Every case is being fought tooth and nail, conflict of interest stories are flying thick and fast, cases involving humongous credit defaults are being sought to be settled at ‘haircuts’ of 50% or more even as rural debt waivers, minuscule by comparison even when aggregated, are hotly debated as ‘morally inappropriate’ and even the very basic principle of not letting errant promoters bid for delinquent assets is being sought to be undermined actively.
In the above circumstances where reforming banks is on the agenda, there is talk of amalgamation of some weak banks with the better off ones and privatisation of public sector banks other than the SBI. The obvious reason is that private banks exhibit higher productivity as is the case with the ones operating in the country due to better governance and efficiency. As is well known and also pointed out by the P J. Nayak committee, Boards of most PSBs lack the expertise to make the banks profitable through better management.
Before the question of privatisation, whether full or even 50%, there is need to go for amalgamation of some weak banks and see the results for two to three years. Along with this, political interference in matters of lending has to be completely done away with as huge lending to corporate groups are carried out at the behest of political personalities where only the top banking management is involved.
An important question that is being asked is whether the private banks would be able to carry out the social goals, i.e. continue with priority sector lending as before. Undeniably, most of these goals can be pursued through RBI regulation and direction of private sector banks. In fact, reports suggest they have delivered on the major social objective of priority sector lending for quite a few years, sometimes even exceeding targets.
In a recently released booklet in January by the Finance Ministry, two important recommendations include setting up Agencies for Specialised Monitoring to oversee credit exposures of Rs 250 crore and above and those that require domain expertise. These agencies are supposed to keep an eagle eye on the progress of every loan, and report to the bank’s board at the slightest hint of trouble. In case loans under these agencies do go bad, recovery will have to be through a specialised asset management vertical.
Another significant aspect is to concentrate on consortium lending. Smaller banks normally join a consortium that funds large projects. These banks do not necessarily have the economic or technical expertise to get involved in such projects, but fall back on larger banks such as the SBI. Now the government has recommended that every member of a lending consortium have at least a 10% stake in the project being funded. More importantly, the government suggested that smaller banks have a limited exposure to corporate lending.
There are many other recommendations, including on selection and functioning of auditors, and appointment of a risk officer. The big question is if all this is too little, too late. Would steps like these have prevented a Nirav Modi like situation from taking place?
However, one has to agree that these recommendations cannot be considered “the magic wand that will change the banking scenario” because there are too many problems left unresolved. The real test rests in proper implementation of the recommendations. According to some experts, the banking sector has always had enough rules or laws, but the rot continued due to their poor implementation. There was the Board for Industrial and Financial Reconstruction (1987), the Company Law Board (1991), the Sick Industrial Companies (Special Provisions) Act 1985, the corporate debt recovery mechanism (2001), the master circular on wilful defaulters (July 2015) but they all achieved little because the political will was missing.
But a point that needs emphasis is that the RBI’s jurisdiction is more constrained than anywhere else in the world because if it penalises a public sector bank, it is the government that will have to pay. So, the RBI is simply not allowed to levy a penalty. Ultimately, it’s more about insulating the banks from government interference. As long as a Finance Ministry nominee sits on the board of PSU banks, it is highly unlikely these banks will have a free run. Letting these banks run free, without government interference but strict supervision will help efficient functioning of banks.
Finally, one my consider a suggestion that even after contemplated reforms are unable to gear up functioning of PSBs, say after two or three years, dilution of 50% stake to a private party with requisite experience and retaining the remaining amount with the government. Thus, there could be joint management of these banks with both public and private sector nominees on the board. In such situation, there should not be any apprehension that social sector goals would not be carried out with overall supervision of both the RBI and Finance Ministry. Moreover, if the management is equally distributed by the government and the private party, the interference of the political leaders would come down and the banks would be professionally governed.—INFA