Finance minister Arun Jaitley told a meeting recently that the “time has come to be strict with public sector banks. I have urged the Cabinet Secretary and the RBI Governor to examine recent appointments in these banks”. He was obviously provoked by the recent hauling up of the CMD of Syndicate Bank for granting undue favours to some industrialists in exchange of bribes. But the case is proverbially one of locking the stable when the horse has bolted! Words of caution had been advanced when banks were nationalised in 1969. There are serious faultlines in the process of selection and appointment of chief executives. There are several other issues involved that may explain the maladies.
As on 30 June 2014, the total value of the declared Non-Performing Assets of these banks was Rs 2.5 lakh crore. The concealed amount would be nothing less than another Rs 2.5 lakh crore, including the cases covered by Corporate Debt Restructuring schemes (CDRs) which are nothing but a smokescreen to hide the actual NPAs. The scope of mala fide action in approving these CDRs leaves much to be examined. The gross NPAs of a small bank like the United Bank of India as on 30 June 2014 with equity capital of Rs 632.15 crore (after fresh capital infusion of Rs 257.44 crore) is Rs 7097.44 crore and free reserves of Rs 3319.01 crore. Would it be heresy to suggest that the bank is ripe for being sent to liquidation? Old readers would recall that this bank owes its origin to four failed banks way back in 1948 soon after Independence.
Now consider the health of the “bankers to the nation” ~ the State Bank of India. Gross NPAs as on 30 June 2014 with equity capital of Rs 7465 crore (after infusion of Rs 625 crore) is Rs 60434 crore and net NPAs amount to Rs 31883 crore, in percentile terms being 4.07 per cent and 2.66 respectively. Possibly, the D-day is still not on the horizon, but the historical perspective over several quarters is not too inspiring either. The condition of other banks is equally precarious. This deterioration in the health of the PSBs stares starkly at the ratios displayed by the three private banks, namely, HDFC Bank, ICICI Bank and Axis Bank. The disparity requires serious introspection by the policy-makers. It has been reported that in order to be Basel III compliant by 2017, PSBs would have to be incrementally capitalised. Last year, the budgetary provision was Rs 14000 crore and in the current fiscal, such provision is Rs 11000 crore. Tax-payers would be called upon to finance this massive support through the budgetary munificence. Is it just and fair to them?
Apart from meeting the needs arising out of the hunger-march of the banks, such augmentation of capital excluding the shareholders (public shareholding in the PSBs is not insignificant) would seriously affect their wealth; there does not appear to be any proposal in sight of rights issue of capital. In any event, if the preferential issue of capital, as in the past, is resorted to, it would amount to depriving the minority shareholders, the public in this case, because such restricted increase would only reduce the distribution of profits by the banks. A particular expression is gaining currency in public discourse ~ inclusive banking. Whatever it means is best left to the imagination of the policy-makers responsible for rescuing these banks from the verge of despair. We had a glimpse of this in the concept of “priority banking”. Under the existing dispensation, 40 per cent of all lending should be advanced to the agricultural and small sectors. Competitive lending marks operations of the auto, housing and sundry other segments. Consider also the loans to the state power sectors, private infra sectors and general business sectors. Most of these loans are mid-term and long-term and financed by short-term and CASA deposits. There is a mismatch between the relative tenures of these transactions. This is against the accepted banking philosophy. The results are too obvious to be missed. Mr Chidambaram, to score political brownie points in the past, waived about Rs 70000 crore of loans, purportedly given to farmers for agricultural needs, but largely utilised for unproductive purposes. Now, the Governments of Telangana and Andhra Pradesh are following the same route and the possible waiver would, if granted, amount to more than Rs 1 lakh crore. Apart from making profligacy a virtue, such unsound schemes for ulterior motives can hit the sentiments of all borrowers. They take it as a given that loan repayments need not be made because the self-generated vote-bank compulsions would finally come to their rescue. And it is not confined to rural indebtedness; it affects big borrowers too. Watch the drama being enacted by the likes of Kingfisher, GMR, Lanco and Sahara. We have also seen the pathetic experience of CRB Capital, Prudential Capital and Ceat Financial.
Why do such developments occur at periodic intervals? Political interference is undoubtedly a major factor. Some of the defaulters have strong political clout, ably assisted by the tribe of lobbyists. Law plays its own role to scuttle drastic action. Why don’t we have such provisions as Chapter VII and XI of the US Code? Why does it take decades to liquidate a business entity after it has turned terminally sick? It would be instructive to prepare a dossier of annual final closing of liquidation cases for the last three decades. Such statistics can easily be compiled by the authorities. It would also open a window for meaningful discussions and adoption of remedies. The gap between the normative and real world, however, is too wide to be removed.
There are several reasons for such irregularities. The pre-sanction formalities are defective, and this could either be systemic or motivated. Second, there is little or no post-sanction monitoring of the accounts. When the incipient sickness of the account cannot be anticipated, disaster is inevitable. Third, there is no sense of urgency to take corrective action. Fourth: instead of ring-fencing the account, “ever-greening” is allowed indiscriminately. A case monitored by this writer revealed that the outstanding loan amounted to more than Rs 18 crore when the value of the collateral security was less than Rs 3 crore.
The systemic inadequacies are manifest in many ways. The prevalent phenomenon of “Shadow Banking” is one of them. In the name of making finance available to the borrowers on the periphery of the economy, the institution of micro-finance has been in vogue for about three decades. The firms raise large amounts either from the vulnerable sectors by promising unsustainable returns or even from the PSBs at lower rates and in turn, lend at usurious rates to the same sector. The consequences are disastrous as would be evident from the recent cases of Sahara or Saradha. The PSBs have to compete with these shadow bankers and in target-based lending, huge NPAs are inevitable.
Not that the Reserve Bank of India or the Finance Ministry are not trying to address this problem, but the fundamental philosophy underlying the safe and sound running of the banks must be observed. The RBI Governor, Raghuram Rajan, has lamented the predominance of crony capitalism in the economy in general and the banking industry in particular. This must be faced squarely and with expediency. And yet one wonders how close the PSBs are to their Lehman moment.
As on 30 June 2014, the total value of the declared Non-Performing Assets of these banks was Rs 2.5 lakh crore. The concealed amount would be nothing less than another Rs 2.5 lakh crore, including the cases covered by Corporate Debt Restructuring schemes (CDRs) which are nothing but a smokescreen to hide the actual NPAs. The scope of mala fide action in approving these CDRs leaves much to be examined. The gross NPAs of a small bank like the United Bank of India as on 30 June 2014 with equity capital of Rs 632.15 crore (after fresh capital infusion of Rs 257.44 crore) is Rs 7097.44 crore and free reserves of Rs 3319.01 crore. Would it be heresy to suggest that the bank is ripe for being sent to liquidation? Old readers would recall that this bank owes its origin to four failed banks way back in 1948 soon after Independence.
Now consider the health of the “bankers to the nation” ~ the State Bank of India. Gross NPAs as on 30 June 2014 with equity capital of Rs 7465 crore (after infusion of Rs 625 crore) is Rs 60434 crore and net NPAs amount to Rs 31883 crore, in percentile terms being 4.07 per cent and 2.66 respectively. Possibly, the D-day is still not on the horizon, but the historical perspective over several quarters is not too inspiring either. The condition of other banks is equally precarious. This deterioration in the health of the PSBs stares starkly at the ratios displayed by the three private banks, namely, HDFC Bank, ICICI Bank and Axis Bank. The disparity requires serious introspection by the policy-makers. It has been reported that in order to be Basel III compliant by 2017, PSBs would have to be incrementally capitalised. Last year, the budgetary provision was Rs 14000 crore and in the current fiscal, such provision is Rs 11000 crore. Tax-payers would be called upon to finance this massive support through the budgetary munificence. Is it just and fair to them?
Apart from meeting the needs arising out of the hunger-march of the banks, such augmentation of capital excluding the shareholders (public shareholding in the PSBs is not insignificant) would seriously affect their wealth; there does not appear to be any proposal in sight of rights issue of capital. In any event, if the preferential issue of capital, as in the past, is resorted to, it would amount to depriving the minority shareholders, the public in this case, because such restricted increase would only reduce the distribution of profits by the banks. A particular expression is gaining currency in public discourse ~ inclusive banking. Whatever it means is best left to the imagination of the policy-makers responsible for rescuing these banks from the verge of despair. We had a glimpse of this in the concept of “priority banking”. Under the existing dispensation, 40 per cent of all lending should be advanced to the agricultural and small sectors. Competitive lending marks operations of the auto, housing and sundry other segments. Consider also the loans to the state power sectors, private infra sectors and general business sectors. Most of these loans are mid-term and long-term and financed by short-term and CASA deposits. There is a mismatch between the relative tenures of these transactions. This is against the accepted banking philosophy. The results are too obvious to be missed. Mr Chidambaram, to score political brownie points in the past, waived about Rs 70000 crore of loans, purportedly given to farmers for agricultural needs, but largely utilised for unproductive purposes. Now, the Governments of Telangana and Andhra Pradesh are following the same route and the possible waiver would, if granted, amount to more than Rs 1 lakh crore. Apart from making profligacy a virtue, such unsound schemes for ulterior motives can hit the sentiments of all borrowers. They take it as a given that loan repayments need not be made because the self-generated vote-bank compulsions would finally come to their rescue. And it is not confined to rural indebtedness; it affects big borrowers too. Watch the drama being enacted by the likes of Kingfisher, GMR, Lanco and Sahara. We have also seen the pathetic experience of CRB Capital, Prudential Capital and Ceat Financial.
Why do such developments occur at periodic intervals? Political interference is undoubtedly a major factor. Some of the defaulters have strong political clout, ably assisted by the tribe of lobbyists. Law plays its own role to scuttle drastic action. Why don’t we have such provisions as Chapter VII and XI of the US Code? Why does it take decades to liquidate a business entity after it has turned terminally sick? It would be instructive to prepare a dossier of annual final closing of liquidation cases for the last three decades. Such statistics can easily be compiled by the authorities. It would also open a window for meaningful discussions and adoption of remedies. The gap between the normative and real world, however, is too wide to be removed.
There are several reasons for such irregularities. The pre-sanction formalities are defective, and this could either be systemic or motivated. Second, there is little or no post-sanction monitoring of the accounts. When the incipient sickness of the account cannot be anticipated, disaster is inevitable. Third, there is no sense of urgency to take corrective action. Fourth: instead of ring-fencing the account, “ever-greening” is allowed indiscriminately. A case monitored by this writer revealed that the outstanding loan amounted to more than Rs 18 crore when the value of the collateral security was less than Rs 3 crore.
The systemic inadequacies are manifest in many ways. The prevalent phenomenon of “Shadow Banking” is one of them. In the name of making finance available to the borrowers on the periphery of the economy, the institution of micro-finance has been in vogue for about three decades. The firms raise large amounts either from the vulnerable sectors by promising unsustainable returns or even from the PSBs at lower rates and in turn, lend at usurious rates to the same sector. The consequences are disastrous as would be evident from the recent cases of Sahara or Saradha. The PSBs have to compete with these shadow bankers and in target-based lending, huge NPAs are inevitable.
Not that the Reserve Bank of India or the Finance Ministry are not trying to address this problem, but the fundamental philosophy underlying the safe and sound running of the banks must be observed. The RBI Governor, Raghuram Rajan, has lamented the predominance of crony capitalism in the economy in general and the banking industry in particular. This must be faced squarely and with expediency. And yet one wonders how close the PSBs are to their Lehman moment.
“If it plays its cards wisely, India can reap the benefits of a multipolar world” 
