Banking sector's worrisome woes continue

BRP Bhaskar
Gulf Today

India’s largest public and private sector banks are grappling with problems arising from systemic weaknesses and their unhealthy consequences.

The State Bank of India, with a customer base of 420 million and balance-sheet of more than Rs 30,000 billion, is the only bank from the country among the world’s top 50. It reported a net loss of Rs 65.47 billion for the financial year that ended on March 31 as against a net profit of Rs 104.84 billion in the previous financial year.

It attributed the loss to “an increase in provisions for non-performing assets (NPAs) and mark-to-market investment portfolio”. In plain language, this means the bank had to take into account possibilities of non-recovery of some loans and fall in market value of securities.

NPAs, always a source of worry, have become a cause for increased concern in view of the ease with which high-profile borrowers like playboy-businessman Vijay Mallya and diamond merchants Nirav Modi and Mehul Choksi have been able to slip out of the country.

Of the 21 state-owned banks, 19 were in the red when the last financial year closed. Their total loss was about Rs 873.57 billion.

The Punjab National Bank, which is at the centre of the Nirav Modi-Choksi scam topped the list with a loss of Rs 122.83 billion, followed by IDBI Bank with Rs 82.38 billion. SBI was in the third place.

At the end of 2017, the gross NPAs of all banks stood at a whopping Rs 8,409.58 billion. Industrial loans accounted for Rs 6,092.22 billion in NPAs, the services sector for Rs 1,105.20 billion and the agricultural sector for Rs 696 billion.

According to information provided to Parliament, the industrial sector led in delinquency with 20.41 per cent of the advances turning into NPAs, as against the agricultural sector’s 6.53 per cent and the service sector’s 5.77 per cent.

SBI, the largest bank, has the highest NPA figure of Rs 2,015.60 billion, and is followed by the Punjab National Bank with Rs 552 billion and IDBI Bank with Rs 445.42 billion. 

Among private sector banks, the ICICI Bank has the most NPAs: Rs 338.49 billion. A large loan it gave to Videocon Industries, a home-grown consumer durables company, is now under investigation for suspected quid pro quo as that company pumped money into NuPower Renewables, a firm owned by Deepak Kochar, husband of ICICI Bank CEO Chanda Kochar.

Videocon, which was once a highly profitable company, filed an insolvency petition before the National Company Law Tribunal last week. It owes about Rs 200 billion to a consortium led by SBI.

The steady rise in the growth of NPAs over the years raises the question whether the Reserve Bank of India has been diligent in the performance of its role as the central bank. 

Last February, while going through SBI’s documents relating to the financial year ending March 31, 2017, RBI found that it had understated its NPAs by 21 per cent and overstated its profits by 36 per cent. The standard RBI practice is to publicly report the divergence if it exceeds prescribed limits, which are quite liberal, with a view to naming and shaming the bank. No one is punished for misleading the regulator and the general public.

In April, RBI reportedly put 11 state-owned banks under its prompt corrective action framework which entails restriction on their lending activities.

Three days ago Piyush Goyal, who is officiating as Finance Minister, announced the setting up of a committee with instructions to submit recommendations for the formation of an asset reconstruction company for quick resolution of stressed bank accounts in a transparent manner.

When gross irregularities are investigated, bank officials get caught and are charged with corruption. But bankers do not always bend the rules for personal gain. Sometimes they do so at the behest of politicians who want to help their financiers.

Former RBI Governor YV Reddy has said that the government is pressing banks to lend to infrastructure projects, which are not an area in which they have competence, and to make depositors share the burden of bank frauds. 

A lasting solution to the banks’ woes cannot be found until the political overlords learn to respect the professional judgment of bankers.--Gulf Today, Sharjah, June 12, 2018

Banking sector problems remain

BRP Bhaskar
Gulf Today

With the State Bank of India absorbing six smaller public sector units on the first of this month, the country now has a banking institution with enough assets to figure in the list of the top 50 in the world.

The merger is part of a plan for consolidation in the banking sector. While consolidation is probably  a necessity at this stage, it is not a complete solution to the banking industry’s problems. 

The SBI’s roots go back to the colonial period. After the East India Company took control of the subcontinent with the help of three largely mercenary armies headquartered in Kolkata (Calcutta), Mumbai (Bombay) and Chennai (Madras), Britain permitted setting up of presidency banks in these cities. In 1921 they were merged to form the privately owned Imperial Bank of India.

A few years after gaining freedom, the government nationalised it and renamed it as the State Bank of India. Banks established by the former princely states were made its associates. All the associate banks and a niche bank for women launched in 2013 have now lost their identity in the SBI.

In 2015 the SBI was at the 52nd place in Bloomberg’s listing of the world’s banks. With the merger pushing up its assets to Rs 550 billion, it moves up to the 45th place.

The SBI now has about 24,000 branches, 270,000 employees and 370 million account holders. Its deposit base is about Rs 26 trillion and advances total Rs18.5 trillion. 

However, it is way behind the Industrial and Commercial Bank of China, which, with assets of $3.6 trillion, is the world’s largest bank. There are three more Chinese banks among the top 10.

The idea of merger of the associate banks in the SBI to create a mega bank capable of playing a significant role in the global economy was mooted by the Manmohan Singh government.  It moved slowly as the Left-led employees’ unions were against it. 

Prime Minister Narendra Modi gave it high priority as part of a banking reform plan.  Last year the government provided Rs 25 billion to infuse fresh capital in the public sector banks and made a commitment to provide Rs70 billion more in the next five years.

Basel III (the Third Basel Accord), the voluntary global regulatory mechanism, stipulated that banks must achieve a capital adequacy ratio (ratio of capital to risk-weighted assets) of 10.25 per cent by March 2017 and 11.5 per cent by March 2019. Fresh capital was needed to meet this requirement.

The government and the SBI management have claimed that the merger would result in reduced costs and increased efficiency, leading to recurring savings estimated at more than Rs10 billion in the first year.

Ironically, its immediate impact was increased costs to account holders as the bank raised the minimum balance requirements and fixed fees for transactions above a prescribed minimum. As a mark of protest, a citizens’ group called for observance of April 6 as “no transaction” day. A few thousand customers of the associate banks are reported to have moved their accounts elsewhere.

All that happened on April 1, the day of the merger, was the replacement of the name-boards and stationery of the associate banks with those of the SBI. The databases of the banks are likely to be merged only by the end of May. 

Since the associate banks, like the SBI, had worked on a national basis, there is a need to undertake rationalisation of branches and redeploy staff.  A category of employees of the associate banks, numbering more than 12,000, were given the option to take voluntary retirement, but only about 3,000 used the opportunity.

The government’s plan reportedly also envisages consolidation of the other 20 public sector banks into 10 large units.  Moody’s, the global credit ratings and research agency, has warned that the proposal involves risks that may offset potential long-term benefits. A prudent course will be for the government to study the SBI merger experience over a period of a year or so and recast its plan on a realistic basis.

The banking industry’s major problem is not the small size of the units but warped policy as also faulty implementation. The gross non-performing assets of 49 commercial banks stood at Rs 6 trillion in June 2016. Of this, the 20 public sector banks’ share was Rs 1.54 trillion. While banks are generally harsh on farmers who default on loan repayments when crops fail, they declare hefty loans of business magnates as non-performing assets and allow them to get away. -- Gulf Today, Sharjah, April 11, 2017.

Troubled banking system

BRP Bhaskar
Gulf Today

How healthy is India’s banking system, especially its large public sector component? The question has assumed significance following reports that state-owned banks wrote off bad debts to the tune of Rs 2,110 billion between 2004 and 2015.

Based on material provided by the Reserve Bank of India, the country’s central bank, in response to a Right to Information query, the Indian Express said the banks had written off as much as Rs 1,141.82 billion in the last three years alone. Bad debts which stood at Rs 155.51 billion in March 2012 had shot up to 525.42 billion by last March, it added.

Public sector units dominate India’s banking sector. The British-owned Imperial Bank of India, which the government took over in 1955 and renamed State Bank of India, is the country’s largest commercial bank. It now has more than 16,000 branches, including 191 abroad. Its assets stood at Rs 20,480.80 billion a year ago. Banks set up by former princely states function as its associates.

Fourteen large private banks were nationalised in 1969 and six more in 1980.

The SBI topped the list with write-offs of Rs 400.84 billion in the last three years. The Punjab National Bank, the second largest bank, stood next with a write-off of Rs 95.31 billion.

Responding to media reports, the Finance Ministry, the RBI and the SBI said loan write-off was basically a technical exercise to cleanse the balance sheet and achieve taxation efficiency. It was done at the head office level and did not preclude the branches from continuing recovery efforts.

However, many financial analysts voiced concern over the rise in bad debts and the recent fall in bank share prices. RBI Governor Raghuram Rajan accused critics of making claims bordering on scare-mongering. He attributed the fall in share prices to the turmoil in the world markets but conceded that the performance of some banks, particularly public sector units, was not pretty.

There may be no need for panic, as Raghuram Rajan says, but there is certainly cause for worry. The RBI recently put the value of banks’ stressed assets (including restructured loans) at Rs 7,400 billion. This means 10.9 per cent of all loans is stressed. Standard and Poor’s has forecast an 11-to-12 per cent growth in stressed assets during the year.

The issue of bad debts was a well-kept secret until the All India Bank Employees Association released a list of top defaulters in 2014. It contained names of 406 account holders who owed the banks Rs 703 billion.

Liquor king Vijay Mallya’s Kingfisher Airlines headed the list with debts of Rs 26.73 billion. The Winsome Diamond and Jewellery Company was a close second with debts of Rs 26.60 billion.

Among the other big defaulters was a construction company owned by KS Rao, who was Textile Minister in the Manmohan Singh government at that time. Raghavendra Rao and Deepak Puri, two businessmen whom the government had honoured with Padma awards, also figured in the list.

The AIBEA said bad debts of public sector banks had risen from Rs 390 billion in 2008 to 2,360 billion in 2013.

It alleged that banks, including private and foreign ones, had written off loans totalling Rs 2,040 billion between 2001 and 2013 under political pressure. It asked the RBI to publish the names of defaulters and demanded enactment of legislation to improve the recovery process and to make wilful default a criminal offence.

Raghuram Rajan, professor of finance at the University of Chicago and a former chief economist at the International Monetary Fund, took several steps to help the banks deal firmly with defaulters immediately after he took over as RBI governor in 2013. Guidelines issued by the RBI allowed banks to convert debt into equity and take control of defaulting companies if debt restructuring failed. The banks could then find new promoters to run the companies.

The Modi government, which assumed office the following year, announced a seven-point programme to revive public sector banks. It has only been implemented partially.

The latest debt figures indicate that the steps taken by the RBI and the government have not yielded anticipated results. The government told Parliament last year that 30 top defaulters owed public sector banks Rs 951.22 billion. This was more than one-third of their non-performing assets.

The name-and-shame policy adopted by some banks also does not seem to have had any effect on the defaulters.

The RBI and the government must urgently come up with foolproof measures to ensure the good health of the banks with a view to safeguarding the interests of the depositors and honest borrowers. --Gulf Today, Sharjah, February 16, 2016.