Autonomy crucial for banks to function

India’s banking industry, particularly the public sector banks (PSBs), are at a crossroads with their flanks exposed to market mayhem in the wake of their worst third quarter results. Bank after bank vied with one another in presenting a gloomy balance sheet that rattled their registered scrips in the country’s major bourses. In a sense, the third quarter of 2015-16 marks a morose chapter in their post-nationalisation annals, bringing down the curtain on their complacent business-as-usual approach as being the sovereign arm of the government.

Thanks to the savvy Central bank governor Dr. Raghuram G Rajan who introduced the Asset Quality Review earlier to detect the dimension and magnitude of the non-performing loans/assets (NPAs) of the PSBs, the reality on the ground was startlingly scary in all its details about how the PSBs had been reckless in dressing up their asset position in the ledgers! Provisioning the PSBs must perforce have to make for their NPAs or what in plain language bad loans hit Rs 44,000 crore in the quarter ending December 2015, which is double the level a year earlier. Eleven out of 25 PSBs reported a loss with another eight logging a fall in profit in the range of 60 to 90 percent. All PSBs combined ended the quarter with a loss of well-nigh Rs 11,000 crore compared to a profit of Rs 33,613 crore in the analogous quarter last year.

It is small wonder that there was a panic writ lugubriously large on the bourses where the banking stocks have been hammered hideously on the heels of morose tidings over the bulging NPAs (non-performing assets/loans) the system is wrestling with and the attendant astronomical write-offs of the bad loans to clean up the slate and to reflect the true value of the stocks! In plain parlance, when there is no income—in this case interest for the advances extended—flowing from an asset (loan/advance), the bank is of perforce to  provide for the loss of the “asset” and then get rid of it from its balance sheet. This process of declassifying the loan as an “asset” in the books is what is termed write-off.  In the present context, most of the PSBs have a dreadful practice to inflate their asset base by persisting to show the defaulting accounts as normal and not lending money to others in dire need to finance a project/scheme/venture. An undesirable upshot of the of mounting NPAs is to render the banks to keep deposit rates ultra low and lending rates inordinately high in an unwholesome bid to recover the losses on these assets. The consequent impact of this dubious practice is that both the depositors including retired people who put their lifetime savings  in the safe haven of the banks and the entrepreneurs of small and medium enterprises (SMEs) looking for a viable vehicle of financing to realise their dream project run aground with astringent agony.

The ongoing unsavory practice can no longer be concealed under the carpet as the third quarter results of the nationalised banks announced recently revealed warts and all. Even before these results shook the markets and sapped the zest of the rest of the stakeholders in the country’s financial system, the stressed assets (comprising gross non-performing assets plus written-off assets and restructured assets) accounted for 14.1 percent of total bank loans as of September- end 2015, up from 13.6 percent in March 2015. For the PSBs, the stressed assets were in the neighborhood of 17 percent at the end of September 2015, while this was only 6.7 percent for private sector banks.   It is no mammoth task to ascertain why PSBs ended up accumulating avalanche of NPAs. No less a person than the RBI Deputy Governor Mr. S.S.Mundra conclusively demonstrated in a presentation in Mumbai at a CII event recently which showed that the asset quality review (AQR) conducted by the apex bank had revealed malpractices ranging from funding of “satellite entities”, round-tripping of funds by companies, repayment of short-term loans through overdraft facilities and such other ruses and incomplete assessment of viability of projects.

The present RBI Governor Dr.Raghuram G Rajan has presciently voiced his concerns over the deteriorating credit quality the banks under his charge suffer since way back in 2014 when he was just a year into his three-year tenure. At the 20th Lalit Doshi Memorial Lecture in Mumbai on August 11, 2014, Rajan put it point-blank when he said how banks had become the whipping-boy and ploy down the years. “The crooked politician needs the businessmen to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the underprivileged”. 

There are honorable exceptions and corporate houses which do not subscribe to this nefarious nexus to move up in the ladder but in a universe where “the culture of impunity” as elegantly expressed by Rajan to criticise the “rich and well-connected wrong-doer” holds sway, the cynicism gets entrenched. Hence, his  formula of putting AQR in two quarters, October-December 2015 and January-March 2016 meant the magnitude of bad loans would be brought to the fore, hitting their profitability. 

The trend to sequester rotten apples from the harvest of advances is an ongoing process and the fourth quarter results would also take a hit on profitability. Rajan justified the move to ask banks to classify loans that were detected during the AQR as bad loans as this is a good accounting, realistically reflecting what the true value of the loan might be. “It is accompanied by provisioning which ensures the bank sets aside a buffer to absorb likely losses. If the losses do not materialise, the bank can write back provisioning to profits”. In a sense, the regulator signaled that the idea of persisting with the recovery of loans would not be relented by the banks if they are to retain their value, worth, and existential significance.

Eventually, nothing can restore the PSBs to a hale and hearty state than investing them with the functional autonomy they are badly in need to banish the NPA blue.   Merely talking about diluting the government stake in the banks or putting them up for divestment at a time when the albatross of NPAs is hanging like a noose in their necks would not do, analysts assert.  PSBs should be board-managed and not be rode backseat by powers that be,  nor the culture of terrorising honest officials 

post-crisis by CBI sleuths to render them shy away from their core areas of nurturing the economy by providing the wherewithal of credit/advances to stakeholders in the real sectors.