The bad
loans
of public sector banks grew by a whopping 56% during 2011-12.
On the face of it, it appears
as if public sector banks (PSBs) have managed to keep their head above water in the past year. However, a closer
look reveals that their operations are dangerously vulnerable to the economic
uncertainties in India today. After eliminating the last minute window-dressing
by banks, deposit growth looks halting and growth in advances below par.
However, the shocker is the whopping increase in their non-performing assets
(NPAs) which reflect the health of a bank’s asset portfolio. Here are the
numbers. While the total loans and advances of public sector banks grew by
17.37% during 2011-2012, their gross NPAs increased by a huge 56.95%. This is
nothing short of daylight robbery. If NPAs of public sector banks gallop at
this rate, it will not be long before many PSBs return to being deeply in the
red. Central Bank of India, dogged by a series of controversies over actions
and decisions of the past two chairmen, has already earned the ignominy of
declaring a net loss of Rs105 crore in the 31 March 2012 quarter, as against a
net profit of Rs132 crore during the corresponding quarter of the previous
year—a sharp reversal of its situation.
In banking, loans going bad are part of the business risk; NPAs are inevitable,
but they should remain within limits. A bank’s lendable resources are mainly
public deposits and, unless these deposits are profitably deployed with proper
checks and balances to keep NPAs low, a capsizing bank can cause systemic
banking failure. NPAs have to be taken seriously because loss-making banks are
inevitably bailed out and capitalised with the taxpayers’ money in India. There is another major issue that
most analysts miss—banks are allowed large write-offs against NPAs which reduce
their tax liability. Lower taxes paid means fiscal stress that has to be borne
by taxpayers either as inflation or by higher tax rates. Preventing a further
downgrade of their credit rating is important not only from the perspective of
retaining public confidence but also the impact it has on the bank’s
resource-raising cost. As India remains mired in poor economic growth, where
are we on the issue of bank NPAs?
The following two tables give details of the growth of the advances portfolio
and the corresponding rise in gross NPAs of all the public sector banks (first
table) for and private sector banks (second table) for the year ending March
2012. A quick look would reveal that there is a marked contrast between the
performance of PSBs and private banks. Although the total advances of private
sector banks were less than 25% of those of PSBs, private sector banks, as a
whole, have done better on the NPA front. This is reflected in the
significantly higher valuation of their shares on the bourses
It is clear that performance of the PSBs has deteriorated considerably during
the past year.
Indeed, the private sector banks have, in fact, improved their position over
the past two years. If credit growth slows down during the current year, the
position of PSBs will worsen, unless banks are able to recover or upgrade a
substantial part of their existing NPAs. Mind you, this position is after
writing off substantial NPAs as being irrecoverable last year.
Besides NPAs, every bank has a sizeable portfolio of restructured advances,
not included in the NPAs at present. Restructured advances are those that
were prevented from being classified as NPAs by rescheduling them by giving
extended holiday for repayment of loan
instalments as well as interest to give the borrowers some more time to meet
their commitments. Until 2001, these restructured accounts were considered
NPAs, but to provide reprieve to banks and borrowers, the Reserve Bank of India
(RBI) magnanimously took a decision to permit these loans to be treated as
standard so long as they were rescheduled before becoming NPAs. Banks were
allowed to do this if they considered the projects to be viable and believed
that the cash flow problems
faced by these borrowers were temporary. This amounted to the regulator’s nod
to ‘ever-greening’ of loans and officially postpone the problem. More often
than not, a sizeable chunk of these loans becomes non-performing—RBI officials
themselves concede that 15% of restructured assets become bad debts.
As on 31 March 2012, restructured advances of State Bank of India (SBI) alone
grew to Rs37,168 crore. This helps to camouflage
the ugly face of the Bank’s performance, fools investors and creates a false
sense of complacency. If you add up SBI’s NPAs and restructured loans, it is a
massive Rs76,849 crore which is over 91% of the total net worth of the Bank!
The obvious question is: Why do PSBs suffer from this malaise? They point out
to sluggish economic environment
which makes loans turn sticky. But this is only an excuse; private banks have
performed better in the same environment. Indeed, they have improved their
gross and net NPA ratios. Another excuse trotted out by PSBs is the use of
technology: that shift to core banking solutions led to higher reported NPAs!
Does this mean that the banks were deliberately suppressing NPAs so far? Does
it also mean that auditors (and RBI inspectors) were sleeping or certifying
false disclosure of NPAs without verification? The problem is endemic. The way
PSBs operate inevitably leads to several functional deficiencies:
1. Credit assessment in PSBs is inadequate. Decisions with regard to large
value loans usually get clouded by internal and or external pressures. It is
often said that the large value loans in PSBs are often fixed in advance—much
like match-fixing. This puts public resources at risk for the personal gain of
industrialists with political clout. The ‘cash for loan’ scam unearthed last
year revealed how this works. Most loans that are granted under (political or
corporate) pressure often turn into NPAs within about a year. RBI should,
therefore, ask each bank to make an independent
study of all large-value loans that have turned non-performing
within a year and investigate each of these cases to ascertain whether there
was any violation of the laid down norms and regulations. A periodic inspection
by an outside agency will serve as a deterrent and prevent the operating staff
from deviating from prudent principles.
2. Keeping a close watch on the end-use of funds is the most important role of
the banks’ operating staff, since any misuse of funds leads to default. While
this is the primary responsibility of branch offices, the central office cannot
absolve itself of the responsibility. Most often, financial mismanagement by
borrowers results in loan default. If bank branches take cognizance of the
symptoms of financial difficulty, such as dishonour of cheques for lack of
funds, delayed submission of stock statements,
etc, many accounts can be saved from turning into non-performing ones.
3. All large branches of PSBs are brought under concurrent audit as per the
guidelines of RBI, at substantial cost; but the contribution from these
concurrent auditors in identifying and reporting potential NPAs is poor. It is
necessary to widen their role and responsibilities and make it mandatory for
concurrent auditors to examine in depth the utilisation of loan proceeds in all
large value accounts and their operations, and report to the board of directors
where an RBI nominee is ever-present. This will help banks initiate corrective
steps long before the account goes bad.
4. There are generally two types of recalcitrant borrowers and banks do
categorise them as such in their records. The first is an unintentional
defaulter, who becomes sick due to factors beyond his control. The second one
is a wilful defaulter, who, by mismanagement or intention, makes his company
sick and seeks all sorts of concessions from the bank. In such cases, it can
often be seen that the company turns sick but the promoters remain healthy and
lead a life of luxury. Unfortunately, the Companies Act currently does not
allow lenders to remove wilful defaulters from the management. Banks remain
silent spectators to such loot. It is desirable that the names of all wilful
defaulters be put on the website of RBI, so that they are exposed and
ostracised by the banking community.
5. In the United Kingdom, once a company’s net worth turns negative, it is
considered insolvent and its directors become personally liable for all the
actions (from that day), if they continue in the management. Usually, the
directors resign immediately and hand the company over to the lending bank
which, in turn, appoints an administrator until it is sold through a public
auction. This ensures that the company survives and banks realise their dues.
In India, this was done only in the case of Satyam Computers after its promoter
Ramalinga Raju admitted to fraud. There is a need to introduce legal provisions
in our Companies Act so that the entire hoax of companies becoming sick and
carrying on business from the comfort of a five-star hospital called BIFR
(Board for Industrial and Financial Reconstruction) for years together at the
expense of the exchequer is put an end to. The ministry of corporate affairs
should include these provisions as in the UK Companies Act in the revised
Companies Bill under the consideration of our government.
6. The introduction of The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) has helped
banks in improving recovery of dues. However, borrowers can obtain stay orders
from higher courts and prevent banks from enforcing the securities. This leads
to delays of several years.
Meanwhile, moveable securities charged to the bank slowly disappear and
operations come to a standstill. The government must stipulate a maximum limit
of, say, six months for the higher courts to dispose cases filed under the
SARFAESI Act to ensure that projects are still viable when sold. However, the
fact that NPAs have ballooned even after the SARFAESI Act, shows that banks are
not known to invoke the Act quickly and effectively against those borrowers who
bring political pressure to bear or obtain loans by dubious means.
7. Debt Recovery Tribunals (DRTs) are specialised courts for speedy disposal of
recovery cases filed by banks. There are 33 DRTs in the country with as many as
67,000 cases involving over Rs1,36,000 crore pending before them as on 31 March
2012. The finance minister, while addressing the presiding officers of these
DRTs recently, expressed concern over the large pendency of cases and asked
them to suggest ways to unlock banks’ resources. While there is an urgent need
to set up more DRTs in tier-II cities and fill up the existing positions (several
DRTs are headless), to ensure that cases are disposed of within two years, the
fact is corruption has affected DRTs too. Cases are deliberately dragged on
either due to the interests of the parties or simply incompetence of the
judges, giving the impression that DRTs are overloaded with work. If the speedy
disposal of cases makes some of this disputed Rs1,36,000 crore available to the
banks within the next two years, the government will not have to pump
additional capital into banks. This will save taxpayers’ money and bring down
fiscal deficit substantially.
8. The appointment of chief executive officers (CEOs) of PSBs is a game of
musical chairs. Selection is either without application of mind or due to
political lobbying. Many continue to be appointed for a term of around one
year. A chairman appointed with a 12-15-month tenure ends up spending six
months to understand the bank’s culture and the remaining period in making
retirement plans. This includes lobbying for post-retirement government sinecures
or seeking lucrative private sector directorships. What is the incentive for
such CEOs to be involved with the bank in any constructive manner? The
government should ensure a minimum tenure of three to five years for bank CEOs
with clear accountability for its functioning in critical areas like
profitability and NPAs. If they fail in the task then they should not be
considered for any assignment post-retirement. The incentive scheme applicable
to chairmen and managing directors and executive directors of PSBs should also
be broadened and there should be negative marks for failure to achieve pre-set
goals. Only this will ensure better performance.
Rot at the Top
One obvious reason for
bank bad loans: controversial appointments, says Sucheta Dalal
If public sector banks (PSBs) are in trouble again, despite frequent
recapitalisation by the government at the taxpayers’ expense, it is due to two
major factors—rising NPAs caused by behest lending, and dubious loans (which
are not meant to be repaid) sanctioned by senior bankers as the price of
chairmanship. Corporate debt restructuring
(CDR) was supposed to be a one-time affair and, along with the SARFAESI Act to
help recovery of loans, it was supposed to be the end of excessive NPAs.
Instead, banks have found a way around it all. CDRs are frequent and neither
the regulator nor the government seems inclined to question them.
The main article has already pointed out how banks have blamed the rise in NPAs
on the automated tracking
system through core banking solutions (CBS). Now, RBI deputy governor, KC
Chakrabarty has lashed out at banks for this. Bankers point out that repeated
restructuring of loans is followed by deliberate devious acts such as feeding
wrong data into the CBS system to hide stressed loan accounts. Friendly auditors also help camouflage bad loans and, when things begin to get really
sticky, banks simply off-load the bad loan
to an asset reconstruction company at a huge loss. This is the price for
getting the loan off the bank’s books.
According to media reports, the real-estate sector is a big beneficiary of
restructuring, accounting for about a tenth of the sticky loans. RBI officials admit that loans to loss-making
state electricity boards ($5.5 billion outstanding) are a big problem, as is
the huge bailout of Air India ($4 billion) in the public sector and Kingfisher
(Rs7,500 crore after restructuring) in the private sector. There is also
Paramount Airways, which cost New India chairman M Ramadoss his job, because he
disguised a loan of several hundred crores of rupees as an insurance product
(some say at the behest of a powerful minister and for the privilege of heading
a larger insurance company). Corporation Bank
chairman, Ramnath Pradeep, is another one who quit after an indictment by the
Central Vigilance Commission.
A Reuters report in June 2012 quotes State Bank of India’s deputy managing
director as saying that 43% of loans that the Bank restructured in March 2010
were declared non-performing within two years. The report also cites several
cases of restructuring turned bad including Hotel Leelaventure, Electrotherm
and some electricity companies. One of the most extraordinary cases was that of
Central Bank of India which announced a net loss of Rs105 crore for the 31
March 2012 quarter, in its 101st year. Its bad loan provision has doubled,
restructured loans trebled and slippages, despite restructuring, are a massive
Rs3,300 crore in this quarter. Central Bank of India, which was headed by two
controversial chairpersons, also had the ignominy of having MS Johar, an
independent board director (a chartered accountant), being arrested by the
Central Bureau of Investigation (CBI) in 2010 on charges of facilitating loans for a price. The arrest
focused attention on several shady chartered accountants who are inexplicably
appointed as directors on PSBs. A former bank chairman tells us that many of
them broker dubious loans for corporate houses in return for choice
appointments for bankers. The arrest of Mr Johar in 2010 has apparently made no
difference to the system. A blog named www.allbankingsolutions.com, which has
put out a long list of potential candidates to head banks, says, “The million
dollar question is whether the lobby of corrupt bankers will be able to
continue to dominate the scene and will have its own way” or will the prime
minister “be able to exclude” some of the known corrupt names.
