The poor performance of public sector banks is ultimately a governance issue. They would present a different picture if they were professionally run by managers with the right attributes
Indian banks are not in good shape. This is understandable during an economic slowdown - when the overall economic growth rate has dropped to around half of what was achieved in its heyday. As is inevitable in a slowdown, non-performing assets of banks are rising faster than the banks' ability to provide for them, which is leading to falling provisioning coverage for stressed assets. Balance sheet health is declining.
But what is more worrisome is that public sector banks, which have a 76 per cent market share, are worse off than the rest. In the last financial year, 2012-13, the new private sector banks provided a return on assets of 1.74 per cent, whereas public sector banks were nearly a full percentage point behind, at 0.78 per cent.
Things have gone worse in the current financial year, setting alarm bells ringing for the banking regulator, the Reserve Bank of India (RBI), which has promised new guidelines for recognition, resolution and recovery of loans in trouble. The easing of asset classification norms after the 2008 global financial crisis has "killed credit quality," says one central banker. "Things are quite out of control," says another, pointing to the volume of restructured loans.
Public sector banks have been likened to venture capital funds because of the large amounts they have lent to firms where the owners' stake is small. The RBI governor has specifically referred to bank chiefs with short tenures (that describes public sector banks well) seeking to evergreen troublesome loans and leaving it to their successors to bell the cat.
If there is a core infirmity, it is the practice of corporate debt restructuring, through which companies' troubled loans are restructured by giving a moratorium on repayment, easing interest rates and allowing a bit of a write-off. Through this, banks enable promoters of such companies to continue to exercise control. The total value of restructured corporate loans has gone up two and a half times to Rs 2.7 lakh crore, or around 2.5 per cent of GDP, in a little more than two years.
The RBI has done the right thing in making these warnings, but it has to take a major share of the blame for allowing things to come to such a pass in the first place. For a decade or more (Pradipta Bagchi first wrote about this on this page in the mid-nineties), we have witnessed a familiar pattern in the quarterly results of public sector banks. They usually peak as an incumbent nears the end of his term. Then there is a sharp decline as soon as the new incumbent comes in and seeks to begin with a clean slate and unearth what has been swept under the carpet. The numbers keep improving thereafter until the incumbent's tenure is over, after which the whole cycle is repeated with the next incumbent. This raises the question as to whether the quarterly results of banks tell us the truth about their health.
Since corporate debt restructuring is a key area of trouble, it is worth noting what is widely discussed and believed to be true. Companies often lobby on behalf of individual officials for key posts. If a candidate wins, there is obviously a payback. In the case of public sector concerns, this can happen through the awarding of tenders or orders. In the case of banks, either a loan is given or a loan that has become non-performing is restructured - this gives both a financial leg-up and a breather to the promoter, who does not lose control of his business.
Alongside this is the case of the criteria for the positions of executive director and chairman-cum-managing director being periodically altered, which creates the impression that this is done to enable particular candidates to sail through. It is enough that there are a few questionable appointments among many that are deserving for a cloud of suspicion to hang over the entire situation.
As with a lot else that is pulling down the performance of the economy, the poor performance of public sector banks is ultimately a governance issue. They would present a different picture if they were professionally run by managers with the right attributes - and reasonable tenures, which could both promote accountability and enable an incumbent to produce results. The RBI can keep tweaking rules and issuing long circulars - it should certainly not let drift persist - but at the end of the day, governance issues can only be addressed by the owners (in this case, the political executive of the day). The bad news is that micro-management from behind has returned after a respite.