Who is responsible for the crisis at UBI?

 B S :Manojit Saha & Somasroy Chakraborty  |  Mumbai/ Kolkata   4,Mar 14


Lax credit appraisal and rivalry at the top may have caused
 the rise in bad assets, but the episode raises larger
 questions on the role of leaders in PSU banks


At a time when the demand for bank finance is weak, interest rates are high 
and the economy is growing at its slowest pace in a decade, not many 
lenders are willing to expand their credit portfolios aggressively. But there
 are exceptions, and Kolkata-based United Bank of India (UBI) is one of them.
 Thus, UBI's advances increased 34.2 per cent to Rs 83,636 crore at 
the end of September 2013 from a year earlier. This was almost double 
the industry average during the period. Even on a sequential basis, the 
bank's advances increased 17 per cent.

UBI is certainly not the only bank in the country to report unbridled growth
 in its loans. Bank of Maharashtra, for instance, increased advances 
36 per cent in 2012-13 (April-March) when loan growth in the banking
 sector was only 15 per cent. But, given UBI's weak finances, mounting
 losses, deteriorating credit quality and low capital adequacy ratio, many 
now blame the unrestrained growth for the crisis in the bank. The bank's
 loss more than doubled to Rs 1,238 crore in October-December 2013. 
UBI's gross non-performing asset at the end of December stood at 
Rs 8,546 crore, or 10.82 per cent of all assets, which is much higher 
than the public sector banks' average of 4.1 per cent, as on 31 March 2013. 
While UBI's share in overall gross advances is about 1 per cent, its share
 in non-performing assets is as high as almost 3.5 per cent. Fresh slippages 
topped Rs 3,000 crore in the December-ended quarter. The Reserve Bank
 of India (RBI) recently conducted an audit to examine the factors 
contributing to the rise in its non-performing assets and capped the
 loan sanctioning power of the bank to Rs 10 crore, pending further 
instructions.

Too many things to blame

From faulty software to political pressure - everything is being held

 responsible for the present state of UBI. Claims are also being made

 that because of a rift between its senior executives, UBI probably 

overstated its non-performing assets to the extent of Rs 2,000 crore

 in farm loans and cash credit accounts. Industry analysts and experts

 feel aggressive credit expansion in an uncertain macroeconomic 

environment added to the bank's problems. "I have learnt a very 

simple lesson in banking: if you are attempting to build assets at a pace

 much above the industry, then the quality does suffer. This one is no

 exception," Ashvin Parekh, managing partner of Ashvin Parekh Advisory 

Services LLP and a senior expert advisor on financial services at 

Ernst & Young in India, says.

Public sector bank chairmen are often accused of window dressing

 their accounts at the end of a financial year in order to inflate the size 

of their book. Every year, without fail, loan growth gathers pace towards

 the end of the fourth quarter, while bulk deposit rates rise as lenders

 scramble for funds. Analysts say sometimes banks in their exuberance 

to grow fast relax their credit appraisal processes a tad, which later comes

 back to haunt them. UBI, for instance, has seen several small loan accounts

 (of below Rs 10 lakh) turning non-performing - which points towards a

 lax credit appraisal system.

A few bankers, however, believe that the problem is deep-rooted and blame

 the government's appointment process for top executives in public sector

 bank. It is often seen that a state-run bank's fortune fluctuates and earnings

 dwindle immediately after it gets a new chief. The common perception is that 

the outgoing boss prefers to leave on a high note and often under-reports 

non-performing assets, leaving the task of cleaning up the mess to his successor.

The appointment of the chairman in a public sector bank involves the 

formation of a search committee, which is headed by the RBI governor.

 In practice, the governor usually delegates the responsibility of overseeing 

the appointment to his nominee (mostly the deputy governor in charge of 

banking development and operations). A representative from the finance 

ministry is also there on the search panel. The eligibility criteria for chairmen 

or executive directors are relaxed every now and then. According to rules,

 to become eligible for the post of chairman in a public sector bank, a

 candidate needs to have at least two years of residual service and must

 have worked as an executive director for at least one year.

But, in the last few years, there have been instances of candidates becoming chairman with less than two years of residual service. In one particular case, a chairman was appointed for only nine months. "This system fails to build a strong 
leadership structure in public sector banks," says a senior banker. Archana
 Bhargava, who became the chairperson and managing director of UBI in 
April 2013, opted to resign within 10 months of taking charge. The official
 reason cited was ill-health, even though talks of mismanagement and her 
growing rift with senior executives were getting louder. The government is
 yet to name a new chairman and has put the two executive directors - 
Sanjay Arya and Deepak Narang - in charge of the bank till further announcements.

"Several factors have played a part in monitoring the quality of the loan 
book, or the lack of it, at UBI. The board members as well as the officers at
 the grassroots have to take responsibility for the quality of the assets. 
Leadership plays a very important role and the top management should
 take responsibility, particularly in the areas of decision making and not
 disclosing the risks sitting on the book," Parekh says.

While the boards of all public sector banks have representatives from RBI 
and the government, it is the chairmen or their deputies who are blamed
 for all the bad loans. This, bankers explain, is because of a near-dormant
 role played by the board members (other than the chairmen and executive
 directors) in key decisions. RBI has been advocating the withdrawal of its
 nominee from boards of public sector banks - a decision which the 
government is not keen to implement any time soon.

Too late to turn the tide?

While it is clear that there is a problem with UBI, the question is,
 can the crisis turn into a systemic problem? If not, then why is
 the central bank suggesting superseding the entire bank's board?
 According to senior finance ministry officials, because an RBI nominee
 also sits on the board, a more proactive response is expected from the
 regulator. They also suggest, now that the worst seems to be over, 
what UBI needs is a new chief executive, and in a year, the bank will be 
back on track if some discipline regarding loan sanctioning and asset quality
 is maintained. "It (UBI's problems) should not have happened. As a matter
 of fact, we are engaged with RBI, checking to see why such a thing has
 happened. RBI has to react quickly to these problems. It has a nominee
 director who should have been wide awake," Rajiv Takru, secretary 
(financial services) in the ministry of finance, told Business Standard in
 a recent conversation.

Another senior official at the finance ministry suggests that one way of 
solving this problem is to do away with direct government holding in public
 sector banks. He adds that a quasi-government agency should own the
 majority of shares in public sector banks and cites the ownership pattern
 in Axis Bank as an example. The country's third-largest private bank is 
owned by SUUTI, or Specified Undertaking of Unit Trust of India, in which
 the government has a majority stake. The arrangement has allowed the
 board of Axis Bank to appoint key officials like chief executive and executive
 director who are in control of the day-to-day business. The chairman of 
the bank, which is a non-executive role, is appointed by the government.

BANKING LIKE A SHARK

To corporate trainers, who take inspiration from the animal world to
 describe leadership style, United Bank of India's former chairperson, 
Archana Bhargava, will probably come across as a shark - someone 
who forces others to accept her way, wanting to win at any cost and
 to be in control at all times. As an executive director of Canara Bank, 
Bhargava did not see eye to eye with many of her senior colleagues. 
A former co-worker remembers her as someone who disagreed with
 colleagues - be it loan sanctioning or asset classification. Once, apparently, 
she refused to sign the bank's financial statement as she was not 
convinced with the treatment of non-performing assets.

A post-graduate gold medalist from Miranda House, University
 of Delhi, who started her career as a management trainee in Punjab 
National Bank, Bhargava did not make much effort to change that
perception when she took charge of UBI on April 23, 2013. Talk of 
the growing rift between her and other top management executives
 started within months, and became louder and louder in recent months. 
She quickly earned the reputation of a "tough boss" who would not
 take no for an answer. General managers were often found waiting 
in a queue outside her office for their turn to brief her.