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.
Archana Bhargava