These are not the best of times for India’s public sector, especially for the government-owned banks and financial institutions. Always faring worse than their private counterparts in the art of ‘image management’, the public perceptions about them have nosedived recently. Take the case of the government banks. Much before a serving chairman of a nationalised bank — S. K. Jain of Syndicate Bank — was arrested on a bribery charge, public sector banks (PSBs) carried the inefficiency tag and were urgently in need of a make-over in the fullest sense of the term.
All of them need additional capital to meet the new capital adequacy norms of international regulators, and also in the context of the massive provisioning that all these banks have had to do.
In fact, tackling huge bad loans, as reflected in their high levels of non-performing assets (NPAs), has become a principal challenge for banks, the Reserve Bank of India (RBI) and the government. A number of explanations exist as to why the NPAs spun out of control.
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The economic downturn has definitely stressed bank balance-sheets. Stalled infrastructure projects have made repayment of bank loans difficult. Even if the government succeeds in reviving some of them, the portfolio of banks’ problem loans will not improve dramatically. (Among other reasons, more money would be needed and where else except from banks will it come from?)
This smacks of political interference. There is no other major reason why commercial banks should have such large exposures to infrastructure projects which typically require long-term funds. Commercial banks, as a rule, take deposits and borrow only for the short-term. Their loans are, therefore, for short-periods. The humongous loan exposures to entities such as Kingfisher Airlines and Winsome Diamonds and its associate companies are even more inexplicable. About Mallya the two things that stand out are his well-cultivated playboy image and success in the spirits business. Both these should not normally count with government banks. Yet, they lent and lent large, apparently without any real security.
Airline business is again something new to Indian banking leading one to conclude that but for some extraneous pressure sober banks would not have gone anywhere near Kingfisher Airlines.
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In this season, however, it is not any new expose of political interference that is affecting the image of public sector banks. It is corruption, not confined to just any specific acts, but applicable to the whole canvas. In other words, corruption among banks is perceived to be endemic, deeply ingrained and affecting all strata of bankers.
It is such sweeping generalisations that have put all PSBs on the defensive. Consider these. The fall of the Syndicate Bank Chairman has prompted probes against six or seven other recent top-level bank appointments. Suddenly, the system of selecting them has come unstuck. Nobody wants to have anything to do with their selection. One cannot but note the irony in this. The Finance Ministry and the top management of banks have wanted field-level bank staff to be less ‘credit shy’ and avoid fear psychosis “assuring them of a reasonable protection against vexatious prosecution if bona fide commercial decisions go wrong”. Now it is a case of top bureaucrats and probably ministers taking cover from accusations of wrong selections of top bankers. Should they be persuaded to sit on selection committees and be provided with immunity if the person they selected goes berserk even though he seemed to be an ideal candidate at the time of selection?
Mr. S. K. Jain of Syndicate Bank allegedly operated through and was tripped by a middleman, who specialised in getting loans sanctioned for his clients. When this fact became known, practically every broker, every intermediary, every middleman became suspect.
In many respects, this is reminiscent of the securities scam of 1991-92 where every broker was seen complicit with corrupt bankers. Nothing useful came of it then and nothing will come out of today’s hysteria. Like in any other profession, there are good and bad middlemen.
In any case, banning middlemen from entering office or even talking on the phone is bizarre to say the least. Incidentally, credit syndication by merchant banks is a legitimate activity. Should the activity be banned? In fact, in a broader sense, all merchant banks, investment counsellors and others are middlemen. At another level, there are any number of small and medium-sized industrialists and businessmen who require the help of chartered accountants to get loans sanctioned and to iron out problems thereafter. Nobody has suggested that these useful service providers should be banned.
There are reports that some PSB chairmen are going the extra mile to deflect any possible criticism by installing closed-circuit TVs to presumably record the proceedings of their investment committees. If true, these steps can only be termed outlandish. If any one wants to cheat, they can do so in a thousand other ways and still not be caught by television cameras. Which brings us to the cardinal point: there is no substitute for trust. The best of selection procedures cannot prevent a delinquent bank chairman. Nor can the finest credit appraisal skills prevent bad loans. But exceptional results should not force large scale changes that are both unworkable and bring the system to disrepute.
narasimhan.crl@thehindu.co.in