The government will soon introduce a new set of guidelines for appointment to board-level positions in public sector banks. The position of chairman-cum-managing director (CMD) is to be bifurcated with two persons holding the posts. The boards will have banking professionals and economists as independent directors to impart transparency in decision-making and to eliminate political interference.
This has come in the wake of the recent arrest of the Syndicate Bank CMD, allegedly for taking bribe for enhancing credit facilities of a few companies in violation of the bank’s lending norms. The CBI also found irregularities in his appointment by the UPA government last year. Public sector banks have been in the news for all the wrong reasons. Right from appointment of directors to lending loans, rules are flouted with impunity to suit the government’s interests. Public sector banks, which still account for over 70 per cent of the assets of the banking sector, work primarily for the government.
This may sound exaggerated but it is backed by statements from the likes of RBI governor Raghuram Rajan, who has voiced his concern over the rampant corruption and cronyism in the banking sector.
Being the majority stakeholder, the government reserves the right to appoint persons to managerial and board positions of banks. Unlike lower and middle-management positions that are filled through competitive tests, higher managerial positions are often sold for a price. Small wonder that bank boards are filled with people who have nothing to do with the banking sector.
Big corporations and private lobbyists manage to plant in banks people of their choice who dance to their tunes and extend favours in the form of loans. Such firms undoubtedly fail in their financial commitments and timely repayment of principal and interest. The private-public nexus also revolves around ex-bankers, who join corporate clients they favoured during their tenure as bankers. Such people work as intermediaries between banks and corporates, throwing public interest to the winds.
One may recall how the SBI came into being in 1955 with the government taking over the assets of the erstwhile Imperial Bank and how Indira Gandhi nationalised 14 leading private banks to make banking accessible to the masses. The nationalisation of banks was a huge success as the number of branches increased dramatically. But, with the increase in customers, banks often faced negative returns on assets and rising non-performing assets (NPAs), i.e. loans where interest and principal have been overdue for a period of 90 days. Initially, the government provided money for meeting the capital requirements of the banks. Later, the banks had to rely on public money to raise funds, though the government never reduced its stake to below 51 per cent in any bank.
According to latest figures, of 42 banks, both public and private, 36 banks have reported a 36 per cent increase in gross NPAs from `1.71 trillion in 2012-13 to `2.34 trillion in March 2014. Barring the SBI, the remaining 35 banks registered a decline of 9.1 per cent in net profit against 9.4 per cent last year. The biggest share of NPAs is from the public sector banks, which has jumped to 5.07 per cent in December 2013 from 1.84 per cent in March 2011. Private sector banks performed better. The stressed loan assets, i.e. gross NPAs and restructured loans where payment of interest and principal hasn’t been made for 90 days, have also shot up to 14 per cent of the advances—it is only 3 per cent in case of private banks. Restructured loans comprise around 7 per cent of the loans in case of public sector banks, compared to only 2 per cent for private ones. Also, public sector banks end up writing off more loans than they recover to dress up the balance sheets.
The latest data released by the finance ministry shows public sector banks have recovered only 23 per cent of NPAs in 2012-13, against 37 per cent in 2009-10. These banks filed cases for recovery of loans to the tune of `86,306 crore of which only `19,963 crore could be recovered. Higher NPAs also compel banks to make provision ranging from 20 to 100 per cent of the loan value, depending upon loan and the type of clients, to cover up the loss. The money so provided could have been used for lending and generating more revenue. The provision made by public sector banks stood at `23,241 crore in 2013-14, accounting for 91 per cent of total provisions of all banks taken together!
If one takes into account the gross NPAs of `2.43 trillion and stressed loan assets of `8.30 trillion, the amount of `11,200 crore earmarked in the budget for meeting cash requirements of the sector seems grossly inadequate. The banks need to raise their capital base by around `2.4 trillion in the next five years to meet new banking norms, not only to register growth, but also to relieve itself of the NPA burden.
Analysts estimate around 25 to 30 per cent of the stressed loan assets is likely to turn into bad loans. Given such a contingency, even a `2.4-trillion rise in the capital base may not bring much relief. The only viable solution seems to be to reduce government stake to below 50 per cent in line with the P J Nayak Committee recommendations, which will automatically reduce state interference, provide a level playing field to the banks with more autonomy, responsibility and accountability and provide the much-needed capital base.
The so-called autonomy and risk management review policy, code of conduct for board of directors and whistle-blower policies published on websites of public banks will remain a paper tiger when appointments to top managerial positions are dictated by those in power. Merger of small banks with strong ones can also help provide life to a financially weak bank with negative capital or negative return on assets. Promises like identifying delayed projects and ensuring timely clearances or setting up new debt recovery tribunals will not provide instant respite, however welcome they are.
The government must identify and plug loopholes within like the presence of “governments within the government” that the PM mentioned in his maiden Independence Day speech.
This can be done by appointing competent people to head such banks, offering them a respectable pay package on a par with private sector banks and putting them under continued surveillance. After all, it is public money and no one has the right to play with it.
The author is a company secretary and can be reached at jassi.rai@gmail.com