The present 12 public sector banks have shown profit of about Rs 15,306 crore during this April-June period which is a 9.2 per cent growth annually despite big dadas SBI , Bank of India and PNB have not performed well . Their profits have reported a fall of about 7 % due to the decline in the bond yields on account of Mark-to-Market (MTM) losses . MTM losses happen when the financial assets held are valued by the present market price which is lower than the purchase price.
During the April-June period of the previous financial year , the state-owned banks made a total profit of Rs 14,013 crore.
Surprisingly , Bank of Maharashtra has shown a profit of Rs 452 crores as against of Rs 208 crores during the same quarter of the previous year which is the highest percentage growth . Bank of Baroda has shown a profit growth of 79 per cent . The profit for the previous quarter was Rs 1,209 crores as against the present quarter profit of Rs 2,168 crores
Despite the fall in the profit of State Bank of India it has contributed about 40 % of the total profit. .
The total profit for 2021-22 is Rs 66,539 crores as against the profit Rs 31,816 crores made during the preceding financial year 2020 -21, Central Bank and Punjab & Sind Bank have reported losses during 2021–22. In fact many public sector banks have declared dividends
The losses recorded in the five years from 2015-16 to 2019-20 are furnished .
The highest amount of net loss was registered
2015-16 Rs 17,993 crores
2016-17 Rs 11,389 crores
2017-18 Rs 85,370 crores — highest loss
2018-19 Rs 66,636 crores
2019-20 Rs 25,941 crores
Some important points from the report of Raghu Ram Rajan ( ex RBI governor) who submitted explaining the cause as well the actions initiated
A larger number of bad loans were originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget.So they are willing to accept higher leverage in projects, and less promoter equity.
Slow Growth
Unfortunately, growth does not always take place as expected followed by a slowdown . Strong demand projections became unrealistic as domestic demand slowed down.
Government Permissions and Foot-Dragging
Suspected corruption in allocation of coal mines and subsequent cancellation coupled with the escalated project cost made the borrowers unable to service debt resulted in mounting NPAs. Similarly under power sector also default of repayment started
Loss of Promoter and Banker Interest
Due to the promoters' little equity stake ( wilfully accepted the banks ) — put in the project shortly vanished and they lost interest. The bankers feared of restructuring the advance and not able to threaten the promoters to bring additional equity . Hence fresh advances were made under some pretext to keep the advance as standard . In fact the projects were “zombie” projects, neither dead nor alive (“zombie” is a technical term used in the banking literature). No one was seriously trying to put the project back on track – this was deceptive accounting.
Malfeasance
Clearly, bankers were overconfident and probably did too little due diligence which was outsourced , for most of these loans . Such outsourcing of analysis or due diligence is a weakness in the system, and multiplies the possibilities for undue influence. Further over-invoicing of the capital goods were rarely checked. Public sector bankers continued financing promoters even while private sector banks were getting out . Finally, too many loans were made to well-connected promoters who have a history of defaulting on their loans. But he was very much hesitant to say — a significant element of corruption was there - because that could be ascertained if the unaccounted assets of CEOs are unearthed . Though the bank CEOs were responsible but the board has sanctioned the loan .
Fraud
Frauds are different from normal NPAs ( genuine business loss). Unfortunately, the system has been singularly ineffective in bringing even a single high profile fraudster to book. As a result, fraud has not been discouraged.
The investigative agencies blame the banks for frauds on account their slow interest evinced . But the reason for slowness from the side of bankers is the fear of harassment by the investigative agencies . He also sent a list of high profile cases to the PMO and he was not aware of the progress
2) Why did the RBI set up various schemes to restructure debt and how effective were they?It was clear to him that bankers had very little power to recover from large promoters — defaulters . The Debts Recovery Tribunals (DRTs) , set up under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 — were not much helpful in recovery and cases before the DRT were expected to dispose off in 6 months originally , but only about a fourth of the cases pending at the beginning of the year were disposed off during the year – suggesting a four year wait even if the tribunals focused only on old cases.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 were helpful a bit to recover dues even without approaching the DRTs.
Yet the amount banks recovered from wilful- defaulted debt was very meager that too after long time . The large promoters understood how to game in that set up .
The defaulter had gone to the extent of threatening to divert payments to the favored bank, as the lender feared the loan becoming an NPA. Sometimes promoters offered low one-time settlements (OTS) knowing that the system would allow the banks to collect even secured loans only after years.
The RBI decided to empower the banks and improve on the ineffective CDR system then in place. The first task was to make sure that all banks had information about the borrower. So a large loan database (CRILC) that included all loans over Rs. 5 crore, which was shared with all the banks. The CRILC data included the status of each loan – reflecting whether it was performing, already an NPA or going towards NPA. That database allowed banks to identify early warning signs of distress in a borrower such as habitual late payments to a segment of lenders.
The next step was to coordinate the lenders through a Joint Lenders’ Forum (JLF) once such early signals were seen. The JLF was tasked with deciding on an approach for resolution, much as a bankruptcy forum does. Incentives were given to banks for reaching quick decisions. The unconvinced bankers on the joint decision were allowed to exit.
In April 2015 , RBI wanted to stop ever-greening of projects by banks who want to avoid recognizing losses – so it was decided to end the forbearance, with the exceptions of long duration projects such as roads had been structured through the 5/25 scheme , provided the long dated future cash flows could be reliably established.
Because promoters were often unable to bring in new funds, and also the judicial system often protected those with equity ownership, together with SEBI , RBI introduced the Strategic Debt Restructuring (SDR) scheme so as to enable banks to displace weak promoters by converting debt to equity with a time-line by which they had to find a new promoter. All the above changes and new schemes were brought in for increasing discipline and transparency in the system .
3.Why Recognize Bad Loans?
There were two approaches to stressed loans . One is to apply band aids to keep the loan current , hoping that time and growth will set the project back on track. Here due to lack of interest from the promoters and the low equity stake , it didn't work well .
An alternative approach was to try to put the project under deep surgery. For this government banks have to recognise the actual loss and also all the stakeholders have to forgo including the tariff authorities . But to proceed in this line , first the problem had to be recognised and ready to face of the realities. But the banks were very much reluctant to face the realities. Loan classification and provisioning norms were modified to present the true picture of the balance sheet .
4) Did the RBI create the NPAs?
Bankers, promoters, or other stake holders accused the regulators as creator of the bad loan problem. The truth was otherwise . The regulator could not substitute for the banker’s commercial decisions or micromanage them or even investigate them when they were being done . Though the regulator had been warning about poor lending practices when undertaken, and demanded banks to hold adequate risk buffers. The RBI is primarily a referee, not a player in the process of commercial lending. Further the nominees on bank boards have no commercial lending experience and can only try and make sure that processes are followed. In view of this RBI Governor had asked the government for permission to withdraw them from bank boards. Instead , the controlling bank had been insisting to bring timely recognition of NPAs and their disclosure when they happen, followed by requiring adequate bank capitalization. This was done through the RBI’s regular supervision of banks.
5) Why did RBI initiate the Asset Quality Review?
Despite all the above , the banks were not following uniform procedures – a loan that was non-performing in one bank was shown as performing in others. They were not making adequate provisions for that kind of loans . Ultimately it resulted in slow credit growth .
RBI proceeded to ensure to remove this divergence among the banks , in 2015 , it was instructed that every bank followed the same norms on every stressed loan. A dedicated team of supervisors ensured that the Asset Quality Review (AQR), completed in October 2015 and subsequently shared with banks concerned .The government was kept informed of all the developments.
6) Did NPA recognition slow credit growth, and hence economic growth?
The RBI has been accused of slowing the economy by forcing NPA recognition. In July 2016 the governor made clear that the vested interests who wanted to hinder the clean-up started attacking the RBI on the growth issue.
From 2014 , the credit growth had been lagging and the public sector banks were performing badly compared to private sector bank . The non food credit growth by the public banks was also falling in relation to private sector banks.
The same slow-growth story reflected in micro and small enterprise credit .
The relative slowdown in credit growth, albeit not so dramatic, was also seen .
In agriculture too the credit growth in public sector banks during the same period was slow though public sector bank credit growth picked up in October 2015.
Interestingly, the credit growth in personal loan sector and also in housing loans sector was good in the public and private sector banks . Hence it had to be construed that the growth was not hindered because of low NPA in that sectors . Almost both sector banks had shown aversion in lending to sectors where the NPA was more .
Though the above trend was noticed from early 2014 but the cleanup operations were started in the second half of fiscal year 2015 . The cleaning up solution had worked well in foreign countries . This was not a “foreign” solution but it was expected as an economically sensible solution .
7) Why do NPAs continue mounting even after the AQR is over?
The AQR was expected to stop the ever-greening and concealment of bad loans and indirectly force banks to revive the stalled projects. Unfortunately, this process had not yielded the desired results . Once almost all the concealed accounts were brought out the provisions to be provided were huge and the banks slipped into red . Arrests of some banks executives created panic among risk-averse bankers . This had impacted the morale of the entire banking system . No one was prepared to revive the projects after admitting write-downs . Blame probably on all sides had to be accepted.
Until the Bankruptcy Code was enacted, promoters never believed they were under serious threat of losing their firms. Even after it was enacted, some still were playing the process, hoping to regain control though a proxy bidder, at a much lower price.
Further the continuous problems persistent in the power sector on account of court intervention was one example .
Delay in appointment of CEOs was one more problem .
Lack of protecting banks' commercial decisions from the investigative agencies had it's worst impact on all staff . The recapitalisation of banks with the urgency could have saved some prestige to the public sector banks .
The judicial process under bankruptcy is simply not equipped to handle every NPA . Banks and promoters had to strike deals outside of bankruptcy . If the promoters proved uncooperative, bankers should have the ability to proceed without them. Bankruptcy Court should be a final threat .
Public sector banks were losing market share as non-bank finance companies, the private sector banks, and some of the newly licensed banks were expanding vigorously .
8) What could the regulator have done better?
However, it was accepted that the RBI should probably have raised more flags about the quality of lending in the early days . Forbearance was a bet that growth would revive, and projects would come back on track. That it did not work out . That does not mean that it was not the right decision at the time it was initiated. Further it was accepted that had the initiatives with the new tools taken earlier - that is the AQR process and the enactment of the Bankruptcy Code — the impact might have been reduced .
9) How should we prevent recurrence?
Improve governance of public sector banks and distance them from the government.
Public sector bank boards are still not adequately professionalised and the government rather than a more independent body still decides board appointments, with the inevitable politicisation . The government could follow the PJ Naik Committee report more carefully. Eventually strong boards should be entrusted with all decisions but held responsible for them.
No excuse for banks to be left leaderless for long periods of time as has been the case in recent years. The date of retirement of CEOs is well known and government should be prepared well in advance with succession. All the more reason to delegate appointments entirely to an entity like the Bank Board Bureau, and not retain it in government.
Outside talent has been brought in very limited ways into top management in Public Sector Banks. There is already a talent deficit in internal PSB candidates in coming years because of a hiatus in recruitment in the past. Compensation structures in PSBs also need rethinking, especially for high level outside hires.
Risk management processes still need substantial improvement in PSBs. Compliance is still not adequate, and cyber risk needs greater attention.
Improve the process of project evaluation and monitoring to lower the risk of project NPAs
Significantly more in-house expertise can be brought to project evaluation, including understanding projections and the estimate for the project’s output, likely competition, and the expertise and reliability of the promoter. Bankers will have to develop industry knowledge in key areas since consultants can be biased.
Real risks have to be mitigated where possible, and shared where not. Real risk mitigation requires ensuring that key permissions for land acquisition and construction are in place up front, while key inputs and customers are tied up through purchase agreements. Where these risks cannot be mitigated, they should be shared contractually between the promoter and financiers, or a transparent arbitration system agreed upon.
A more flexible capital structure should be in place. The genuine promoter should have ability to bring equity, not borrowed equity . Promoters should be incentivised to deliver on time with significant rewards for on-time execution and debt repayment. Corporate debt markets should be used to absorb some of the initial project risk.
Financiers should put in use a system of project monitoring and appraisal and also a careful real-time monitoring of costs. This will indicate that projects that are going off track should be restructured quickly, before they become unviable.
The incentive structure for bankers should be worked out so that they evaluate, design, and monitor projects carefully and they should be recognised in the promotion . Similarly the accountability of the bankers should also be put in place .
Strengthen the recovery process further.
Both the out of court restructuring process and the bankruptcy process need to be strengthened and made speedy. Steady modifications where necessary to the bankruptcy code are to be brought to be effective, transparent .
Credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs. Credit targets should not be encouraged .
Loan waivers, as RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government. They are poorly targeted, and eventually reduce the flow of credit. Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest, especially given the impending elections . End of the report
The Government prefers privatisation to nationalised banks and also merger of the nationalised banks . Why the government resort to such actions?
In India , before nationalisation , the Banking sector was good and it was run on only profit motive . Initially as the commercial banks were owned by private sector and they were doing good business and earning sizable profit . As the Private Banks were only profit motive , they were extending credit only to worthy deserving people who can repay , in the past , that is before nationalisation.
But can we ever think it is not correct. No , any business is started with the intention of making profit . No one does business for incurring loss .
So at that stage the government wished to change the priorities from profit to social and economic development . Hence by nationalisation , the private sector banks were made as public sector banks . The intention was good but the implementation of the schematic lending was very bad — mostly influenced by politicians and bureaucrats who were totally corrupted .
The selection of the borrowers was done by political groups alongwith the corrupted government officials and the only role of the bank manager was restricted to distribution of the money .During that period bank managers and executives were severely criticised and punished by central ministers . Their contention was that Government sponsored schemes should be disbursed without any screening or scrutiny . In one of the meetings Janarthana poojari grossly insulted the bank executives who were supposed to run the bank independently .
Here only the initial seed for non performance of the public sector banks , NPA , was cultivated . The rest is history .
Poojary, who was known for organizing loan melas for the poor by nationalised banks across the country during the early 1980s and for his tirade against bank managers, has been controversial throughout his career of four Lok Sabha and two Rajya Sabha terms.
Initially it started in small ticket loans but slowly it spreaded it’s wings to big ticket loans and loans were disbursed left and right .Another thing , salt added to the wound , is that the whole corrupted lot of politicians and bureaucrats , instructed the borrowers not to repay the loans .
Hence the repayment of the loans were not forthcoming . Latter the loans disbursed in the above mode were written off from the tax payers money .
But the whole blame was put on the banks , as if , all the bad things happened because of the ineffective management and follow up by the bank . In fact the managers and the field staff had been beaten .
Suddenly Government allowed some waiver of agricultural loans also . So the good borrowers who had been repaying regularly stopped making repayments to the loans , expecting some more waiver .
Like this , the government decided to kill repayment of the loan - culture systematically.
After that , income recognition norms were introduced and investing public also participated in the equity of the public sector banks . Even then the influence of the politicians and bureaucrats in the credit disbursement was much and all the banks executives who were cooperative to them were given rewards by elevation or good place of postings .
The ethics of Banking is that the bankers are expected to analyse and decide without any prejudice and as a prudent man and act without negligence and also the actions should be in the normal course of business . This ethics in Banking was not only buried totally and but it has been simply forgotten by many of the executives and staff .
Public sector banks are quasi government institutions by which it’s meant that the ownership is with the Government but the bank has to be managed by the board of directors . Had been allowed to function so independently and the public sector banks would have been extremely well .
Can't be said whether the government decision towards nationalisation is right or wrong . Because it seems to be a trial and error method adopted already at the time of nationalisation .
Nationalisation , of course , has helped in many ways to the poor people and the economic development and penetrations of Banking in to the remote village and that too among very low income group people , at least to some extent .
The present government is under the impression that private banks are smarter than the nationalised banks so they have started implementing mergers of nationalised banks and also privatise the nationalised banks so that these problems could be solved , forgetting the history that once the profit making private sector banks were nationalised .
Now let us have a look at the private sector banks . During nineties private sector banks were given licences with the great expectations that the efficiency of the public sector banks can be improved on account of competition .But the competition was peak among the Banks which led to unethical methods to garner business.
Corruption has started in all stages of banking in nationalised banks .Private sector banks were deemed as performing and good bank and also non-corrupted . But that also proved otherwise due to the corruption found in ICICI Bank and other private sector banks and the latest one is yes bank . The old generation private sector bank , Lakshmi Vilas Bank has failed . So irrespective of the sectors - new generation or old generation banks - the failure is there .But in nationalised banks the efficiency has gone down mainly and the NPA has been increasing consistently because the promotion in all caders has been politicalised.
Further the sincere people who were following the rules and cared the welfare of the bank , were punished by not giving promotion and transferring to hard ship centres.
Honesty and sincerity were not given the due importance in the financial sector . The staff who had served well and sincerely in the nationalised banks were not been recognised not only by the public but also the Government .
Now once again the government thinks that privatisation of the government Banks will give good and desired results .It is like without eradicating the root cause of the disease , trying to cure the patient .
It would be very clear that interference and involvement of the corrupted politicians and bureaucrats in the Banking systems made the entire Banking systems as a NON Performing sector .It is very difficult to identify the persons behind the scenes . That doesn't mean that the staff and executives are not to be blamed .
Then comes to the second part - loan scrutiny mechanism which is mainly important for efficient function for the banks . Once again the branch heads and the brave officers who really respect the ethics of Banking very well remember that they deal with poor depositors money and withstood the pressures from politicians and executives .Now let us analyse what the people who are mainly borrowers customers , think about the banks .
In social medias we can see of late , lot of questions , Like - Will my educational loan be waived or written off ?Will the government bear the interest burden of the loans ?
Why such idea is prevalent among the so-called genuine borrowers . That mentality is very dangerous to the society . When the borrower starts to really understand that the borrowed money belongs to the poor depositors who depend on the interest for their living - then this kind of thinking will not appear in the society .
During the tenure of Raghuram Rajan , the ex-RBI governor has written about the indiscriminate sort of practices prevalent in lending and he has admitted the same in a report also . Having known all the facts about the probable NPAs , he brought the norms to clean and clear the balance sheet of the public sector banks but without any process or method to recover the dues in an efficient manner . Almost all the wilful defaulters have left the country and are fighting in the foreign courts . It is to be admitted grossly that the bank executives of recent years have not the guts to say No to the unviable business proposals .
In this place it would be best to remember one of the SBI executive by name Mr . R.K.Talwar who was a highly respected banker & Chairman of State Bank of India, from 1969 to 1976. He was removed from his office for his principled stand, against an unjust and unethical interference by the Government, in functioning of the Bank. The government had to amend laws in the parliament, in order to get rid of Talwar, which became well known in banking circles, as “Talwar Amendment.”
Mr . Narayan Vaghul , Former Chairman of ICICI Bank Ltd who was a close confidant of Talwar describes the episode, which can be an INSPIRING EXAMPLE of 'PROFESSIONAL COURAGE' TO YOUNGSTERS , wherein the detailed story of him and the atrocities of the government have been written .
Source Alphaideas
Mr Vaghul, who started his own distinguished banking career in SBI, recalls that a cement company to which the bank had given a loan became “sick”, with mounting losses. Seeing that the problem was mismanagement, the bank agreed to a restructuring package provided the company’s promoter, also its chairman and CEO, made way for a professional. The promoter happened to be a friend of Sanjay Gandhi.
Sanjay called the finance minister (who, though unnamed, was C Subramaniam; Pranab Mukherjee was nominally under him as minister for revenue and banking), and asked him to direct the bank to waive the condition on change of management. The minister phoned Talwar, who called for the details of the case, satisfied himself, and informed the minister that the condition could not be waived. The minister summoned Talwar to Delhi and told him that he had instructions from “the highest authority” in the country. Talwar stood his ground.
This was communicated to Sanjay, who called for Talwar. Talwar refused to meet him, saying he had no constitutional authority. Sanjay’s response was swift: Sack Talwar.
This was easier ordered than done, because under the State Bank of India Act the chairman could not be removed without sufficient cause. So the minister offered Talwar a different assignment, to chair the proposed Banking Commission. Talwar said he would accept and could do that in addition to being the SBI chairman.
The minister looked unhappy, so Talwar observed that the minister seemed to be “very particular” that Talwar not continue as the bank chairman. The minister admitted that the problem was Talwar’s lack of flexibility on the cement company issue, and said that if he did not resign, he would have to be dismissed. Talwar said he had no intention of resigning, and the minister could decide on dismissal.
As Mr Vaghul tells it, Sanjay next asked the Central Bureau of Investigation (CBI) to look for grounds on which Talwar could be dismissed. It turned out that Talwar had sent appeals to many businessmen, seeking donations for the Auroville project to which he was devoted. But no businessman was willing to testify that Talwar had spoken to him or tried to persuade him to make a donation. All that he had done was to forward an appeal signed by the prime minister and the secretary-general of the United Nations (U Thant), recommending the Auroville project for support. The CBI was forced to close the case.
Sanjay now lost all patience, and told the minister to amend the SBI Act so that Talwar could be dismissed without stating the reason. With opposition leaders in jail, Parliament rubber-stamped the Act’s amendment in no time. The minister told Talwar one final time that if he did not resign he would be dismissed. Talwar remained defiant.
Finally, on August 4, 1976, Talwar was given 13 months’ leave and asked to hand over charge to the managing director of the bank.Even after arming itself with the required powers, the government could not bring itself to sack Talwar. Mr Vaghul records that there was hardly anyone to see off SBI’s greatest chairman that evening, so great was the atmosphere of fear at the time.
No comments:
Post a Comment