Perform Or Perish -This Is Message to All Banks By RBI

Perform or perish: Govt's message to public sector banks

Govt's message to public sector banks: Perform or perish

In a message to public sector banks (PSBs) that only performers will survive, the government, in an unprecedented move, has decided to allocate capital to only nine PSBs, which have shown efficiency in recent years. As a result, some lenders reeling under pressure due to mounting bad loans and depleted capital reserves have been left out.

The government has allocated Rs 6,990 crore towards capital infusion in nine PSBs this financial year, compared with Rs 11,200 crore allocated in the interim Budget for FY15 announced by the United Progressive Alliance government.

“Those who have performed better than average have been rewarded,” the finance ministry said in a statement. For the allocation of capital, two parameters were considered — the weighted average return on assets (RoA) for all PSBs for the past three years (those scoring above average were considered) and return on equity (RoE) in the last financial year.

“The government of India has adopted these new criteria through which only banks that are more efficient only be rewarded with extra capital for their equity so that they can further strengthen their position,” the statement added.

Lenders that have received the highest share of capital were State Bank of India (Rs 2,970 crore), Bank of Baroda (Rs 1,260 crore) and Punjab National Bank (Rs 870 crore).

Some banks that haven’t received capital from the government will face challenges in raising funds, owing to pressure on asset quality. Indian Overseas Bank, for example, which reported net losses for two successive quarters (those ended September and December 2014), saw its capital adequacy ratio drop to 10.15 per cent as of December-end from 10.99 per cent a year earlier. The average net loss for the two quarters stood at Rs 750 crore. The bank’s gross non-performing asset (NPA) ratio deteriorated by 77 basis points sequentially to 8.12 per cent, while the net NPA ratio stood at 5.52 per cent at the end of the December quarter compared to 5.17 per cent at the end of the September quarter.

Terming the government’s decision as a major shift in its approach to allocating capital, T M Bhasin, chairman and managing director of Indian Bank and chairman of the Indian Banks’ Association, said it would encourage good performance. Indian Bank didn’t seek capital in the past five years. For the past three years, it generated retained earnings of about Rs 1,000 crore. “For the first nine months of this year, profits have been in the region of Rs 800 crore. The government infusion of Rs 280 crore will help us manage asset growth comfortably in 2015-16,” he said.

Research by Business Standard showed Bank of Baroda’s RoE for the past three financial years was as 13-21 per cent, while that State Bank of India, it was 10-16 per cent.

Allahabad Bank, which has secured a grant of Rs 320 crore, has one of the RoEs and RoAs, at 11-22 per cent and 0.57-1.02 per cent, respectively.

In the past 15 months, most PSBs couldn't tap the equity markets to raise capital, despite favourable conditions such as abundant liquidity and a buoyant stock market. This was because of subdued valuations and a sharp rise in NPAs and restructured assets. On the other hand, some private banks, which have seen valuations double, were quick to tap the stock market for raising capital.

According to Reserve Bank of India (RBI) data, the banking system's stressed advances increased to 10.7 per cent of its total advances from 10 per cent between March and September 2014. "PSBs continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September, while that for private banks stood at 4.4 per cent," RBI said in its latest Financial Stability Report.

I submit hereunder my comment on above mentioned article

My opinion is clear since long that all public sector banks are non-performers and that is so not because of only external factors and uncontrollable factors but due to internal and controllable factors too.  Banks which are considered strong banks are equally weak provided such banks are forced to declare all bad assets as bad. Some banks  like PNB, SBI, BOB, Union Bank  , Bank of Baroda,Corporation Bank , Canara Bank were stronger banks in recent past . But all so called strong banks have also accumulated volume of stressed assets more than 20 percent of their total loan portfolio. Banks like United Bank, Indian Overseas , Indian Bank, Allahabad Bank, Syndicate Bank, Vijaya Bank, syndicate Bank , Central Bank have already ben exposed many times.

There is no doubt to me that all PS banks are not performing as they are supposed to perform .Government have to  infuse capital to save them from perishing because they cannot allow any bank to perish. All 27 PS banks are owned by GOI and loss to any bank is ultimately a loss to GOI , loss to customers of bank , loss to taxpayers, and a loss to all stake holders in bank. It Government really wants to assess performance of a bank on the basis of Return on Assets (ROA) and Return on Equity (ROE) , it is the duty of GOI to first fix bench mark rate of ROA  and ROE. Assessing performance of a bank on average ratio of the same bank in preceding three years will lead to wrong conclusion. Weak banks which have been weak since long , their bases ratio or average ratio is too low and hence any rise in it will show greater percentage rise.

In my view , all banks should earn minimum of 1 one percentage ROA provided they are not forced to incur loss in government suggested activities. If we look at the ROA of any bank , it is clear that most of them are far below benchmark of one percent. It is ironical that ROA for the year ended March 2014 , ROA of stronger bank SBI is 0.65 whereas that of Syndicate bank is 0.78. It is pity that ROA of bank like Andhra Bank is only 0.29 but that of owner of the bank which is GOI has taken no step to improve it .If United Bank or Syndicate Bank or IOB collapses under burden of Bad assets, What RBI will do?

Can RBI remain a silent spectator of Chirharan of depositors? No, Not at all. GOI will have to take corrective step sooner or later and continue to provide ventilator to all of them without any discrimination if any of these banks are facing capital crisis or if LGD ( Loss given default ) goes beyond control. GOI will have to be uniform and stop step motherly treatment . I would like rather to suggest GOI to first peep into books of strongest bank to know the reality of quality of assets of so called strong bank.

It is unfortunate that majority of media men or interview takers of print media or TV media do not have adequate knowledge about functioning of bank and about process of sanctioning of loans in banks. They ask various questions to CMD or ED or retired CMD of bank and collect some comments of these VIPs and print it to fill their blank space or show them on TV to earn TRP.

Every quarter some bank or the other book higher NPA ratio and lesser profit. Every time top officials of banks and RBI appear on media and tell that position of bank is healthy and from next quarter there will be improvement. In fact no improvement is visible in any bank. Bankers who are clever in restructuring process, they are using this tool to hide bad debts. When this continues for some quarters , they fail to continue this and constrained to declared the same as NPA. Without applying restructuring process of bad loans, none of PS banks can book improvement in their health.

Since 2010 when Core banking solution was adopted by banks, exposure of misdeeds of top bankers are slowing surfacing and coming to light. It is the fraudulent act of top officials of banks which kept bad debts hidden in system and when CBS came, these top officials could not continue the mischievous tactics to hide bad debts in the same way as they could from 1991 to 2010.

Media men do not have capacity to understand whether the person to whom they are interviewing are telling truth or simply making lame excuses to cover up their misdeeds which have resulted in accumulation and rise in bad debts in banks where they worked or where they are working.. The person who have looted the bank and who are mainly and primarily responsible for rise in bad debts will definitely blame global recession or natural calamities or some other unnatural events so that media do not point out accusing fingers towards them. Clever officials first commit fraud with banking systems and procedures and then earn name and fame by appearing in media and win the heart of RBI officials and ministers so that they may get new assignment even after retirement.

There are internal reasons like corrupt manpower , inefficient manpower, unskilled manpower, flattery and bribery culture ,delay in sanction and many other factors which have contributed mainly in rise of bad debts. Top officials of each Public sector bank failed to properly run the bank and it is they who promoted bribery and flattery culture in banks which has damaged the fundamentals of banks.

Therefore ,I simply request media men to ask ED, CMD of banks who instead of owning responsibility for sickness of banks are blaming extraneous factors , why private banks have been rising up and up, booking higher and higher profit and whose balance sheet have minimum ratio of Non Performing assets under the same government, same economic global situation, same domestic environment and same administrative and legal set up .

Last but not the least , It is also true that political exploitation of public sector banks have added fuel to fire and the ineffective and corrupt legal machinery have played destructive role and caused accumulation of court cases against defaulters for years and decades. On the contrary private banks kept its management strong and effective and hence they could not be exploited by politicians nor by legal or administrative machineries. Priority of top officials of banks is always profitability whereas that of public sector banks is to please ministers and higher bosses. Officers worship bosses in PS banks whereas officers in private banks worship work and profit only.