Public sector banks as punching bags

Sushma Ramachandran
Senior financial journalist

THE crisis in the banking industry does not seem to be ending anytime soon. The latest news about the arrest of Bank of Maharashtra’s top executives comes on the heels of the continuing saga in ICICI over the links of Chanda Kochhar’s husband with Videocon. Combined with the fleeing of Vijay Mallya, the PNB scandal involving diamond tycoon Nirav Modi and the enormous pile of NPAs afflicting the sector, the impression is that nothing but bad news is emanating from the country’s banks.

Worse is the extreme reaction by regulatory authorities and the government: instead of taking a holistic approach to problems, panic seems to be the guiding action ending up with innocent bystanders being hanged, or virtually so. The decision to go ahead and arrest top Bank of Maharashtra officials falls in this category. It is alarming that a system that has not been able to bring to book powerful industrialists who have defrauded the financial system, leaps into precipitate arrests of public sector employees who have been doing their legitimate jobs.

It is indeed in the fitness of things that the Indian Banks Association has called for a committee to consider charges against bankers before drastic action like arrests is taken. In the case of the Bank of Maharashtra, the Pune Police’s economic offences wing was investigating fraudulent deposits invited by a real estate developer and roped in the public sector bank for having given it a loan. In this case, recovery proceedings for the loan were under way and there is no indication of any malfeasance in credit appraisal. The amount of the loan — about Rs 100 crore —  is paltry considering the amount lent to tycoon Vijay Mallya who left this country without any of the economic offences wings taking action against him.

This is not to say that the banking system both in the public and private sector does not need remedial revamping. But reforms will not be possible by undertaking a witch hunt against reputable bank officials who have followed due diligence in procedures. It has to be pointed out that many of the infirmities in the system are due to political control over the public sector banks (PSBs). It has now been widely acknowledged that many of the bad loans were due to pressure from influential political leaders. This aspect cannot be wished aside as the attempt to use the nationalised banking system for individual profits cuts across party lines. The question has to be asked, how many political leaders are being put behind bars for making phone calls to bankers to insist on loans being granted to unworthy recipients.

PSBs are also asking about the favoured treatment being given to private banks for similar defaults. Here the case of ICICI Bank’s chief executive, Chanda Kochhar is relevant. One of the stars of the banking system, mentored by the legendary KV Kamath, Kochhar has been commended over the years for her competent handling of the country’s largest private bank. The news about her husband’s financial dealings with Videocon and a loan to that company by ICICI Bank has cast a cloud over her achievements. Without in any way prejudging the issue, she should have stepped down from her post immediately to enable an impartial investigation into the allegations. In this case, she was given a long rope. This is in stark contrast to the harsh treatment meted out to PSB executives by investigating agencies. In the ICICI Bank case, the CBI has been involved so it is a serious issue, whatever the outcome. Hence one needs a level playing field in such aspects for those working in both public and private banks.

Apart from these scandals that have rocked the financial world, the banking system has had to deal with the weight of accumulated NPAs (non-performing assets) that have created havoc in the balance sheets of both public and private banks. The RBI’s assessment is that NPAs rose gradually after 2011 owing to a period of rapid credit growth from 2006 to 2011.  The numbers shot up dramatically after 2015 once the RBI tightened norms for NPA recognition. As a result, what were earlier said to be standard assets became NPAs.

The good news is that firm action has finally been taken after the establishment of the Insolvency and Bankruptcy Code. The first success in this entire process has been the sale of Bhushan Steel for roughly Rs 36,000 crore to Tata Steel. With this first step, can one share the Finance Ministry’s confidence of recovering Rs 1 lakh crore this year? This is just the beginning but it certainly augurs well for a sector that has not been able to see the end of this dark tunnel for a long time.

Banking is clearly in the throes of a crisis but the churning may end up with some much needed changes in the system. The RBI has already begun to tighten regulatory operations but it has rightly pointed out that it cannot police each and every bank action. The role of bank boards needs to be expanded to ensure more accountability and better corporate governance is the need of the hour. The government’s role also needs to be redefined in the case of PSBs which have been prone to political pressures. Indian banking may thus be under siege but if reforms move in the right direction, it could be looking forward to a brighter tomorrow.