Efficient AND Inefficient Banks

Govt's decision on capital infusion in PSBs to trigger consolidation-Business Standard-10.02.2015 ( read my views below)

The move might curtail growth ambitions and debt capital will become costly

 

The government’s decision to deny capital to less efficient public sector banks (PSBs), at least for now, will force them to curtail growth ambition, clean their books and pay a higher coupon rate on bonds.

It could also set the stage for a consolidation in the sector.

The government over the weekend decided to reward with equity capital (about Rs 6,990 crore) only nine PSBs, on the basis of return on equity and assets.

Those left out are Bank of India, Indian Overseas Bank, Union Bank of India, Bank of Maharashtra, Oriental bank of Commerce and Corporation Bank.PSB executives said the thrust on efficiency is welcome but the timing was questionable. For, most state-owned banks face challenges due to big asset quality pressures, large scale retirement and a leadership gap at the top.

Ananda Bhoumik, senior director, India Ratings, said the banks not to get the new capital had a 30 per cent share in banking assets, a significant amount. As they wouldn't be abandoned, the issue would be of providing timely support. The impact could be on the cost of borrowing from the market. This is true of both non-equity capital (tier-I and tier-II) and money raised through commercial deposits.

Analysts said there was a bunching of banks, with very little difference in the coupon (interest rate) on bonds issued by them.

This was despite the differences in asset quality and perception about quality of management.

The similar treatment is based on the common owner, the Government of India.

Rating agency ICRA said the new performance criteria for equity infusion was a step in the right direction but could lead to a shake-up in the system in the absence of a transition period, given the pending structural issues.

A senior executive with Indian Banks’ Association said the banks which failed to figure in the list would drive them to review growth ambitions and intensify efforts to repair balance sheets.

Employee unions are critical. The All India Bank Employees Association said the government's approach was discriminatory and undesirable.

The government was the mother of all PSBs and a mother is expected to take care of all her children, particularly the weaker ones. Such discrimination between banks was an attempt to allow market pressures to operate and to further weaken the weak banks, it said.

Link Business Standard

My Opinion on above news is as follows..

RBI and Government of India should introspect , investigate and peep into the books of  so called efficient banks to find out whether they are really efficient or they are playing with data in a fraudulent way. We remember how banks in general use to inflate profit upto the year 2009-10 by not making adequate or making no provisions for terminal benefits and bad debts. It was RBI which came to rescue to such fraudulent banks by allowing them to ammortise provisions in five years. Similarly RBI should be proactive and try to find out whether all standard assets of so called efficient books are really standard or there are volume of stressed assets but fraudulently concealed by restructuring them on unacceptable excuses.

Similarly RBI should also go deep into the books of inefficient banks to find out why and how these banks were considered as star performer only a few years ago and how these banks have now been downgraded.

Is there fault in identification criteria or there is play of foul game at all levels?

RBI should try to understand whether  these banks were fraudulently projecting attractive balance sheet to remain as top performing bank upto only a few years ago. They should know whether  officials of inefficient banks sanctioned huge volume of loan to unscrupulous individuals and companies five to seven years ago which are now bad and unrecoverable forcing  banks to make higher provisions for such NPA accounts resulting in erosion of capital and profitability. Why not those top officials booked to task?

There is no use in awarding some banks and cursing some other banks at one time. RBI and GOI both are cleverly passing time . Only a few days ago RBI Governor told in an interview that Health of Public sector banks is not a matter of concern and now the same RBI has cautioned all banks on rising volume of bad debts. On one day GOI promises to inject capital to all banks facing capital crisis, on other day they say that they will provide capital to only efficient banks and some other days they suggest for merger and consolidation of banks to cope with capital crisis.

Sometimes RBI suggest banks to manage their crisis from their own sources by ploughing back profit into capital or you can say by retention of profit into the system and by recovering money from defaulters . Some other time, Finance Minister ask all banks to pay minimum 20 percent as dividend to them. GOI wants tax on profit earned by them even though they are doing social welfare works.

Sometimes Prime Minister promises that they will not interfere in internal affairs of banks, in working style, in loan policies , in the matter of loaning policy and in all HR policies. Some other day  , the same minister will build pressure bank management on opening of accounts under PMDJY, or writing off of agriculture loan, or for lending to infrastructure projects to help in nation building exercise, to open branches in remote villages where profitability is zero and negative, sometimes they talk of social banking and some other time they blame banks for less profit compared to private banks.

Sometime GOI  will deny wage hike to bank staff  and deny fresh recruitment to demoralise, exploit, demotivate existing bank staff  and tell them to stop lazy banking and some other time PM will prise bank staff for opening 11.5 crore bank accounts in shortest period of time to make record of Guniees Books of record.

In conclusion, there is no consistency in approach and attitude of RBI officials and ministers representing Government of India. They have made banks victim of their foul game and political gain. They abuse banks for all wrong outputs but fail to provide and ensure good inputs like happy manpower, sufficient manpower, profitable branch expansion, safe lending, hassle free recovery from defaulters etc. First they force banks to do wrong and later they accuse banks for doing wrong. What a dirty game is going on?

It is none other than top officials and ministers  of GOI and top officials of RBI  who are responsible for present sorry state of affairs of public sector banks whose faulty policy and dirty execution of policy, whose failure in properly monitoring PS banks and diagnosing sickness of banks with proper medicine at proper time and  whose failure in making judiciary and administrative system effective to deal with bank cases of recovery filed in courts . It is the entirely the Government and politicians who damaged banks by using banks for vote bank and inculcating bad culture in banks in the name of social banking or in the name of nation building.

Lastly when public sector banks are invariably to be used for social banking and nation building  or for taking care of financial needs of the country or for disbursal of salaries of government employees or for disbursal of subsidy in the account of poor persons or for collection of taxes which result in losses to banks and which cut profit of banks , why staff of banks should be denied respectable wage hike and why bank staff should not be awarded with 5 days week when other employees of same government  enjoy 5 days week. Several loss making PSUs are paid higher salary and several departments of government whose functions are almost negligible are paid higher salary without caring about output ,why only bank staff are denied wage hike on the plea of less profit .

Why such step motherly treatment with bank staff  who play prominent role in strengthening financial health of the country?

Last but not the least , Government of India or RBI is not justified in setting criteria of efficiency without giving it to the notice of banks . Rule of the game cannot be decided after the end of the game.

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.