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Friday, November 10, 2017

Capital Infusion Is Temporary Solution

Government has decided to infuse capital to the tune of Rs.2.11 lakh crore to ailing public sector banks (PSBs). Keeping in view the pathetic position of these banks , government was left with no alternatives . Because these banks have to ensure minimum capital as per Basle III norms in their balance sheet. Due to huge volume of Non Performing Assets accumulated in the system and due to unabated addition of fresh NPA every quarter, these banks have lost their profit earning capacity. Whatever they earn in the year is less than what they need to provide towards bad loan and hence they have to incur loss. 

Almost every PSB is either already in loss or will invariably incur loss very soon. Only banks which know the art of concealing bad loans are able to book profit artificially for few quarters , that too not in every quarter. In some quarter they hide bad loans and in some other they declare them. This hide and seek game continues. You cannot say with guarantee that any PSB or SBI is in good health. Only a part of malady has surfaced after coming of Modi government, much more is still hidden.

Not only this , the way these bankers lend and the way politicians force them to lend , there is no doubt to me that volume of NPA in each public sector bank is bound to increase year after year and quarter after quarter. I have said , not once but several times in the past , that the way banks function and the way Indian politics run, no power on earth can protect PSBs from disaster. 

In the year 2011 , total NPA of PSBs was less than one lac crore and now it is approaching Rs.10 lakh crore and there is no doubt that in coming five years it will cross the figure of Rs.20 lakh crore. The volume of NPA declared in balance sheet is only a small part of total NPA which already exists in the system. 

Basic reason for continuous increase in NPA are:-

Inefficient Workforce in many branches of banks, faulty deployment of workforce and frequent transfer of good officers to far and critical places play disheartening  role. Very few officers in banks know how to process a loan proposal . This is bitter reality though some banks has a system of imparting training to their workforce. Though this training system is also sometimes a formality and employees enjoy it as paid LFC.


 There is no one to listen to personal problems faced by workforce unless and until he or she a big hand behind him or he or she know the art of earning bribe to share with bosses. Good officers are transferred from east to west and from West to East and bad officers are given choice posting. This give rise to a negative feeling in minds of those who work hard. Officers expert in credit disbursal are made recovery officer and officers expert in recovery are made insurance agent. This play with inherent quality of an officer has jeopardised the work culture to a great extent.

Unskilled managers at many places are in power to sanction loans. Experienced and skilled officers are posted in less important posts and unskilled officers who are in good book of bosses are given the posting of sensitive big branches. This improper and ill-motivated assignment of duty to officers results in poor quality lending and/or monitoring of advances. This results in quick mortality of advances. 

Officer who hide bad debts are promoted to higher level and those who tell the truth are penalised in different ways. This is the pathetic message which you may get from majority of ground level branches. As such it is more important to provide motivated workforce at post which are vulnerable to risk. In olden days, say in seventies and eighties, an officer with work experience of 10 to 15 years could get an opportunity to become a Branch Head. Now a days, an officer even in the year of joining is made Branch head. And in span of 10 years to 15 years he can become Regional head. Officer who do not have adequate exposure in all fields become administrative officer.

Rampant corruption in promotion. Flattery based promotion has killed the enthusiasm of good workers.

For last thirty years  and more, bank management has been giving importance to flatterer and ignoring senior and experienced officers in the name of merit. Though every bank say that they have merit oriented promotion process in force, in fact they choose flatterer on priority and force seniors and experienced officers to work under juniors who are less capable. 

This is bank only an officer can be awarded with 5 o6 promotion in a span of 10 to 15 years and on the contrary there are many officers who have not been promoted even in span of 10 to 30 years.This has spoiled the work culture to a great extent. I do not hesitate to say that banks were more healthy and stronger when there was a system of seniority based promotion in seventies and eighties. 

Senior Management and top management are not held accountable and responsible for bad lending . It is only juniors who are punished when a loan account turn bad . Loans amounting to hundreds of crores of rupees are not sanctioned by junior officers but by top ranked officers only . Juniors officers have simply to process it as per verbal and phonic instruction received from top ranked officers. As soon as government start penalising senior ranked officers , it will send positive message down the line. 

These is always a political pressure on bankers for fending to increase their vote bank. And then adding fuel to fire ,there is a culture of announcement of loan waiver scheme or compromise settlement scheme by government of India or state governments. In other words I may say sanction of loans in Loan Mela or target based lending has forced bankers to compromise with quality of lending. Sometimes officers do not want to sanction loan to a particular loan seeker but he is constrained to compromise with policies to achieve the target and get quicker promotion. 

When there was a system of promoting a staff based on seniority , staff never tried to compromise with quality barring a few officers who in greed of bribe used to sacrifice quality . But these days , compromising with policies and quality has become a normal practice. Higher officers also want that juniors achieve target by hook or by crook so that their own career is brightened. This greed has played a big role in ever increasing volume of bad debts.

Recovery of loan has  never been given due importance in any of government sponsored meetings to review credit achievements by banks. CMD and EDs of bank please the minister by presenting fabricated statistics and they get appreciation. 

Past records will tell how under regime of Congress led governments , posting at top post was sold . 

Even in District level bankers meeting called as DLCC , District collectors and attending Block Development officers never take care for recovery of dues from defaulters. Rather they openly speak in the meeting that they need not bother for recovery and have to focus on only lending to achieve the set target.

Legal machinery is weakest . Bankers have hundreds of cases in the office of Certificate officer, in civil courts, in Debts Recovery Tribunals and in high courts . Years and decades pass away but bankers  do not get back the money which are locked in the accounts of defaulting borrowers. 

More than 80 percent of total bad loans are with less than one percent of borrowers. If government is not able to recover money from 25 to 30 big borrowers identified by RBI involving three to four lac crores of rupees, you may imagine the rotten position persisting at lower level . There is no one total case of small loan accounts in District or mid level accounts in DRT. Government post the rejected banker as Administrative officer at DRT,. Position of judiciary is so much pathetic  that I need not enlighten much on it. It is an open secret.

There is no fear in the minds of defaulters of bank loans and this culture is deep rooted in the system. Officers sitting at responsible post do not discharge their duty  honestly and sincerely. They are influenced by outside forces , money power and muscle power .Banks which handle more than one crore crore rupees of public money are not getting any protection from government . 

Bankers dealing in crores of rupees at each and every branch are to function under the mercy of local goondas , mafias and politicians. Every bank staff has a inherent and natural desire as also a duty first to protect his life, his family and lead a life of peace and then think for others.  There are many occasion when a Branch Officer do not find a loan proposal fit for sanction, but he or she is forced to put his signature for sanction. This is ground reality in many branches. In case of high value proposals, branch officers and Region level officers has to write note in favour of proposals to please top level officers and politicians who play the role from behind the scene.


I now come to point of capital infusion once again. The decision by the government to capitalise PSB has been welcome by all banks and outside economists. This is because this step will solve the problem of capital inadequacy . But it is not the first time that government has resorted to capital infusion  due to high NPA . If we add net present value of total capital infusion made by the government during last few decades. it will cross Rs.10 lakh crore. 

If capital infusion is the real solution , then banks should have been in good health by now after injecting so much amount of public money . But the bitter truth is that health of PSBs has been deteriorating fast continuously and volume of declared NPA is approaching ten lakh crore and much more is on the verge of surfacing very soon. Not only this , there is no checkpoint to stop further slippages .There is no full proof method to recover the money from defaulters. There is no fear of law in the mind of defaulting borrowers and no fear of punitive action in minds of evil officers.

As such capital infusion has always been a temporary solution and still it is a temporary solution. Government tries to seek its image by spending public money instead of penalising bad bankers , bad borrowers , bad legal professionals, bad administrative officers, bad politicians and ill-motivated workforce active in judiciary and quasi judicial bodies meant for recovery of bank loans. Everyone in Government and regulating bodies incuding RBI know it very well that lakhs of cases are pending in various court for years and decades . Even decrees passed by courts are not executed due to some reason or the other.

To add fuel to fire, team of Chartered Accountants who are supposed to certify accounts of bankers as well as borrowers have been playing the heinous and dirtiest role since long and there is none to penalise them. They are not held accountable, responsible and punishable for their ill-motivated lapses. 

It is auditors who certify a bad balance sheet as good, it is they who prepare a unrealistic project report for getting higher amount of loan, it is they who act as middlemen between bankers and borrowers , it is they certify fabricated balance sheet of banks to artificially brighten the figure appearing in balance sheet. It is they who help unscrupulous business men in evasion of various taxes. It is they who work as agent of Income Tax or other tax officials. It is they who audit the branches of every bank and give a certificate that all loan accounts are standard and profit is genuine. It is they who advise or certify corporate balance sheet of a bank despite several deficiencies and shortcomings. Proper provisions are not made by banks and team of CAs certify correctness of balance sheet of every bank., All this happens under some greed. Similarly it is outside agencies who give higher valuation of collaterals causing loss to banks in the long run.

Instead of taking tough stand against evil persons in the system , government has tried to send a message that all banks are in good health. This is not going to help in recovery of loans from defaulting companies. And please note that unless and until there is recycling of fund, it means when loan money is not repaid in time  the capacity of bankers to lend cannot increase. Unless and until every political leaders is forced to help banks in recovery of dues as a national duty , we cannot save banks from facing more bad days in future. Unless and until , administrative officers, judicial workforce are honest to treat bank loans as national property, we cannot dream of any improvement in health of banks inspite of capital infusion from time to time. 

In brief , I may say that banks are sitting  on a big scam. We do not smell it because we think credit growth is backbone of GDP growth and balance sheets of these banks certified by a team of Chartered Accountants portray good image of the bank. 

But we do not think that recycling of fund and safety of public money is much more important for survival of banks on its own strength. Private banks are prospering quarter after quarter only because government run banks are managed by greedy people, governed by greedy politicians and regulated by greedy officials. Private bankers focus on quality lending whereas government banks focus on achievement of targets only. 

This is why profits of each private bank like HDFC, Axis Bank, Kotak Bank, Inducing Bank, Yes Bank run in profit to the tune of thousands of crores of rupees every year whereas on the contrary government banks run in losses and has to be protected by capital infusion out of public money. 

Last year. while the gross operating profits of all PSBs was Rs.158982 crore , the total provisions made was Rs.170370 crore. It means there was a net loss of Rs.11388 crore. This is as data coming to my knowledge. If even 20% of bad loans amounting to Rs15 lakh crore vslued stressed assets is recovered, banks will not require capital from outside and will be able to show real profit too at its own. Not only this , if banks earn adequate profit, they may incentivise their workforce too. 

Last but not the least, poorly paid bank staff cry for respectable wage hike but they do not get. On the contrary employees under government sector are given a bigger hike periodically. In eighties , pay package of bank officers used to be at par or even better than IAS and IPS officers and now the bitter truth is that bank officers are getting less than a peon and clerical staff working under central government of state government. 

In case of hike demanded for bankers, government talk of profit and paying capacity whereas in case of central government employees and PSUs , they pay from treasury without talking of profit or even usefulness of a department. There are many departments which have become useless , non-functional and defunct , are also getting higher salary. Fate of retired bankers is much more pathetic compared to pensioners of central government services. 

Obviously a frustrated and unhappy workforce in banks also contribute in deterioration of bank’s health. Other departments are paying bonus every year despite loss or no profit whereas banks are not despite the fact that they booked profit .Incentives are also distributed as charity at the whims of officer in power.

I therefore request you to look into various aspects and try to solve the problem from the root instead of acting on  the basis of symptoms which appear . 

In brief, capital infusion proposed by the government may be a welcome step for the time being, but there are many issues that should have been dealt with first on top priority. BJP government should not act in line with what Congress Government did to brighten its ugly face during their decades long rule. we have higher expectation from our Prime Minister Mr. Narendra Modi and Finance Minister Mr. Arun Jaitley.

I have written  many letters in the past . I have written to you also . On the issue of merger and consolidation of banks , I reiterate that even if the idea of merger is good and unavoidable from point of view of present government, the decision on merger must be deferred at least for a year or two. 

Because our country has already seen poor GDP growth due to demonetisation and GST. If merger plan is put into action at this critical juncture, it will simply add fuel to fire. Bankers who are already running away from making new advances for last two to three years due to their more engagement in recovery and non-banking activities will be further engaged in completion of merger plan. 

In addition to it, all cases pending in court will be further delayed due to complicated procedure of courts . Recovery speed will be diluted. Credit growth will further go down. Already growth has come down from 25 to 30 percent to 5 to 10 percent. Please avoid merger plan for God sake ,Otherwise GDP has to go down further which will give an opportunity to opposition parties to pull down a best performing government.

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