State-owned banks: The writing on the wall

Any of the Indian private sector banks will be happy to step in and help, including taking some of these banks from the government’s protective hands, if asked. Why not take help, when it is so close at hand?

Punjab National Bank’s Valentine’s Day disclosures about diamonds turning to coal is yet another wakeup call that the state-owned banks need a cure for. What is unsettled is what ails these banks. And till this question is resolved, there can be no repair.

There are worrying signs that the debate is being misdirected by focusing on the wrong issues. For example, that because this happened in a government-owned bank, there has been no run on the bank or the banking system. The conclusion this set wants you to reach is that government ownership is not just desirable, but the needed lifeblood for our economy.

For the banking aficionados this will quickly morph into discussions about risk-based supervision of banks—and how this is where the problem is and why it needs to be strengthened. There will be talk of audit failure. Astonishingly the government-owned banks have numerous audits: concurrent audit, internal audit, statutory audit and then one by the Reserve Bank of India (RBI). The CAG may also somehow be in this mix—though I am not sure. PNB says it has a credit audit, risk-based internal audit, revenue audit, information systems audit, snap audit, segment audit, compliance audit, legal audit, Fema audit. This list ends with “etc.” (from sheer exhaustion of listing the various audits, I guess). So clearly one more audit is not likely to help. Is it that PSUs don’t pay their auditors fair wages, and so get mediocre service? Just the contrary. PSU bank auditors, in the aggregate, are paid much more than those minding private sector banks. PNB paid its auditors ~670 million for FY 2017, State Bank of India (SBI) a whopping ~2,161 million, while HDFC Bank, the lodestone for managing risk, spends just ~218 million (and ~257 million if you include certification). Both the amounts, HDFC Bank sheepishly admits, includes taxes. So powerful is the auditors’ lobby, that former President Pranab Mukherjee, when politically at his most powerful, is purported to have refused to intervene regarding audit fees in PSU banks, as being too sensitive even for him.

Given the desire to apportion blame in the quickest possible time the easiest to corral are those who were on-site and signed the documents. They are already in custody. But this will not prevent a repeat. Nor will yet more oversight by the three Cs—CBI, CAG and CVC. Their shadow has not straightened many backs. Their presence does not sharpen decision making, rather it leaves more boxes to be ticked. IndiaSpend reported that an RTI query to RBI revealed that banks lost ~193.5 billion because of fraud in 2014-15 alone. The highest 17 in this list were all PSU banks—and you guessed right, PNB held pole position, with ~23.1 billion on reported frauds. And exotic cures suggesting that whistleblowers’ letters need to go to the chairman of the audit committee are not even band-aid.

There was a brief period when stateowned banks reeling with losses were starved of capital. A low share price and a government diktat that their shareholding cannot fall below 51 per cent meant that these banks were staring into an abyss. This also gave rise to what can only now be described as a conspiracy theory: that the government will let these banks—except for the State Bank of India—shrink and over time it won’t matter much.

The finance ministry’s announcement in October that PSU banks will be recapitalised over two years through a combination of funds left over from the Indradhanush programme (~180 billion), fresh capital from markets (~580 billion) and recapitalisation bonds (~1,350 billion), tightened the government’s grip when it should have cut its umbilical cord. ~2,110 billion is humongous by any count.

With no sense of ownership and no way of enforcing performance, it is difficult to understand the government’s desire to hold on. The private sector banks—HDFC Bank, Kotak, IndusInd, Axis, ICICI—name any, are staffed with people who joined them from governmentowned banks. How is it that these very same people do most things generally right, when sitting in a different office? Lend to the right corporates, recover money in time, spot frauds, trade smarter, build a nonfund-based franchise extracting money from the same customers that PSU banks are serving, and have happier retail customers (okay, maybe not happier retail customers!).

Any of the Indian private sector banks will be happy to step in and help in any way they can, including taking some of these banks from the government’s protective hands, if asked. Why not take help, when it is so close at hand? Is Kotak Mahindra Bank any less Indian than Bank of Baroda? For that matter, are any of the above-mentioned banks any less “national” than those that have been nationalised? The same directed lending norms apply to them than to the PSU banks. They are manned by the people carrying the same passport. And they all serve Indian customers—be they farmers, retail borrowers, Indian SMEs and corporates. And they have bolstered the exchequer rather than hoovered up taxpayer money. By coincidence there are seven private sector banks and seven PSU banks in the top 100 taxpayers in India. The private sector banks shelled out ~176.5 billion as tax, while the seven state-owned banks gave back ~73 billion.

Leave out the SBI (the only one worth keeping), the contribution of the remaining six drops to ~29.3 billion. (This is when some of the seven private sector banks are much smaller than their stateowned rivals). Not counting the money already pumped in over the years, the ~2,110 billion earmarked now—despite the book entry nature of the financing— pays for just about every social scheme in the Budget, many times over. It’s an expensive decision.

That the NiMo story has so rapidly become a political slugfest reduces the chance of rational decision. But for those who care, the writing is on the wall.