The Hindu Business Line

Wrong tar­gets

Rather than mi­cro­man­age PSB lend­ing, the Cen­tre should set KPIs based on prof­itabil­ity and RoC

- Finance · Business · India · Belgium · Centre · Government of India

Its not sur­pris­ing that the Gov­ern­ment of In­dia, hav­ing sunk over ₹3 lakh crore into the re­cap­i­tal­i­sa­tion of public­sec­tor banks (PSBs) over the last five years, now wants to hold them ac­count­able for Key Per­for­mance In­di­ca­tors (KPIs). There is good rea­son to worry about the rapid pace at which state-owned banks have lost ground to the pri­vate sec­tor. PSBs have seen their over 60 per cent share of out­stand­ing bank credit in FY14 plum­met to 46.5 per cent by FY19. Pri­vate banks have ac­counted for nearly three-fourths of all new lend­ing in the last five years, leav­ing PSBs out in the cold. Even more wor­ry­ing is their loss of trac­tion in de­posits, with pri­vate sec­tor banks gar­ner­ing over twice the de­posit flows of PSBs in the last two years. PSBs des­per­ately need low-cost de­posits to par­tic­i­pate in im­prov­ing credit off­take so that they can re­pair prof­itabil­ity af­ter con­sec­u­tive years of losses. But it is a moot point if the KPIs on which the Fi­nance Min­istry is now seek­ing to eval­u­ate PSBs will set them on the path to prof­itabil­ity.

The 16 KPIs on which PSBs are pro­posed to be bench­marked fall into three buck­ets. One, the Cen­tre wants to track the ag­gre­gate credit ex­tended to in­fra­struc­ture, agri­cul­ture, hous­ing, MSMEs, ‘Start Up In­dia Stand Up In­dia’ and other pet causes. Ex­pe­ri­ence clearly shows that sub­ject­ing banks to di­rected lend­ing based on quan­ti­ta­tive tar­gets is what prompts them to throw risk as­sess­ment to the winds and end up with sub-prime bor­row­ers. It re­cently came to light that the MUDRA loan scheme, on which PSBs have been dou­bling down, has al­ready run up NPAs of over ₹16,000 crore by March 2019. With PSBs just in the process of writ­ing off legacy NPAs from risky lend­ing in the pre­vi­ous boom, it is un­wise to em­bark on a sec­ond loan binge so soon. Two, it is keen to hold PSBs ac­count­able for so­cial out­comes in terms of fa­cil­i­tat­ing di­rect trans­fers, fi­nan­cial in­clu­sion, women’s em­pow­er­ment and cor­po­rate so­cial re­spon­si­bil­ity. While PSBs certainly ought to in­vest in bet­ter dig­i­tal in­ter­faces and cus­tomer data min­ing for credit ap­praisals to bet­ter com­pete with pri­vate banks, lend­ing de­ci­sions based on so­cial ob­jec­tives will likely hurt their fi­nan­cial health. Three, the Cen­tre is also keen that PSBs lend di­rectly to MSMEs and com­pa­nies instead of chan­nelling such loans through NBFCs, de­spite the lat­ter prov­ing more ef­fi­cient at last-mile de­liv­ery.

This whole idea of mi­cro­manag­ing the sec­tors to which PSBs lend and sub­ject­ing them to re­gion­wise tar­gets mil­i­tates against the idea of PSB re­form, the pri­mary ob­jec­tive of which is to dis­tance the Gov­ern­ment of the day from call­ing the shots on lend­ing. Instead, the Cen­tre, as the pri­mary share­holder in PSBs, should set KPIs in terms of NPA re­duc­tion, re­cov­er­ies, loan growth and re­turn on cap­i­tal, so that the tax­payer money it has sunk into them yields rea­son­able re­turns.

Newspapers in English

Newspapers from India