Benchmarks for banks

Public sector banks (PSBs) have been critically evaluated in the last few months because of stressed assets including rising non-performing assets (NPAs). There is a need to critically review the performance of PSBs and the factors that are responsible for such high stressed assets, especially when tax payers have to provide resources for recapitalisation.

The sectoral analysis based on latest available data for December 2014 from the Reserve Bank of India reveals that industry continued to record high stressed assets at 17.9 per cent of advances followed by services at 7.5 per cent. The retail sector, in which private banks (PRBs) have a dominant share, recorded the lowest stressed assets at 2 per cent.

The sub-sectoral analysis reveals that mining, textiles, iron and steel, infrastructure and aviation are the major contributors to stressed assets, followed by food processing, engineering, vehicles, wood, paper, glass and glassware, and construction. Thus, the economic slowdown is clearly transmitting through waves and ripples across different sectors of the economy.

If carefully analysed, PSBs account for a substantially large share of stressed assets in mining, iron and steel, textiles, infrastructure and aviation as compared to PRBs because of substantially larger exposure to these sub sectors. Illustratively, PSBs account for 17.6 per cent of advances to infrastructure as compared to 8.4 per cent of the PRBs, while stressed assets were 30.9 per cent compared to 18.2 per cent, respectively. Similar are the results when comparison is extended to other stressed sectors. Thus, when granularly analysed, relatively, the performance of PSBs is not inferior(bad,निम्न) to that of PRBs. Also, the sub sectors referred to previously generally require a large amount of resources, which only PSBs have the wherewithal(resources,साधन) to provide.

In general, the areas of major stressed assets are precisely those where policy paralysis and episodes of stalled(postpone,रुके हुए) projects were most dominant, namely mining and infrastructure. The airlines industry, globally, is very quickly impacted by the slowdown, and in addition, specifically in India, the demise(end,अंत) of a prominent domestic luxury airline was understandably a major factor for the stressed assets in aviation.

The sluggish demand in slowing Western economies and deteriorating(make worse,विकृति) competitiveness against China and Bangladesh has led to restructuring of loans by the textile industry. The dumping of steel in India by China is now clearly emerging as an issue and the survival of domestic manufacturers with implications for employment is the most critical factor for continuation of financing of the steel industry. Most importantly, it deserves recognition that PSBs responsibly supported and significantly partnered with the government in containing the impact of the global meltdown since 2008.

Time for introspection

Though India has weathered(face,सामना) a significantly higher ratio of stressed assets during the initial period of reforms in 1993-94 and a similar ratio of about 13 per cent in 2001, the current critical situation should be used for introspection and undertaking structurally corrective measures. In addition to the issues raised in the Nayak Committee Report (RBI, 2015) such as tenure(period,काल) of the chairman, bank boards and an overarching(very important,अतिमहत्वपूर्ण) banking investment company, there is the need to ensure that top positions of PSBs are not left vacant for prolonged periods. In fact, a waiting list should be readily maintained, and an overlap period for an understudy for a month should be provided to the incoming official to ensure continuity. Further, following the Gopalakrishna Committee Report (RBI, 2014), nearly 8 lakh serving officials in PSBs, filtered through a rigorous(strict,सख्त) procedure, should be skilled through high-quality training to ensure enhanced efficiency in operations. This would be more useful than recruiting a few management graduates from elite(specific,विशिष्ट वर्ग) institutions at high salaries every year, like a drop in an ocean, to transform the working environment in PSBs.

The government’s proposal to try senior officials from PRBs to chair PSBs can be expected to yield(give,देना) positive results and should be experimented in a few banks initially before scaling up to many more. Interestingly, efficient and experienced officials from PSBs are regularly poached by PRBs.

To ensure that every employee is made aware of the responsibility of their collective action, regular wage-hike fixation and incentives should not be industry-wide but only restricted to the performance of the respective banks. Finally, the proposed capitalisation of PSBs should not be offered as a matter of routine but made conditional on strict performance criteria and a specific roadmap for recovery, placed in public domain to ensure accountability.

Since the first nationalisation of State Bank of India in 1955, followed by more in 1969 and 1980, PSBs were created to pursue social objectives and focus on banking the unbanked. Consequently(therefore,परिणामस्वरुप), PSBs have been at the forefront in rural areas and have been relentlessly(continue,लगातार) pursuing implementation of government welfare schemes o in terms of priority sector lending, and pension and insurance, including those recently announced.

PSBs, admirably, despite pursuing social objectives, are competing well on various financial parameters with PRBs. But the authorities need to consider that in the absence of a level playing field, should PSBs and PRBs be evaluated on similar norms? Illustratively, to be fair to the PSBs, the owner and regulator should take cognisance(awareness,जागरूकता) of the fact that in opening 16.5 crore Jan Dhan accounts within six months, without seeking additional man-power, these PSBs would have deployed all their resources at the cost of other activities. In contrast, PRBs only opened 68 lakh Jan Dhan accounts.

Therefore, the norms and benchmark for these unique financial creatures typical to India have to be designed, especially for PSBs, and comparison and contrasts of performance evaluated among themselves. The incomplete growth and welfare-based agenda of the new government, especially the Make in India campaign, will again need active support of geographically widespread PSBs. Therefore, comparison of socially oriented PSBs with profit-oriented, citycentric PRBs needs to be revisited. Further, given the acceptability of transparency in operations, globally, should India not offer an alternative set of benchmarks for its time-tested and faithful PSBs? After all, the world does accept different standards, and the non-implementation of the Basel banking norms by the U.S. has not impacted financial markets, either.