The way our public sector banks are run would shock the alien PK no less than our religious hypocrisy did
In the movie PK, the alien played by Aamir Khan stumbles upon many contradictions, deceit and hypocrisy in how we practise our different religions. And, yet, as a nation, we stumble along in a largely peaceful manner, dealing with occasional bouts of ugly ‘intolerance’ while remaining rather backward and poor. But PK would have been just as shocked to find that, we, Indians are expected to stumble along the same path when it comes to the highly regulated and red-tape-bound world of modern business and finance. If I attempt to list all the issues, it would run into several tomes. Instead, let us just trawl through a couple of headlines of the past fortnight and you will know what I mean.
On 28th January, Business Standard reported that shareholders of State Bank of India (SBI) were crying foul over the giant bank refusing to provide e-voting facilities at its forthcoming extraordinary general meeting (EGM) called to decide on raising fresh capital. E-voting was made mandatory by the Securities & Exchange Board of India (SEBI) in 2014; but the paper tells us that SBI has been in violation of the rule ever since. The Bank says that it is not a company under the Companies Act but is governed by its own statute. Wasn’t all this discussed when the listing rules were changed? Since SBI is listed on stock exchanges since 1959, isn’t it fair to assume that someone in SEBI would have studied the implications of SBI going by its own Act? Who decided that if the SBI Act conflicts with the Companies Act or the SEBI Act, then the Bank’s statute will prevail?
Well, quite simple. PK would have discovered that there is a caste system when it comes to listing of companies in the market. Public sector undertakings (PSUs), owned by the government of India, are the Brahmins. They are not particularly popular with ordinary investors; but government ownership ensured that they were exempted from a whole clutch of rules applicable to private companies. In the original burst of economic liberalisation in the 1990s, these companies were allowed to list with sketchy prospectuses, vague disclosures, exemption from minimum listing of capital requirement (many PSUs had less than 2% of their shares listed).
After 25 years of existence, the regulator still does not have the courage to force PSUs to comply with rules regarding appointment of independent directors. Bureaucrats posted as SEBI chairmen rarely dare to question powerful Union ministers who the PSU behemoths report to. As Gurpur wrote in an article (“Why Are PSUs Being Spared from Penalties”
) on Moneylife’s
online edition(16 December 2015), 25% of listed PSUs do not have independent directors. They have also not bothered to comply with the rule regarding women directors; but SEBI, which penalised private companies for not meeting the mandatory women director norm, has not touched PSUs.
SBI has now told investors that e-voting rules also do not apply to it. Consider the enormity of this stand by the Bank which is considered a banker to the government. It is saying that its share can be traded on a single screen across the country and abroad, but its ‘part owners’, who cannot be physically present at the meeting effectively, have no voting rights unless they can send in a proxy. Business Standard writes that the listing regulations use the word ‘listed entity’ since 2015 which would cover SBI. It further says that other banks, which are not ‘companies’ under the Act, have complied with the rules, so why shouldn’t SBI?
If PK were to explore the problem of bad loans in Indian banking, would he even begin to understand what is going on? What if he landed on earth in 2013 when the governor of Reserve Bank of India (RBI) Raghuram Rajan cautioned banks about window dressing bad loans? “You can put lipstick on a pig but it doesn’t become a princess,” said the governor; PK probably noticed a few bank chairmen smirking. Two years later, SBI chairman Arundhati Bhattacharya, who is reported to be on the shortlist to become SEBI chairman, has virtually told him not to preach.
She stirred things up at a public lecture on 12th January by saying what amounts to, ‘Don’t look at us; everybody is to be blamed for the bad loans’. A report in The Hindu Businessline quotes her as saying, “Promoters were bidding aggressively riding on the back of good times around 2007-08 and some of them were diverting funds out of the well-run units hoping the money flow would continue forever.” The banks, she said, “…extended loans for long duration, as much as 30 years, while hoping the funds would be recovered in 10 years or so. While the regulator is to blame for allowing such a dispensation, the government was to take the blame for policy uncertainty like cancellation of telecom licences.”
It is all very well to blame RBI and corrupt politicians (for the cancellation of 2G telecom licences) but does it absolve bankers for not knowing how to manage assets, liabilities and maturity of funds. How can banks lend for 30 years and expect repayment in 10? Whatever she meant, the statement sounds most irresponsible. As for diversion of funds, that buck stops at banks. Lenders, who do not hesitate to use the most coercive means to recover money from small borrowers and individuals, have extremely cosy equations with industrialists and large borrowers. Diversion of funds, fresh funding for new entities set up through such diversion, and, later, the ever-greening of bad loans, happens due to collusion with bank management. On the other hand, even good borrowers, who cannot pull strings, are made to run the gauntlet of endless conditions, sureties, personal guarantees, arm-twisted to buy insurance products and then harassed over release of working capital or subsequent loan tranches; they often drive businesses to losses.
If this is the SBI chairman’s response to the dangerously high bad loans of public sector banks (PSBs), it is no surprise that investors are dumping the stocks. In an article titled “What Does the Carnage in Public Sector Bank Stocks Mean?
digital edition pointed out that stocks of many PSBs are down 60% to 67% in the past calendar year. While dual regulation, political interference and lazy regulation may all be responsible, there is no escaping the fact that bank chairmen are not selected on merit and not held accountable for disastrous loans or collusion with promoters. The same crony system, which manipulates appointments, also protects bank chairmen by ensuring that they can do no worse than getting a letter of displeasure for the most flagrant corruption.
The beneficiaries of this mess are the nimble-footed private banks. They have no problems managing funds, keeping bad loans in check and dumping dubious assets long before they need to be written off. They are also able to extract higher costs from depositors for services that were part of the basic banking package and ought to have become cheaper with core banking. They can do this, because inefficient PSUs, desperate to shore up balance sheets, match the charges levied on customers.
PK would have noticed that the ultimate sucker is the average Indian. The cost of frequent recapitalisation of banks is borne by all, including hundreds of million Indians who do not have a bank account. When the exchequer pays to capitalise banks, we are indirectly paying for the big birthday bashes and ostentatious weddings of defaulter industrialists. Middle-class account-holders get smacked twice over—the bank enjoys a fat spread of 6%+ on their savings account and still extracts a price for services provided, including maintaining the account or receiving text messages of transactions. But PK would notice that most of them don’t even realise how they are being had!
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at email@example.com)