The market thinks PSBs are in a big soup and nobody is in charge
When the new government took over the Centre's reign in May 2014, the benchmark Nifty PSU Bankex was at 3,869. From that point, the index rose to around 4,300 in January 2015, when the government announced with great fanfare the Gyan Sangam, a conclave with banking heads to chart out a glorious future for public sector banks (PSBs). However, despite all the discussions done in the Gyan Sangam and also subsequent steps taken by the government in the form of Indradhanush, a 7-point program to revive PSBs, the Nifty PSU Bankex has crashed 46% to 2,318, from the January 2015 level. This is in sharp contrast to Nifty Private Banking Index, which rose by around 14% during the same period.
The fall has been across the board, signifying some deep-seated problem with all public sector banks. State Bank of India (SBI) lost a little more than 27% during since the past year, eroding Rs62,000 crore of market capitalisation. Others like Bank of India (BoI) and Oriental Bank of Commerce (OBC) have crashed more than 50% during the past year. The market is delivering a simple and clear message through this fall – there are huge problems with PSU Banks and nobody is in charge. The problem is simple: widespread poor lending practices, laden with corruption and influence peddling that have led to huge bad loans.
Technically, the Reserve Bank of India (RBI) is supposed to be in charge. It is the banking regulator and in that role, it has enormous powers of inspection over banks. RBI asks banks to file numerous monthly and quarterly reports and also has a director in every major PSB. And yet, RBI pretends that it has no real supervisory role the burgeoning bad loans.
On paper, the RBI has done a lot of tinkering with the PSBs. It has a program called corporate debt restructuring (CDR), has also introduced strategic debt restructuring (SDR) and launched what is called the 5:25 structure to impart ultimate relief to banks from provisioning. None of these three has been able to generate results in the way they were intended to.
Loans, including those of powerful and mighty borrowers, continue to be restructured with impunity through multiple CDR schemes and under RBI’s 5:25 scheme (five-year moratorium on payments and a 25-year loan tenure), which has even been described as ‘The Great Indian Banking Ponzi Scheme’!
Reserve Bank's SDR Scheme of June 2015 provides step-in rights to lenders to achieve majority holding through conversion of debt and unpaid interest into equity - in case a restructured account fails to meet the financial and other critical targets. However, it permits banks to invoke SDR without treating the accounts as restructured! In addition, it does not stipulate pledge of shares first, which can protect the interests of the lenders.
RBI introduced ‘Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries’ (popularly called the 5:25 structure) in July 2014. The structure permits banks to adopt original amortisation schedule (OAS) for repayment of loans for a period of about 25 years, i.e., up to 80% of the economic life to projects in infrastructure and core sectors and industries. The 5:25 structure is appropriate for projects with steady and predictable cash flow, which can be controlled by lenders through ‘cash trap accounts’. If we go by this criterion, barring a handful of projects, no other borrower from the long list of eligible sectors or projects seems appropriate for 5:25 structure. However, it is quite strange that Reliance Gas Transportation Infrastructure Ltd (RGTIL), controlled by one of the richest men in the world, Mukesh Ambani, managed to get a loan-restructuring package.
The intention of CDR mechanism was to provide timely support to genuine cases through restructuring. However, as a Moneylife cover story in November 2015
showed, the CDR has failed miserably. The success rate of cumulative CDR debt of over Rs4 lakh crore up to FY14-15 was low at around 15% (by value); failed projects accounted for 14% of the debt and the remaining 71% debt was locked in live CDR accounts. The situation was grim as CDR advances were concentrated in a few PSBs; 10 banks accounted for 59% of CDR exposure. For one particular bank, the stressed assets accounted for 100% of its net worth.
Many CDR accounts may turn into non-performing assets (NPAs), which will further stress PSBs. Banks have adopted CDR only to postpone provisioning, given the liberal provisioning norms for CDR. Another issue highlighted was with respect to working capital advances. One of the issues is that stocks are stocks are certified by auditors without any domain expertise and no one is held accountable for subsequent major impairment of these stocks. Moneylife's cover story highlighted that the impact of 5 -25 and other structures is that they have all the trappings of delaying and enhancing, but not extinguishing the NPAs.
With reference to PSB's, RBI governor, Raghuram Rajan, had remarked in 2014, "We have to ensure that these banks have the capacity to compete and many of them recognise what needs to be done and have started on the path, but we should support them.” This cheery view of the PSBs is in grim contrast to the reality of unaccountable bankers and deep seated corruption, allowing lenders to get away repeatedly.
In August 2015, government rolled out a seven-pronged plan called ‘Indradhanush'
aimed at improving the performance of PSBs. These include better senior appointments, setting up a Bank Boards Bureau, pumping in more capital, reducing bad loans, empowering the management, improving accountability and better governance. However, the government is clueless on the last four problems: bad loans, management empowerment, improvement accountability and better governance.
All it needed to do was follow the excellent recommendations of the PJ Nayak Committee (Committee to Review Governance of Boards of Banks in India) submitted its report to the RBI in May 2014. However, the government has not picked up much from the report. The report stated, “Governance difficulties in public sector banks arise from several externally imposed constraints. These include dual regulation, by the Finance Ministry in addition to RBI; board constitution; significant and widening compensation differences with private sector banks; external vigilance enforcement though the CVC and CBI…." Because of this dual regulation, neither the Finance Ministry nor the RBI is accountable for the malaise in PSB's. Indradhanush does not offer any solution to this core problem. Given the free-fall in the stocks of PSB's, the markets have given a message that Indradhanush is a damp squib.
From time to time, the RBI governor thunders against defaulting companies and their promoters. Ironically, he sounds like an advisor not the banking regulator.
All the talk of the governor, the Gyan Sangam of 2015 January and Indradhanush scheme have had little impact on the functioning of the PSBs and the markets have shown their disgust. Indeed, some believe that this failure to fix the bad loan problem and bringing in accountability of banks is one of the biggest reasons behind the flagging economy.