After a long battle with the Reserve Bank of India (RBI) from 2016 (Finally, RBI Shares Inspection Reports of SBI, ICICI Bank, Axis Bank and HDFC Bank under RTI
), Girish Mittal, a dogged Right to Information (RTI) activist, was finally granted access to bank inspection reports for four years – 2012, 2013, 2014 and 2015. Now that we have them, it is important to find out what the RBI fought so hard to hide and suppress, on behalf of banks—to the extent that it even claimed a fiduciary relationship with the banks.
Although the reports are now a little dated, it is worth diving into what the RBI inspects and how seriously banks take these inspections and correct themselves.
I studied the four inspection reports of SBI that have been released by RBI. The reports find fault with the bank across every operation. However, I am going to make allowances for the fact the some slippages are bound to happen given SBI’s sheer size and scale. What still comes out very starkly is the complete lack of accountability and ownership.
Each year, RBI subjects every bank to an inspection that focuses on risk management and integrity of accounts. The inspections are fairly comprehensive and help bring out the deficiencies in risk management, processes and the overall functioning of the bank.
These reports are submitted to the concerned bank, discussed with them and thereafter, the bank is expected to remedy the deficiencies. So, it is logical to expect that a deficiency that is pointed out in one year is not repeated in the inspection report of the next year, IF the directors and the management of the board take the reports seriously.
The owner of the public sector banks (PSBs) is the Government of India. This essentially means that there is no real ownership and PSBs exist merely to serve political bosses. The RBI reports make depressing reading and if the holes that it drills in the bank’s operations were plugged, the government would not need to repeatedly pump in money to re-capitalise banks. But this doesn’t seem to bother anyone.
Check the images below. They are just a sample of hundreds of pages of deficiencies across each and every parameter of SBI’s operations that the RBI has documented. And since this is unlikely to be a 100% check, there could be a lot more.
(Rupees in million. Last column is 2013 March, and the first one is 2015 March)
SBI scores poorly on every single issue that the inspection reports have commented on—from management quality to sophisticated risk management tools.
In the old days, transactions were simple and banks did not need to recruit specialists or assign certain tasks to people with relevant expertise and domain knowledge. Everything could be reduced to template form filling and any credit over four crore rupees was to be submitted to RBI for prior approval. Today, the complexities are a thousand-fold and delegation is extensive. But SBI does not seem to have a grip over what is required.
The Risk Assessment Reports (RAR) for each year, throw up the same errors of omission and commission, a concerted effort to cover up non-performing assets (NPAs) by window dressing, suppression of data, evergreening of loans, ignoring laid down KYC (know your customer) procedures, flouting Anti-Money Laundering rules, suppressing employee fraud, ignoring RBI reports on deficiencies, inability to manage processes and risks etc. This seems to be the DNA of the bank. Or it doesn’t give a damn about RBI inspections, since there is no attempt to correct issues.
The lack of ownership in processes and controls is partly attributable to the lack of continuity at the very top. Every new CEO seems to just focus on ‘managing’ profits. So there are huge write-offs in the first year of every new chairman (nice way to blame the predecessor) and targets are based on a low base – this practice condemns the bank to mediocrity.
Add to this the short tenure at the top (from an organisation point of view), in a business where technology and complexities are dynamic, risk management remains an orphan. In one inspection report, RBI has pointed out that the chief risk officer was also on the credit committee! It is like the cat guarding the milk.
Given the short tenure at the top and the fact that there is no ownership, the chairman is focused on bigger things like public relations (PR), pleasing the political bosses and planning post-retirement sinecures.
Once upon a time, SBI could be choosy about who to lend money to. Today, it has to compete with well-run private sector banks like HDFC or Kotak who now snatch away the best businesses.
And, yet, there seems to be a complete lack of interest in the way the bank is run. This is best summarised by the image below that resulted in the annual report mentioning an incorrect number of branches.
The success (measured for a bank in terms of size, asset quality and RoE) of a financial institution is dependent on how robust its systems, controls and processes are. This is especially true in an automated environment, where nothing can be left to personal discretion or subjectivity.
The inspection reports point to violation of know your customer (KYC) norms, which probably leads to likely abetment of money laundering; one report also says that bank officials were reluctant to share information.
Recurring violations pointed out by the inspections include inability to balance cash in ATMs, reluctance to prosecute employee frauds are some of the recurring themes.
In credit, RBI points to improper assessment of credit needs, non-enforcement of security given, shortfall in loan security as advised, disbursement of loans even before a charge is created on the collateral, lack of surveillance on credit.
Evergreening of loans is evident from the undue increase in loans to problem sector such as diamonds, power, etc, violation of single customer credit limits, violation of sector limits. Clearly, the board is to blame.
Unsurprisingly, the RBI inspections have repeatedly pointed to SBI trying to hide bad loan by ever-greening accounts, granting loans to associate companies to meet other loan obligations, unauthorised lending against capital market Instruments, granting indulgence to borrowers, not keeping the board informed of credit related problems…the list is endless.
The inspection reports also points to repeated frauds in retail loans, SME (small and medium enterprise) loans, government schemes… there is no aspect of credit that is clean. There are also issues with SBI’s overseas operations, which require compliance with our laws as well as those of the countries they operate in.
This leads us to the big question. Does the board of directors have any knowledge of things? Do they even get to read the inspection reports that the RBI sends the banks? Are they tabled at board meetings? Do they boards ask why the same issues appear year after year? What about the statutory auditors? Do they note the findings of the RBI inspection? Do they bother to check why the same issues remain unaddressed? How does the internal audit mechanism work? Are their findings monitored by the board?
Each year, the report also reconciles the profits as ‘reported’ (I presume this is after audit by the statutory auditors) and as amended by the inspection. There is also a detailed list of some large borrowing accounts that SBI has not recognised as NPAs (non-performing assets) or not classified as weak accounts. As a result, the profits are inflated due to insufficient provisioning. A glance at those names and the amounts involved clearly indicate compromised lending standards.
Some of those accounts are in the national news today. By postponing the recognition of bad debts, the management is pushing the chances of recovery farther away. Clearly, each chairman is only focused on pretending that the bank is performing better than it is.
SBI is a great franchise. But we need to stop the bleeding of the taxpayer money that goes in as recapitalisation. My first impression is that someone with ownership and commitment can double the RoE. It has advantages of size, reach and by status of its being a preferred banker to the government. The management structure needs to be revamped. Risk management and operations need focus and continuity of supervision. Business has to be subjugated to risk management and not the other way around.
However, in the area of credit, something can be done within the present constraints. All credit decisions need to be centralised. Local outposts and branch managers should be devoted to compliance, processes and operations.
I should also add one positive observation. The report for the year 2014-15 was not as harsh as the earlier ones. Hopefully, the public noise over NPAs and frauds is the catalyst that improves things.
Here are the inspection reports of the SBI Bank as provided by RBI to Girish Mittal under the RTI Act...