There is no finding the light at the end of the black hole aka public sector banks (PSBs). The mounting non-performing assets (NPAs) have been unyielding to any salutary solution and the government and the Reserve Bank of India (RBI) have practically thrown every known ammunition at the problem.
Starting with the asset quality review in 2015 when Dr Raghuram Rajan first recognised the extent of the problem bogging the banking system, to the prompt corrective action (PCA) of keeping 12 banks under watch, to bringing the insolvency process into motion under IBC (insolvency and bankruptcy code) and, finally, looking at privatising a few of the banks, starting with two in the current year, there has been no lack of ideas and intent, but little in terms of demonstrated outcome.
Mismanagement of PSBs due to political influences, lack of accountability at all levels, poor supervision and absence of vision at RBI have been a long-standing problems and straddle many a government, past and present. It is not easy to pinpoint a specific period when the banks started losing focus and control, and failed to create a robust system of appraising loans along with a timely and strict recovery mechanism.
In some sense, the disappearance of the development finance banks like ICICI (Industrial Credit and Investment Corporation of India) and IDBI (Industrial Development Bank of India) caused a hiatus that commercial banks vainly tried to fill, at a huge cost to the exchequer.
The development finance banks had a cadre of officers that were better equipped to appraise long-term project loans and had the ability to track performance of projects along with sufficient technical capabilities to help them do a course correction where necessary.
Commercial banks failed to create that capacity and, hence, were seriously hampered in their ability to handle large loan portfolios that soured over time.
While there has been a rapid deterioration in the state of affairs, RBI as the nodal regulator not only failed to detect and arrest the problem in time, but kept stonewalling efforts of those in public life who were keen to ensure that the public should know the real picture and take informed view on how the banks were performing.
Girish Mittal has done a yeoman service in obtaining some of the RBI inspection reports under Right to Information (RTI) Act, after a great deal of struggle.
These articles are a great eye-opener for the public to appreciate the actual substance below the surface and the festering issues like poor governance, risk management, and lethargy in going after the bad loan recoveries.
RBI has, recently, shared with Mr Mittal an inspection report of Bank of Baroda for the year 2015-16. While the report is about the past five years, in the absence of any evidence to the contrary, there is every possibility that much of what it contains should be true as on date and perhaps worse, with the addition of Vijaya Bank and Dena Bank in the process of the merger and consolidation of PSBs undertaken in 2019.
The 2015-16 inspection report covers most of the important areas of operation of the Bank and provides a picture, which is quite contrary to what the Bank projects of itself in its annual report to the shareholders and to the public at large.
This is the tragedy of keeping these reports secret as the public is misled by glossy advertisements and self-serving statement of the management and never know the true picture of the shambles that the Bank is in.
This also demonstrates the limitation of the audit exercise that banks undertake with so much fanfare and at a huge cost. Auditors seldom reflect in their reports the true state of the management and just pay lip service to aspects like risk management and internal controls and largely rubber stamp the view projected by the management.
While the RBI inspection report identifies the implications of many of the failures in the governance process, the key takeaway is that the Bank has been very poorly governed at all levels and has shown little regard to processes and controls that are critical to management of public funds.
Prior to the merger of Vijaya Bank and Dena Bank, BoB was no leviathan like a State Bank of India (SBI) or Punjab National Bank (PNB) that it can take cover under size and complexity for the gaps in management.
Its book size on both sides, being advances and deposits, was just around the Rs60,000-crore mark and there are NBFCs (non-banking finance companies) that have a much higher volume of business, compared this Bank.
The following are some of the key findings in the inspection report that raises fundamental questions about the capability, commitment and concern for good governance.
The board of directors has sub-committees for areas like IT strategy, risk management and human resources. Most of these committees were functioning just on paper and failed to adhere to the rigour and routine that is needed of these.
The information technology (IT) committee meetings happened without the participation of the IT expert, human resources (HR) committee failed to meet in two years’ time when the Bank had major challenges on talent acquisition and succession to key roles, and risk mitigation plans were neither in place nor complied with.
Even the main board shows scant evidence of addressing key issues of strategy, meeting the competition, managing the overseas operations and putting in place effective monitoring of the burgeoning bad loans, especially in the top-30 accounts that constituted the bulk of the bad loan portfolio.
The board failed to have a clear policy on appointment of directors to the overseas entities and joint ventures and also in providing a clear role description for staff deputed from some of the affiliates and subsidiaries of the Bank.
It is appalling to note that a directive of the board that the most underperforming zones (on loan recovery) should make a presentation at each board meeting was not adhered to at all!
That the chairman of the board and of the audit committee condoned this lapse is matter for much worry!
With the tone at the top being quite complacent and the main board negligent about demanding discipline and rigour, it is no wonder the operating management was found seriously wanting in most crucial areas of management.
Some of the findings raise questions on the integrity of systems and people responsible for the same. A software problem was found responsible for under-counting the risk weighted assets (RWA) causing the bank to undershoot the capital adequacy requirements. It is difficult to believe that software can fail so conveniently!
Similarly, the undrawn portion of sanctioned loans was conveniently excluded in arriving at capital requirements.
Given such serious deficiencies in the system, there are legitimate doubts about the role of the internal and the statutory auditors in testing the functioning of the key systems.
The major gaps seen are in handling the lending portfolio and in monitoring non-performing loans. It is no wonder that banks like BoB have an unending problem of bad loans, poor performance, and being a cost to the exchequer as the government needs to pump capital periodically.
A large portion of the loans were in the category of restructured loans and a substantial part of it amounting to Rs27,828 crore was identified as slipping back to default category.
The Bank had failed to keep adequate sectoral balance in the lending portfolio; was the preponderance of sectors like steel, power and infrastructure indicative of preferential lending to influential businessmen?
Almost 30 of the top NPA accounts constituted 36% of the total NPA showing distorted judgment in taking large and oversized exposure on a few accounts and that too in the wrong type of businesses. Stress tests were done not with real data but on artificially low assumptions and causing lower projections for capital requirements.
Infrastructure projects funded by BoB went into issues like approval delays, toll collection being far lower than planned and other aspects where the Bank’ management was found wanting in both the appraisal rigour and in monitoring the disbursements.
Sensitive sectors like NBFCs and real estate were sometimes improperly classified by the system and distorting the sectoral balance and in capital adequacy calculation. Loan disbursement to sectors like NBFC for on lending were made just based on a certificate from a chartered accountant (CA) and no tracking of on lending was done.
Bank of Baroda was tardy in referring and pursuing cases under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) and following up on DRT (Debt Recovery Tribunal) proceedings. Often, the realisability of the security was over-estimated and technology was not harnessed to optimise the processes involved.
While the basic core banking system was Finacle, a parallel system ASCROM was used to monitor NPAs and often resulting in under-estimation of the NPA provisioning.
There are multiple findings of systems being inadequate and unreliable, a fact that must have kept the entire board sleepless, but there appears no whisper of the board expressing any concerns publicly or in the annual reports.
Of course, the annual reports are quite unreadable being bilingual.
The internal audit was found inadequate, a fact the statutory auditors do not seem to have emphasised, and was also reporting to a level which itself was within the scope of audit, causing conflict of interest.
International operations have historically been the Achilles' heel of many of the PSBs. Companies that failed to meet the standards locally to obtain a loan often managed to get it overseas!
And, in most cases, the overseas presence was to help blue-eyed boys get a posting there and legitimise the foreign trips of the senior management.
BoB seems to have fared very badly in managing the foreign operations and ended up with fines imposed by the overseas regulators for compliance failures and having overall quite shoddy systems.
Understandably, the cumulative effect of the laundry list of deficiencies cannot be a superlative revenue performance!
The Bank had a huge loss in 2015-16 and had slipped on key parameters like net interest margin (NII), erosion of the deposit base, accumulation of bad debts, key gaps in manning critical positions and sparsity in talent pool.
What kind bank board oversaw operations that were as poor as the inspection report has catalogued? Was the board appointed for their political leanings or connections? Apparently not—the chairman was someone with a great deal international exposure having been a senior officer in a global software giant, with an MBA from Harvard!
A professor in accounting and finance from a premier management institution in the country should have counted for a lot in throwing his weight in risk management or improving the IT systems and in driving the discipline in loan processing and monitoring; apparently it was not to be!
The third was a seasoned auditor retired from a top multinational accounting firm and must have likewise cracked the whip on many inadequacies especially, in accounting and auditing processes.
May be the board was busy with other priorities; one may not know easily!!
In conclusion, the inspection report, in my view, is a greater indictment of the failure of RBI to set right the banking system which has been coming apart for a long time. BoB is generally perceived to be a PSB with a little more sheen than many others and one can only visualise what the system is like overall.
RBI has been dithering on setting up a specialised supervisory regulatory cadre (SSRC) due to lack of support from the officers’ union which perceives lack of clarity and vision in the conception of this idea though the decision was that of the central board of RBI taken in 2019. RBI has been quite shy of acknowledging its supervisory role and insists that it is not an audit as mentioned to the Parliamentary Committee on banking to avoid taking direct responsibility of the mess the banking in India is.
The big question is: Who is queuing up to buy these whenever the privatisation happens!!
Here is the RBI's inspection report for FY2015-16...
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(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)