What does the carnage in Public Sector Bank stocks mean?
Moneylife Digital Team 27 January 2016
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. 
8 years ago
Has RBI regulation failed? Is RBI not competent? What actually is ailing? Who is the real culprit? I think, all those who are responsible for this state of affair also have full knowledge of the ailment. They of course do not seem to have intentions to pursue the remedial measures. All the announcements are mere face wash.
Sunil Rebello
8 years ago
Till India is run in a Democratic way - there will be little or no impact on the functioning of the PSBs or PSUs.
Any Government of the day misuses the PSBs & PSUs like they own family owned units.
They must understand that they are only Trustees.
Like the Governments holds Trustees of NGOs responsible for their actions.
So must the Government be held responsible for their actions.
Ethics has to be the basic principal of operating any PSBs or PSUs or the looting of the assets our country will continue.

8 years ago
till officials of lending officials are not held accountable NPAs will continue to rise. Just like Air India, ITDC hotels will not winded up Public Sector Banks will exist. As regards to officers and award staff of PSB are concerned 80% of them don't know ABC of lending and will not even know where the financed unit exists so Raghuram Rajan will finish of his term as RBI Governor and next man will have to find out new method of debt restructuring or quit as NPAs will only grow further
Mohan Krishnan
8 years ago
China and India both share this problem. Only scale is larger in China. Political elites in both countries have misdirected their people's hard earned savings into massive malinvestments. Both will be punished by market with deep devaluations and associated problems. Poor and middle classes will be burdened with several indirect taxes to protect the elites.
Mahesh S Bhatt
8 years ago
Public ka Paisa Public ki Banks par Private Sector ki Kaamdhenu Gay.

Common Man Dies & Rich has more choppers n security.

Enjoy the Bliss of dark/uncertain/insecure future.

Courtsey GOI/Private Sector/Liberlisation without Conscious Capitalism.

Inference Economic Slowdown/Political Upheaveals/Aanrchy /Chaos/Violence on rise.

Bye to Honesty is Best Policy when Corruption pay royally instantly in just 2 minutes to Power Brokers & Businessmen.

Amen Mahesh
8 years ago
This is the result of constitutionally guarenteed socialism.People are conditioned to believe that all loans from Govt. institutions will eventually be written off whether it is to a corporate borrower or a farmer.The genesis of this malaise can be traced back to Mr.Janardhan Poojary's loan melas that were started in the 8os during Mrs.Gandhi's regime and has only gone up in magnitude exponentially since then.
B. Yerram Raju
Replied to SATISH MADHAV comment 8 years ago
It is not socialism of banking that brought this rot. It is the corporate debt that is responsible for it and more so because of irresponsible lending. Growth in priority sector is just 5.4% during this year. Never the targets of agriculture and MSEs have been met by any and all the PSBs in the country. They took to subscribing to either NABARD or SIDBI to make up for the shortfall. Proportion of NPAs in social lending or directed lending programme is not significant compared to corporate NPAs. It is always good to go by data.
Replied to B. Yerram Raju comment 8 years ago
The point is the mindset.Why people do what they do.Data and statistics are only a consequence of it.When people believe that money from PSBs is "free money" who wants to pay it back?Farmers will agitate and have the loans waived off.The corporates manipulate the system to have the loans re-scheduled/ evergreened.In both cases,the net result is the same-more NPLs.(called NPAs to hoodwink the public)
Suketu Shah
8 years ago
Such major changes for such chronic banking problems since decades have to come from the top and no hope as long as we have the current FM.
8 years ago
Failure of public sector banks will not be a good news major economic development takes fron financing from them we should strength it rather than writing things which everybody knows give some positive suggestion if you have any .Nothing new in your writing.Share prices of private banks go up not because of great business they are doing rather it is speculation of FFI.Do not compare business with shareprices
uttamkumar dubey
8 years ago
Does Raghuram Rajan subscribe your moneylife Magazine? pls. lend him a free copy :P
Sugumar Iyer
8 years ago
The Public sector banks were taken over by Government to streamline lending to poor sections of society and to priority sectors.The Banks were simply asked to lend without assessing the quality of the borrower or the asset quality. Further the law structure was not modified to ensure prompt and speedy action against the defaulting borrowers.The existing courts and their way of functioning without any concern for recovery of public money has further aggravated the situation.
The above factors when coupled with opportunities for politicians to siphon the banks' money without any punishment has further affected the Bank administrators and officers. There were enough opportunities for bank staff and officers also to make money without any problem.
Even to-day the position continues to be same. In order to hide the lacunae in the system of credit disbursals, administration, recovery, the Government has ploughed in the tax payers' money as capital influx.
As the banks are now sure that capital inflow will be there from Government to sustain the useless system, they are also not worried.

All these can be eradicated over a period of time only if,

1. Government gives independence to RBI and Banks to look after their own survival,
2.Amend the laws to effect swift punishment, black marking the defaulters and recovery of locked up funds without resorting to courts and police.
3.The future lending is put on proper assessment and security
4. If the workmen and officers are made to realise that performance or perish has to be their slogan and work sincerely to this end.

Simple Indian
8 years ago
It has become a matter of fact that every time the Govt opens up a sector to private sector, it's only a matter of time before PSUs, no matter how well-entrenched, start declining in profitability. This trend has been proven in virtually every sector opened up to private players since 1991 economic liberalization. Of course, it's also a fact that the inherent flaws and inefficiencies in the PSUs got magnified and highlighted whenever private sector came up trumps. This applies to behemoths like Air India, large PSUs like SBI, BoI, BoB, etc., as also once-largest telecom firms like BSNL & MTNL. So, apart from inherent systemic or institutional flaws in PSUs, crony capitalism ensured that PSUs in various sectors remain in the red at the cost of highly profitable private firms in those sectors. Economists opine that under the current circumstances, the Govt ought to empower PSU Banks to recover their huge NPAs, and also give them operational autonomies to decide whom to offer loans and at what cost. Forcing PSU Banks to dole out huge loans to the likes of Vijay Mallya's Kingfisher Airlines, or such undeserving entities only makes PSU Banks go deeper in the red. Also, efficiency in PSU Banks ought to be rewarded and perennially loss-making ones should either be divested completely or shutdown to prevent taxpayers' money being misused to keep heavily loss-making PSUs like Air India afloat.
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