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Banks' gross non-performing asset (NPA) ratio increased to 4.5 per cent at the end of December 2014 from 4.2 per cent a quarter earlier, according to a report by rating agency ICRA. For public lenders the gross NPA ratio crossed five per cent. Also, 10 public sector banks saw their third quarter net profit fall, on a year-on-year basis, Capitaline data compiled by Business Standard's research bureau showed.
Muted corporate loan demand, reduced business and an uncertain macro-economic environment, along with weak governance leading to lax credit appraisal, have been blamed for the frail performance of local banks.
| REGULATION HURDLES FOR PUBLIC SECTOR BANKS |
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"Governance standards perhaps have influenced the performance of public sector banks to a certain extent. The weak portfolio quality of some is mainly on account of a lax credit appraisal system. Also, the top job in some of these sector banks are still vacant, which creates uncertainty and affects performance. Agility is another problem. Decision making in these banks often take time and prevent them from exploiting opportunities," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.
Governance difficulties in state-run banks are well chronicled. In August 2014, Central Bureau of Investigation (CBI) arrested Sudhir Kumar Jain - then chairman and managing director of Syndicate Bank - for allegedly accepting a bribe from a private company in lieu of granting it credit extension. A few months earlier, Archana Bhargava - former chairperson and managing director of United Bank of India - had opted for voluntary retirement amidst talks of a growing rift between her and other senior executives over asset classification and NPA reporting.
Dual regulation by the Finance Ministry and the Reserve Bank of India (RBI), faulty board appointment process, short average tenure of top executives, and significant compensation differences with private banks are often held responsible for lower productivity, inferior credit quality, deterioration in profitability and un-competitiveness.
The opaque nature of appointment of top executives often affects the quality of board deliberations. A scrutiny of board notes suggests that these focus inadequately on long-term strategy and areas of concern. There is a general absence of calibrated discussion in the boards on NPAs, which continue to remain an area of concern for lenders. According to analysts, there is an immediate need to strengthen the risk management processes at state-run banks. "Governance mechanisms put in place at central risk management departments need to percolate across the network through which credit is disbursed. There is also a need to back-test qualitative inputs used in credit scoring models with actual data especially in case of credit that is not performing to improve future credit assessments. Although most credit is backed by collateral, on-going valuation and assessment of liquidity of collateral is critical for banks to understand what is actually realisable in case of defaults," said Muzammil Patel, senior director at Deloitte India.
Bankers, however, say that fragile governance standards are not necessarily responsible for all the problems. "We are not as bad as we are often projected. Our laws do not empower bankers to take steps that are required to recover loans that have turned bad. Unfortunately, there is now a tendency to blame bankers for everything while the defaulter is left alone," said the chairman and managing director of a public sector bank.
There is some credence to such claims. The functioning of debt recovery tribunals (DRTs), created to help financial institutions recover their dues speedily without being subject to the lengthy procedures of usual civil courts, appears to cause more pains than gains for banks.
Consider this: The amount recovered from cases decided in 2013-14 under DRTs was Rs 30,950 crore, while the outstanding value of debt sought to be recovered was Rs 2,36,600 crore. In other words, recovery was only 13 per cent of the amount at stake.
"The bankruptcy and insolvency regulation in India needs significant overhaul - where enforcement of creditor rights (secured and unsecured) is done in a time-bound manner. This should involve replacing management with credible independent administrators to take over the affairs of the company very quickly if the company has defaulted on its obligations," said Varun Gupta, partner - transaction and restructuring at KPMG in India.
He suggested the creation of a liquid secondary market for distressed debt, where the acquirers enjoy significant enforcement rights to recover their dues, replace promoters or restructure the company. "Give power to the banks to use this mechanism quickly and efficiently, once a certain level of default has happened and the promoters are not able to submit an acceptable restructuring plan to the banks."
