News reports have quoted anonymous sources in the Union finance ministry as saying that the State Bank of India (SBI) management seems to be more interested in using the Moody’s downgrade to wrest more capital from the government than improving its functioning. On the latter, attention has been drawn to the level of non-performing assets (NPAs). This is unfortunate since it is likely to adversely impact a management that is doing the right thing and should be appreciated instead.
The ratings downgrade was caused by two factors. First, the bank’s asset quality (level of non-performing assets) deteriorated, requiring higher provision. Second, write-offs and growth in assets also brought down capital adequacy. Let’s take the second issue first. There is only one way to put matters right: the government, which owns 59 per cent in the bank, has to take the lead in bringing in more capital. The present resources position of the government makes it difficult for it to cough up large amounts of cash (up to Rs 12,000 crore, according to the bank’s calculation). This is understandable but is not reason enough for the Union finance ministry to take umbrage at being told what it must do and aver that the management is not doing a good job. The communication skills of the bank’s current chairman, Pratip Chaudhuri, may not be exactly what the finance ministry would like them to be, but that has nothing to do with his ability to offer good leadership to the bank at a time when it is sorely needed to set things right.
The genesis of the current problem goes back to the time at the bank when provisions for NPAs were not made, in virtual defiance of the norms laid down by the banking regulator, the Reserve Bank of India (RBI). So Mr Chaudhuri adopted the only course available: fall in line with what the RBI requires and provide for the shortfall in past provisioning. In no way does the sharp rise in current provisioning reflect the current performance of the bank; it is a throwback to the past. In fact, the management’s effort to clean up the balance sheet should be appreciated. Unfortunately for the bank, the need for higher provisioning, to make up for the past, comes at a time when the economy is regressing and business distress going up, adversely affecting the loan quality of lenders. If the bank’s owners, the government, were to do its job right, it would have to create three boxes: one for the actions and consequences of rectifying past errors; another for the fallout of the current adverse economic climate; and yet another for the actions and consequences for which the current management can be held solely responsible. If the finance ministry were to carry out this exercise sincerely, it would help itself as well as the largest bank in the country. To act out of pique would be shortsighted and unfortunate for all — the government, the bank and the economy.