Saturday, February 1, 2014

Asset Quality In Public Sector Banks

Rise in NPAs hits PSB third quarter results

Lower provision helps Union Bank to reports 15% rise in net
-Business Standard --01.02.2014 ( My views are below this news )
Five of the six public sector banks which announced October-December quarterly earnings on Friday reported a decline in net profit over a year, owing to higher provisioning for bad loans and mark-to-market losses (writing down assets at current value) on their investment portfolio.

Pune-based Bank of Maharashtra was worst among these. It reported a  92 per cent decline in net profit to Rs 15 crore during the third quarter, as compared to Rs 194 crore during the same period of the previous year, due to a sharp rise in loan defaults. The bank reported the proportion of gross non-performing assets (NPAs) to the total at four per cent at end-December, as compared to 1.7 per cent in the same period last year.

Sushil Muhnot, its chairman and managing director (CMD), said: "The increased cost of deposits is one reason for the decline in profits. We have spent Rs 300 crore on staff costs and made a (bad loan, etc) provision of Rs 320 crore. In the past nine months, NPA cost has increased from Rs 1,137 crore to Rs 3,500 crore.”

The only exception in the pack was Mumbai-based Union Bank of India. It reported 15 per cent growth in net profit to Rs 348 crore, despite flat growth in net interest income. The provisioning for standard advances came down to Rs 24 crore from Rs 100 crore a year before,, while NPA provisioning dipped by Rs 56 crore. Gross NPAs (as percentage of gross advances) were 3.36 per cent as on end-December, up both sequentially and over a year.

“We think the worst is over for the bank in asset quality,” said CMD Arun Tiwari.

PNB
Punjab National Bank reported a 42 per cent decline in net profit to Rs 755 crore, due to a similar increase in provisioning. The latter increased 41.5 per cent to Rs 1,947 crore; this was mainly because the bank wrote off a sub-standard asset, of a troubled jewellery maker in which it had exposure close to Rs 900 crore. It also had to make a higher provision for investment depreciation, as bond yields hardened in the quarter, by Rs 219 crore. This was a sixfold increase as compared to the same period of the previous year.

"In difficult circumstances, we were able to hold on to the net interest margin, 3.57 per cent for the quarter and 3.52 per cent for the nine-month period (since the financial year began on April 1). We have managed to maintain the margin through the cost route. Though margins are under pressure, we hope to also maintain it for the current quarter," said K R Kamath, the CMD. He said the restructured asset pipeline was not significant at present.

Despite the decline in net profit, PNB stocks went up by almost six per cent on Friday, despite a flat broader market, as investors drew comfort from the results. “The positive surprise (from PNB) came on asset quality, which improved sequentially. Gross NPAs remained flat quarter on quarter, while net NPAs declined 5.5 per cent, in absolute terms; in percentage terms, both saw improvement. The addition to impaired assets also declined to 4.3 per cent, as compared to 6.7 per cent in the previous quarter,” said Saday Sinha, analyst with Kotak Securities.

Others
Bangalore-based Canara Bank reported a 42.4 per cent decline in net profit to Rs 409 crore, mainly due to higher NPA provisioning. Provisioning rose 68 per cent to Rs 1,052 crore for the quarter, while net interest income went up by 12 per cent to Rs 2,227 crore.

Another south-based lender, Syndicate Bank, reported a 25 per cent decline in net profit to Rs 380 crore as compared to Rs 508 crore in the corresponding quarter last year. Its gross NPA ratio jumped to 2.8 per cent in the quarter as against 2.31 per cent in the year-before period.

Higher provisioning for bad loans pulled down the net profit of Oriental Bank of Commerce by 31 per cent to Rs 224 crore in the quarter. Gross NPAs rose to 3.87 per cent of the total, from 2.98 per cent in the December quarter of 2012-13.

 I am reproducing letter written on 24.08.2011 
Asset quality in public sector banks have been going from bad to worse for last several years, and it is not a new phenomenon. Unfortunately or fortunately management of all banks have been manipulating the figures year after year in close nexus with team of auditors and officials of Reserve Bank of India and that of Banking Division in Ministry of Finance to conceal bad assets. They have put pressure on field official in branches and taught not to improve the quality and take strong initiative to recover the money from bad borrowers but taught only various tactics to conceal bad assets to reduce provisioning towards bad assets as per RBI guidelines.

At corporate level top officials of banks including CMD and ED have used various false and fake pleas such as global recession, interest rate hikes, bad monsoons, natural calamities etc to give various reliefs to bad borrowers instead of tightening the screws to trap bad officials and bad borrowers. 

Top management of bank management have never diagnosed the real causes of bad assets whenever it is found to increase due to some reason or the other. Clever bank management do not want to take action against erring official, corrupt sanctioning official because they themselves are part of dirty game of bad lending. 

This is why bank management have wrongly but willfully and invariably pleaded that if action is taking against credit officers and top executives , credit growth will immensely suffer and they will not be in a position to achieve the target set by Finance Minister.

After complete introduction of Core Banking Solution (CBS) in banks, Reserve bank of India advised banks to calculate bad assets called as Non Performing assets (NPA) on common terminology using advanced technology and not manually . Banks are slowing getting pressure to assess their quality of assets through automated system taking advantage of CBS technology. Since management of banks find now difficult to conceal bad assets under CBS oriented NPA assessment system, total of bad assets is now being exposed in Balance sheet and it has reached a level of 3% of total advances.

It is to be noted here that NPA percentage is still more than what it has been revealed during last few quarters. Still banks have not declared their entire NPA and after taking RBI hidden consent. Of course they are gradually exposing their bad assets and this is why quantum of bad assets has not jumped to highest position in one time but it is rising quarter after quarter.

Officials of RBI, top management of each PSB and official of Ministry of Finance all know very well that actual quantum of bad assets in government banks is far more than 5% of total advances. In more than 25% of three year old branches gross NPA is more than 25% of total advances. There are many such branches where gross NPA is even more than 50% of total advances. 

Clever bank management are trying their best to show minimum percentage of gross NPA by either manipulating the system secretly or by resorting to fresh lending by opening new branches and resorting to fresh bulk lending to big corporate, to real estate sector and to mutual funds so that total advances in banks increases which in turn reduces percentage of Gross NPA compared to Total Advances.

But this story will not help for longer period until there is adequate improvement in quality and moral integrity of credit sanctioning authority , honesty in promotion processes in banks ,improvement in legal machineries which may help in recovery from willful defaulters , tightening of screws on Chartered Accountants , Valuers and official of rating agencies and change in attitude of politicians. Bank management has to increase number of staff in branches, reduce staff at administrative offices and award honest officers by stopping and punishing corrupt officers who were rising in their career through unfair ways and means. 

Till now bank management has not tried to cure the real disease and at the same time government of India have also not improved the quality of legal system and not tried to inculcate good culture in politicians who are using bank loan to enhance their personal wealth and to increase their vote banks.

It is very sad that all the time when proportion of bad assets increases in banks , management of banks accuse global recession, interest rate hike, bad monsoon, natural calamities etc but not punish the real culprit. It is remarkable here that when most of top official have occupied the top post and come through bad routes and when they have themselves created and accumulated bad assets in their banks they are not in a position to punish the real culprit and hence they are searching always some weak scapegoat , some lame excuses and pleading some irrelevant reasons before MOF for deteriorating quality of bad assets in banks.

Million dollar questions is “Who will bell the cat when even officials in RBI and MOF are equally weak and guilty”. System is not corrupt but corruption has become the system in banks. Not only banks but all other government departments including judiciary are also victim of same disease. It is therefore not surprising that public demand led by Anna for strong Lokpal Bill is gaining momentum month after month, day after day and none can stop this.Government can torture Anna, Ramdeo and their followers but cannot stop public revolt without punishing corrupt officials and corrupt politicians.

02.02.2014

Though during last thirty months some progress has taken place in the system of monitoring but nothing has been done to punish top officials who are the root of all bad assets and until there is change in mind set of top officials and until they start giving value to honest officers , no power on earth can stop rise in bad debts in public sector banks. 

It is worthwhile to mention here that under same economic and social conditions ,private banks have been booking higher and higher profits and lower and lower NPA. Even customer satisfaction level is higher in private banks compared to government banks. This is because , workers in government banks have to work for the bosses who are top officials whereas private banks give value to those who enhances the profitability of bank in real sense.

Therefore Root cause of rise in bad assets in public sector banks lies  not in interest rise or in global recession or in bad economic policies but purely on bad treatment with good officers and best award to bad officers .Any organisation can prosper only if its workforce is devoted, sincere and loyal in true sense .

In brief it is worst human resource planning which has adversely affected the quality of assets in government banks during last decade.Only deep rooted CBI inquiry into entire promotion process, recruitment process and transfer posting history of officers will be able to prove that what I have expressed above.Investigation is needed in lending process also but only after thhe investigation is completed from the appointment, promotion, and posting practices of junior officers to that of ED and CMDs. Government will have to analyse the performances history and character history of those top officials who have booked bad results .They will have to peep into service record of all CMDs and EDs who have booked bad results and take action if their service record is really bad.

  1. Majority of public sector banks have booked erosion in profit and rise in bad assets in their books, but none of ED or CMDs have been taken to task.
  2. Though RBI has started forensic audit of United Bank and special audit of Central bank , the actual reformation will occur only when auditors deputed there are honest and sincere , are allowed to work honestly and finally  their audit report is put into action in real spirit by punishing the rel guilty officials ( from bank as well as from RBI, MOF AND OTHER OFFICES ) and by sending the CRYSTAL CLEAR message down the line . 
  3. Similarly audit of other banks will expose the greater scam flourishing in these banks . 
  4. The most painful is that due to wrong persons , policies are tarnished and ultimately common men and innocent taxpayers have  to suffer .
  5. It is  not easy to identify real culprit because majority of top officials are clever and well versed in ways and means to motivate investigating officials. They are usually expert in delivering good speeches and addressing various meetings of juniors. How to convince RBI officials and MOF is very easy for clever and corrupt team of top officials.They know the art of presenting rosy picture of sick banks and they have been doing so for years and decades.

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