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Thursday, August 13, 2015

Sickness Of Public Sector Banks

Now even Reserve bank of India has understood that problem of Non Performing Assets in Public Sector banks in particular and banks in general is much larger than what it is perceived and reflected in balance sheets of banks. Volume of aggregate NPA of banks shown through Balance Sheet is roughly around 5 percent of total assets only. Volume of stressed assets is around 10 percent. But actual volume of stressed assets including hidden stressed assets is not less than 25% and it may even go beyond 50% if Banks honestly stick to prudential guidelines issued by RBI in this regard.

Previous government also expressed worries on health of public sector banks on many occasion but took no substantial , effective and real step to reduce NPA . Rather they continued to add fuel to fire by forcing bank  to lend without caring for health of their assets. They were more concerned about their political career than health of banks. Mr. Narendra Modi Prime Minister of India  and Mr. Arun Jaitley Finance Minister of India have also expressed concern on rising bad debts several times.

Various Deputy Governors and Governors of RBI too expressed concerned about sickness of banks on many occasions during last two decades but did nothing sincerely to cure it either due to political pressure or in fear of  exposure of banks or due to pressure from corporate houses. All preached sermons to banks to take care of assets but in fact all their actions were directed to affect adversely on continuously  deteriorating  health of banks and this is why Gross NPA and Stressed assets in bank continue to rise every quarter despite all promises by bankers and ministers that they will take effective corrective steps. .

Lending to poor and backward section of the society is unavoidable because India is a poor and social welfare state . Lending to big corporate is necessary to achieve growth .But lending becomes dangerous if recovery of money from defaulters become difficult and dependent on wishes of politicians or on inefficient and corrupt administrative and legal machineries. 

Loan is life if the same is used for the purpose for which loan is granted and repaid as per schedule .Loan is really growth oriented if it is used honestly for growth  and for creation of assets. But if loan is sanctioned to please politicians and not repaid by borrowers  wilfully , it affects the culture of lending , quality of lending, culture of repayment and finally health of lender. Small value Loan to poor may prove to be slow poison and high value loan to big business houses may prove to be  deep poison if lending takes place only to please politicians and are only based on bribery , flattery and to boost up credit figures in balance sheet. If quality of lending is not good , health of assets has to become miserable .

In an interview with CNBC TV18 during first week of August 2015 ,Mr. Narayan Vaghul Former Chairman of ICICI bank says that the problem of bad loans in banking industry is much bigger than what is disclosed and the government needs to act urgently. He further adds that the government should learn lessons from the past . He does not hesitate in saying the decision of nationalisation of bank was wrong.

I like to add here that the government in the year 1991 was also in the same impression that the act of nationalisation was wrong and this is why the then Congress Government under the leadership of P V Narsimha Rao , the then Prime Minister of India initiated the process of liberalisation and privatisation of banks and gave all possible freedom to banks in slow and gradual manner which in their view was inevitable to cure the sickness of bank. It is remarkable to state here that banks recruited so called meritorious persons and promoted to so called talented officers based on merit oriented promotion polices, still they failed to protect banks, stop bad lending and ensure proper monitoring of loan portfolio.

But the hard truth is that banks were nationalised to free the poor from clutches of money lenders .Bank became sick not because they extended banking and lending to poor but because of misuse of banks for political advantages by the then governments. Bank became weak because  of  maladministration of human workforce and introduction of bribery and flattery in all levels of banking as also in administrative, legal, political set up of the country. Bank became weak due to Loan Mela culture and waiver of loan culture imposed on bank .

Bank became weak not because of lending to poor but using the bank's fund for earning bribe and getting quicker promotions by achieving unachievable targets in shortest period of time. Banks became weak because banks were forced to achieve imposed targets and write off the loan when borrower defaulted in repayment. This resulted in a bad culture . Those who repaid in time felt cheated and those who did not repay the dues of banks were awarded.

During the period of so called liberalisation, privatisation and globalisation since 1991 till date, various governments came to power  , but the mindset of politicians did not change and neither the quality of bank employees could change due to polluted culture  inculcated by politicians in bankers , borrowers and officials working in administration, judiciary and all regulating agencies including CBI and CVC. Disaster is unavoidable if protectors like inspectors, auditors , CBI and CVC also became looters in the looting game.

Banks (which were used by politicians for  lending to poor before 1991 to strengthen vote bank ) after 1991 started to be exploited by politicians not only for enlarging vote bank but also for improving financial powers of political parties so that ruling party could ensure their victory in future elections, Government under the leadership of Mr. Chidambram or Mr. Pranab da , the then Finance Ministers used banks for financing hundreds and thousands of crores of rupees to big corporate houses of their choices . They built pressure on banks for writing off of voluminous loans of defaulters which included business houses which helped parties in election. Such exploitation from top level induced top officials of banks to use bank to help their kith and kin , their close friends and to lend money to those business houses which extended huge illegal money either in cash or in kind to bank officials if they sanctioned loans without much scrutiny of capacity of loan seekers.

Till 1991 the culture of non-repayment of bank's loans in time was confined to small borrowers covered under various schemes launched by Government. But after 1991 , this bad culture on not repaying banks dues extended to mid-segment and big borrowers too slowly and gradually. It has become now the habits of majority of borrowers to avail loans from various banks and then not to repay with a target to turn their account as Non Performing Assets so that they may take advantage of various write off scheme or compromise schemes launched by banks under pressure of the government. Bank officers also think it wise and safe to finance liberally to achieve the imposed target , earn bribe and then write off the bad loans , which also to earn bribe. 

Now the million dollar question is whether banks can sustain such large and continuous loss of money in bad debts and in write offs. There is limit for everything. Year after year banks are sacrificing huge money in writing off loans and in compromise settlement with defaulting borrowers. Load of bad debts is rising every quarters. Banks have learnt how  to hide bad debts by using various tools of rephrase, restructure or evergreening of loans. Bank officials who do not hide bad loans  are taken to task and those who are master in manipulations are awarded. Not only bad loans but rising fraud cases in banks are likely to pose a greater challenge to survival of banks.

Not only this , even government does not want banks to disclose all bad debts in one go because it will expose politicians who misused and mismanaged banks .They do not want to close the source which help them in gaining political and financial powers. When banks face capital crisis , Government infuse capital to save them from exposure. After all , it is not the private property of politicians which is lost but it is  public money which is ultimately  lost and it is public who have to bear the burden of taxes. But the question is how loan this huge loss of public money will continue and how long Government will help banks.

It is important to point out here that the same government stopped subsidy on fuel like petrol, diesel or LPG  in phased manner only because it could not sustain the increasing load on subsidy on public exchequer. Government justify the stopping or curtailing of fuel or fertiliser subsidy saying that it hampers growth and it leads to pilferage of subsidy . They says that the amount of such subsidy is largely taken away by middlemen, babus, officers and upper class .

Why the same government do. not understand that major chunk of loan which is now stressed  is in the hands of rich borrowers. It is undeniably true that it is hardly five percent of total stressed assets which belong to poor class of society .Ninety percent of total incremental  exposure of banks during last two decades went to big business houses and more than ninety percent of total loss caused to banks by write off of loans or due to compromise settlement were in favour of upper class and big borrowers only . Poor class of people continue to be exploited by local money lenders as they used to be exploited before nationalisation of banks or after adopting the policy of so called reformation and policy of liberalisation, privatisation and globalisation.

I therefore do not agree that the decision  of nationalisation of bank was wrong . Neither do I feel that the decision of extending more and more freedom  to management of public sector banks after 1991 in the name of reformation was wrong. The root cause of sickness does not lie in policy making .

All policies are framed with right intention and good motives. Problem arises at the level of execution of policies and plans framed. Misuse of banks for political purpose has become a regular phenomenon . Though all prominent and talented bankers who are well wishers of banks from time to time warn government of growing sickness and alert about possible consequences in long run.

Several committees have been set up in the past to explore ways to safeguard banks from disaster and problem of bad debts have been the discussed for last four decades  but no real step has been taken to curb the growing corruption and to stop bad culture flowing from top ranked ministers and officials. No effective step has been taken to stop flattery and bribery based promotion and transfers  of manpower  .No step has been taken to stop favouritism and ill-motivated interview in recruitment of manpower.

It is only in banks that an officer get four promotion in one decade whereas many do not get even one promotion in four decades. This bad culture has resulted in negative motivation. Bank officials are now loyal not to bank but to bosses under whom they work. Similarly politicians are least bothered of health of banks , they are more concerned about their political future . Officers working in RBI, CBI, CVC, Judiciary and other concerned departments are more loyal to their political masters than compliance of rules and policies.

It is ironical that top officials of RBI appears helpless in containing menace of rising bad debts in banks. It may be due to political compulsions. It is also true that RBI did not perform its duty of carrying out proper  and periodical inspections to nip in the bud. RBI deputy Governor Mr. S. S. Mundra on 11th of August 2015 told in a conference that bank's loan exposure to stressed steel sector is worrisome.

Banks’ total exposure to the steel sector stands at ₹3-lakh crore while net sales of the companies within the sector also stands at around ₹3-lakh crore with an EBIDTA (earnings before interest, depreciation, taxes and amortisation) of ₹37,000 crore, said Mundra at the ICAI International Conference at Indore.

Pointing out that the level of stressed assets in the sector exceeds 27 per cent, the Deputy Governor said large capacities are lying idle as global/domestic demand conditions have weakened. "Further the capacity expansion has been done using excessive leverage. These pointers definitely raise concerns," the Deputy Governor said, and added that excessive leverage by the borrowing corporates is not limited to the steel sector alone. The Global Financial Stability Report, released by IMF recently, has noted that 36.9 per cent of India’s total debt is at risk, which is among the highest in the emerging economies, while India’s banks have only 7.9 per cent loss-absorbing buffer, which is among the lowest, Mundra explained.



It is not only steel sector which is stressed, position of agricultural loan, textile loans, loans to jewellery sector, loan to real estate sector, education loan to students etc are all facing the same situation. RBI officials and politicians think it safe to blame global recession for deteriorating health of bank knowing very well that private banks under the same economic and social conditions are performing well compared to PSBs.

It is seen in the past when Finance Secretary like D. K. Mittal tried his best to improve bank's health , he was criticised by top politicians. . And as soon as Mr. Chidambaram took the charge of FM , he removed him from his post . This happens with all officials inside  or outside bank who try to focus on good lending and who try to punish bad officials. We have seen How senior and honest IAS officers like Mr. Ashok Khemka in Harayana State was and is being treated by Government of the state.

Rather it is established culture in banks as well in political circle to award those who blindly follow the right or wrong advices of to  officials and punish those who try to expose misdeeds of top officials. This culture has created a culture and an environment which is conducive for growth and promotion of bad performers at all levels. Even directors appointed for Boards of Directors are those officers and politicians who are number one flatterers and bribe earners.

Unless and until culture of flattery and bribery is changed and stopped fully, one cannot imagine of any improvement in health of public banks. Willingly or unwillingly, Government has to learn punishing officers and politicians who caused loss to bank due to their ill-motivated decisions in lending or in recruitment of staff or in promotion processes taking place in banks . They will have to give full powers to auditors and inspectors so that they have courage to write truth of all bad accounts and bad officers without fear of any repercussions in their career or personal life due to torturous transfers.

Government will have to provide enough manpower and infrastructure to auditors, inspectors, police officials, judges , magistrates, Debt Recovery Tribunals , courts so that they may act timely and honestly. There should not be any delay in punishing bad officials and bad politicians whosoever he or she may be. An environment has to be created in which honest officer can work without any fear of action for their good work.

Practice of transferring an officer to take revenge or for not serving personally to bosses has to be stopped. System of Interview which gives ample opportunity to members of Interview board to select or reject any officer as per their whims and fancies in promotion processes has to be dispensed with. Clear message should go in the minds of each employee that if he or she cause loss to bank and in turn to Nation will be taken to task. Only then we can dream of good health of not only bank but all public sector undertakings.


Government will have to stop using banks for political purpose. They will have to stop asking banks to earn through non-banking activities like insurance , mutual fund or stock market. Let bankers focus on banking activities only. Banks can earn a few crore in form of commission by selling insurance policies , but during the course of this activities, they ignore taking care of valuable assets worth crore and crores of rupees and thus cause loss to bank to the tune of hundreds and thousands of crores of rupees. There is a proverb in Hindi which says "Gau marker Juta Dan" which translate into English as "Penny Wise Pound Foolish".

Due to wrong execution of good  policies  of the government, mismanagement of manpower, corruption at all levels  and inefficient system at all level, health of bank is moving from bad to worse. It is really worrisome. Problem of bad debts in banks is undoubtedly bigger and deep rooted. I doubt whether the government is really serious to deal with it .

Government will have to stop window dressing in banks. Bankers are increasing their balance sheet size by window dressing. Lacs of crore or rupees are added in deposits and advances in last few days of each annual or half yearly or quarterly closing. This results in promotion to wrong and bad officials and rejection of good performers. Bankers conceal bad debts by showing artificial recovery or by restructure of bad advance accounts. This window dressing helps some officers to go up the ladder whereas it become curse for some others in career. This bad culture is known to RBI, Finance Ministers and all auditors , but none has courage to pinpoint it and punish to culprit . Window dressing depicts a false picture of bank and helps defaulters in disposing off the bank's assets for their personal advantage .

Monday, June 8, 2015


Window Dressing And Evergreening -Danendra Jain 

Banks Book Growth in Deposits By Window Dressing And Reduce NPA By Evergreening and by restructuring of loans . Chiefs of banks has been master in inflating profit by fraudulently reducing provisioning . They propagate the same culture down the line .They use the income generated by lending in writing off bad loans .They in this way  deprive investors from adequate dividend and fail to pay adequate interest on deposits.  

STILL Bank Chiefs Are Awarded and in the same way officers down the line are promoted only on the basis of their capacity to inflate business by window dressing and hide NPA by fraudulent methods.


I have written several times in the past on this matter, RBI has several times accepted the bitter truth of culture of inflating profit by bankers and Finance Minister has through MOF issued stern guidelines many times in the past. Still there is no reduction in the foul game. RBI and MOF think it wise to remain silent spectators and issue a false warning to safeguard them in case of need.

After all who will bell the cat?

Will bankers continue to cheat taxpayers, investors and customers of the banks in the same way and same fashion?
Click Here To Read More on Bad Debts and Window Dressing

Hidden Loan is Like Cancer in Banks

If bitter truth of business is analysed properly at least for last ten years , it will be proved that PSBs have indulged in bad practice since long despite all preaching by RBI and MOF . Scam is deep rooted and loss caused to customer , investors and taxpayers in huge , greater than all scams taken together.

Trade Union Leaders who are supposed to protect banks from corrupt officials have also worked hand in glove with top officials. They too failed to protect honest officers . They too promoted bad culture in banks and hence there is no doubt in it that they too are responsible for making the banks so much sick and for critical position of banks in public sector. It is they who in nexus with management damaged the fundamentally good  culture in banks and allowed private banks to grab entire business of PSBs. 

Raghuram Rajan warns of action against banks hiding true NPA numbers-Economic Times 5th August 2015

MUMBAI: The Reserve Bank of India (RBI) said it will penalise banks for fudging bad loan numbers and review debts under the 5/25 plan so that banks don't misuse the avenue for hiding stressed assets. The scheme allows lenders to give borrowers 25 years to repay existing loans with a review every five years. RBI governor RaghuramRajan said on Tuesday that banks are being reprimanded for not coming clean on bad loans.

"We also supervise banks and go through their portfolios to see whether they have declared all the NPAs (non-performing assets) they should. We examine divergences, and bank management is hauled up if there are divergences," said Rajan. "Increasingly, we are turning towards taking action over such divergences. It's not that these things get done with impunity."

Rajan said there was a thin line between forbearance, "which we don't want to do," and flexibility, "which may be warranted." He explained there was no problem in lending to a project that's an NPA in order to put the project back on track. "We are examining the 5/25 cases to ensure that they are being used for the right purpose," Rajan said. "The point is not to postpone problems into the future. We are insisting there should not be a significant moratorium on repayment in the 5/25 rule."

Most state-run banks have posted a first-quarter drop in net profit due to a sharp rise in provisions for bad loans. ETIG data show net profit of 15 banks that have declared results is down a cumulative 34 per cent to Rs 4,164 crore, while gross bad loans have risen 41 per cent to Rs 1.5 lakh crore in the quarter ended June from the year earlier. "The NPAs have accumulated to such an extent that it will impact the bottom line for the next one or two years as banks make provisions for them," said RK Gupta, executive director of Bank of Maharashtra. "Simultaneously, interest income is not significant since demand for credit has not picked up. Both factors will impact earnings and, in effect, limit banks' ability to plough back capital."
Read more in following link
http://articles.economictimes.indiatimes.com/2015-08-05/news/65243940_1_listed-banks-gross-npas-bad-loans
 Banks’ loan exposure to stressed steel sector worrisome, says RBI Deputy Governor-Hindu Business Line -11th August 2015

Mumbai, August 11:  

A string of pointers, including large capacities lying idle as global/domestic demand conditions have weakened, raise concerns regarding bank loans extended to the steel sector, a top Reserve Bank of India official said.
 
To draw a comparison between the Indian scene today and the events in South-East Asian economies in 1997-98 (though the degree of severity differs widely), RBI Deputy Governor SS Mundra took the example of the steel sector.
 
“Bank loans to the steel sector in India have witnessed a 21 per cent compounded annual growth rate over the past five years and broadly range between 4 to 9 per cent of individual bank’s loan book.”
 
Click following link to read more
 
 

Bank nationalisation a failure; NPA problem bigger: Vaghul--moneycontrol


Vaghul says the size of bad loans in the banking industry is at least twice of what is being disclosed officially.
 
The problem of bad loans in the banking industry is much bigger than what is being disclosed, and the government needs to act urgently, feels Narayan Vaghul, former Chairman, ICICI Bank.

In an interview with CNBC-TV18, Vaghul says it is time to admit that nationalistion of banks has failed.

“We should have the courage to learn the lesson from the past; I think bank nationalisation has failed,” he says.

On bad loans, Vaghul echoes what many bankers and analysts have been saying: that the disclosures don’t reveal the complete picture.

“Based on the impressions I would concede that the actual problem of the banking industry is very very serious,” he says, adding,”it is at least twice of what is officially known from the data.”

According to Vaghul, the problem is much worse than the crises seen in 1997 and 1989.

“More important than passing the law is to create the infrastructure such as the commercial courts and the insolvency practitioners to back up the law,” he says.

“But in the short term in the next three to six months, we should think in terms of pooling all this NPAs; not leave it to the bankers.
To read more please click on following link


Monday, June 8, 2015


Modi Government On Bad Debts And NPA -By Danendra Jain

Bad debts or stressed assets or None Performing Assets , all are more or less same and they are all responsible for continuous downfall in profit and shrinkage in profitability , erosion in capital and they all add injury to sickness of banks. There are many internal reasons which cause creation and accumulation of bad assets. There are external reasons like political exploitation and  shortcomings of remedial measures through  legal recourse and administrative hurdles in smooth and timely recovery of dues from defaulters. There may be adverse affects on repayment culture due to high interest rate or loan waiver culture announced by politicians for vote purposes. There may be many more other reasons in the eyes of regulators or from the point of view of Chiefs of banks.

Whatsoever may be the reason behind growing sickness in PSBs, it is dead sure that health of public sector banks has been consistently deteriorating despite claim of Government and RBI that health of bank is improving or likely to improve from next quarter.

Manmohan Singh, former Prime Minister used to say every now and then that price rise will be contained in forthcoming quarters or government banks will be strengthened by infusing additional capital to improve the health of public sector banks. But he undoubtedly failed to do any thing good for betterment of PSBs and to ensure that further deterioration does not take place. He along with all his Finance Ministers got success in passing his tenure  as Prime Minister of India. PSBs continued to face one after other impediments in containing sickness due to stressed assets.

Deterioration may stop only if banks are able to stop at least addition of fresh slippages and are able to improve the quality of lending and  are able to alter and modify the dirty intention of politicians behind change in policies  and quality of human resource .

On the one hand present government is talking of cleanliness in bank , talking of full autonomy and absolute operational freedom to banks and promising non interference in internal affairs of public banks, on the other they are fuelling  the fire by imposing one after other non-banking workloads to already declared sick banks and thus contributing fresh damage to asset quality. Banks may earn few crores in insurance activities or may earn blessings of Modi by devoting full energy in execution of social welfare programmes of the government, but they are likely to loss many more times of income by causing standard assets to turn substandard assts.

I however feel pleasure that at least Reserve Bank of India and present government  has at least publicly understood the gravity of  risk due to ever rising bad debts in bank's books and risk inherent in hiding bad debts. They have understood well the bad impact of culture of window dressing in business, evergreening of loans to contain slippages to NPA, restructuring of bad loans to hide bad loans , the culture of loan waiver schemes and finally the bad ways and means used to achieve imposed target by clever bankers. 

Government of India and RBI has taken some steps during last one year to improve health of ailing banks. Capital infusion has been linked to performance of banks. Provisioning on restructured loans has been increased, Process of recruitment of top officials like ED and CMD is getting new direction to stop corruption. All these measure may have short term benefits , but they have potential to add new wounds on sick banks. For example if weak banks are not given help of capital infusion , they will have to keep their interest rate high and they will lose business in the hands of stronger banks. Weak bank will thus grow weakness and face the risk of closure due to Basle norms. Similarly delay in posting of ED and CMD of banks may cause addition of fresh problems. Posting of officers from private banks as Head of PSBs may have greater repercussion down the line in a bank.

I welcome new steps taken by RBI to contain bad debts and to empower banks to acquire 51 % equity of chronic defaulters. It will have a deterrent effect on defaulting companies. It will have a  positive impact on companies which are doing well and which are loyal borrowers of banks. But mere becoming owner of 51% equity of a defaulting company , banks will not be able to recover the bad money to a great extent. It is to be kept in mind that Ratio of capital in books of a company is microscopically small. A company with equity of Rs.10 crore only can get the loan of hundreds and thousands of crore of rupees from banks. Similarly premium on equity in stock market will also extinguish as soon as the news of taking over of 50% stake by lending bank goes into market. Further , as soon as bank become owner of  50% equity of a company , it is duty bound to take care of company's health, formulate plan for growth  , stop leakage of income and improve operational capacity which banks will not be able to dream of in near future.

I am however happy that present government is not dead as previous government was dead . Current government under the leadership of Mr. Narendra Modi has done a lot of positive work and actively engaged in doing more and more to improve the intrinsic value of PSBs. Hundreds of projects which were languishing in corridors of government departments in search of statutory clearances or licenses have now got green signal and they can now at least go for erection of plant , start operation or think of expansion of their project. Companies which took loan for setting up a plant were paying interest but not able to their expansion work .Companies will no longer face the risk of escalation in project cost if all departments under GOI start functioning well. I hope Mr. Modi will give a real boost to banks in near future.

Real transformation and real reformation in banks will take place only by striking at the root of Human Resource  in banks, administrative and legal set up. GOI will have to stop promotion, transfers and recruitment based on flattery and bribery. They will have to give value to seniors and respect experienced officers. Motivation in rank and file in banks will only help bank management in containing risk and in curing disease for good and for ever. Banks were better managed during seventies and eighties compared to what they are doing in the name of merit , in the name of reformation and in the name of freedom.

Read following links to know more about it
 
http://jaindanendra.blogspot.com/2015/06/modi-government-on-bad-debts-and-npa.html


http://jaindanendra.blogspot.com/2015/07/which-bank-is-first-in-npa.html

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