Health of Banks - A critical view from Banker

Observations of Shri. Uday Kotak, head of Kotak Bank, on Indian banking system in his message to the shareholders is most relevant and apt. Following are the main points.

Among the lessons from the problems in banking sector, banks should understand they are not private equity investors and recovery of money should be at the heart of lending.

“Return of capital is more important than return on capital. If banks think they cannot recover money, they should not lend in the first place,” he said, while suggesting a serious overhaul of the recovery mechanism in the country.

He also blamed the banks for “postponing the pain” for the last many years, saying it has had a ballooning effect on exposures.

Kotak further said, “Banks were nationalised 47 years ago. One of the reasons for this was that private banks were lending disproportionately to big businesses. Access to funds from banks was not easy for the common man.

“Nationalisation was supposed to change this. Today’s irony is that the biggest losses booked by banks, including public sector banks (PSBs), are on account of lending to big businesses.

“Effectively, public policy actions supposedly done ‘in public interest’, are instead going ‘against public interest’ ”

The above comments have summarized the reasons for the background of current mess in the banking sector, an honest assessment by a seasoned banker. Postponing the pain has led to cancer.

Corporate are the major culprits and Banks have never done due diligence, as decisions are not based on objective study of the financials and project plan. It is lack of accountability and lack of external CAG kind of audit on banks books. Huge NPAs are being suppressed by granting fresh loans, bill discounts, mutual accommodation between banks etc., Dr. Raghuram Rajan is being criticized by some vested interests on this ground. The asset quality review by RBI was a master stroke forcing lot of skeletons to come out . Sad part is as Mr. Kotak has pointed out , worst is not yet over. RBI was also very restrained and constrained by taking care of systemic issue and hence, exercise was only to a limited extent.

 Rajan, a former International Monetary Fund chief economist, has spoken out against India’s “crony capitalism”, which has seen banks endlessly rolling over dud loans to companies, and insisted lenders fully reveal the extent of bad assets and undertake “deep surgery” to deal with them by March 2017. A review of banks’ asset quality by the Reserve Bank of India (RBI) has brought to light roughly $35 billion of new bad loans since September. This is the master stroke and a much needed surgery to stop this fast spreading Cancer of bad loans and their suppression in Bank Balance sheets.
 

His statement  “Companies are sick but their owners are rich”  is very much true in our country.  The political, criminal, bureaucrat, banker nexus has destroyed our economy, particularly banks, all these years. New Government under Hon PM Modi and RBI under Dr.Raghuram Rajan have started the cleansing job. Hope, it will be taken forward. Strong accountability set up needs to be in place, forensic audit of all major defaults and external audits by CAG and also publishing of position of borrowings of above a cut off amount may be Rs. 10.00 crores. SEBI should mandate listed companies to declare the asset quality of their borrowings,specially quantum of stressed loans, in their annual reports. Bank lending to individual corporate/groups should be capped and they should be made to approach market for their further funding needs.

Hope Dr. Rajan will be succeeded by an eminent economist, may be from among former /current deputy Governors, and definitely should not be from PSU Banks/SBI, as it is not regulating banks alone that RBI is doing. This is a very responsible position and countries’ fortunes to a great extent depend upon his acts/monetary policy stance. Sure, under PM Modi, government will ensure this.

Best Regards,

Sathya