Soumya Kanti Ghosh - Chastising public sector banks for every failure is a Comedy of Errors
By Soumya Kanti Ghosh
I never thought I had to invoke Shakespeare while writing about public sector banks (PSBs). A mistaken identity resulted in false accusations in the ‘Comedy of Errors’, as is the case with PSBs. It has become fashionable to chastise PSBs for all ills, based on the wrong interpretation of data, so much so that it is a comedy of (data) errors.
Let me start with the most discussed myth that PSBs are monoliths, which, over the past decade have been repeatedly bailed out through capital injections at the taxpayer’s expense. This is a bizarre data interpretation, to say the least. Consider this simple arithmetic. For the decade ended FY14, cumulative capital infusion into PSBs was at Rs 60,000 crore, but the dividend payout (at 20 per cent) was roughly Rs 64,000 crore and the cumulative income tax paid was around Rs 1.30 lakh crore. Thus, on a combined basis, dividend and tax paid to the government was more than 300 per cent during the past decade.
Also, no level-headed person would agree with the concept that capital infusion and bailouts are the same thing. If this was so, what about capital infusion into Chinese banks and even the US Fed asset sale? As per the limited information in public domain, China had injected $127 billion into the banking system during 2004-07, while the US Fed injected $2.27 trillion following the 2008 crisis. Interpreted differently and looking at the incremental GDP growth during the period, a 1 per cent growth in Chinese GDP was made possible by a $30 billion capital infusion, while for the US, the equivalent figure was $172 billion. So is it a crime if a country resorts to growth-supportive measures through capital infusion?
The second issue is that of asset quality and hence recoveries. A higher NPA number per se will not give the whole picture unless it is read along with the credit share contribution of PSBs to various sectors, including those of social importance and national priority. For example, the credit share of MSME in a non-PSB may be as low as 5 per cent, whereas the same in its PSB counterpart could easily be above 20 per cent. In a similar vein, corporate advances from PSBs to sectors other than retail may be close to three-fourths the lending pie, significantly higher than a non-PSB. In addition, close to 20 per cent of PSB advances are in infrastructure sectors.
The lending portfolio of a PSB is significantly different from a non-PSB and this, coupled with the relative underperformance of sectors like infrastructure due to economic slowdown (more than half of infrastructure sectors loans are stressed), have impacted the asset quality.
A logical question then is, why have PSBs gone into funding riskier areas such as infrastructure? It is known that these areas are the largest creators of employment besides being a priority for the nation. If this is the case, a better way to study efficiency of bank operations is to assess the number of jobs created per unit of loans disbursed, at least in a developing country like India.
Our strong sense is that for this to be treated as an investment, the upside needs to be factored into the future. So to rephrase the question, why is the credit share four times lower in a non-PSB for specific sectors?
As far as recoveries are concerned, strengthening the resolution mechanism towards a more effective legal framework is of utmost importance. Under the current dispensation, it may take even a year for getting just the permission to take possession of secured assets under the SARFAESI Act. And whenever banks or financial institutions invoke the Act’s provisions and make an attempt to sell the secured assets, the borrower, guarantor or owner of the property either approaches the DRT or the High Court, procures a stay and prolongs proceedings. PSBs are not allowed to enter into bilateral deals for disposing of weak assets without going in for a long drawn out process for discovering a market price. While such checks and balances are appreciated, at least create a non-level playing field in the area of resolution of stressed assets.
The third issue is the misplaced notion of PSBs working with a significantly higher margin. For the record, the difference in the interest income earned on loan advances and average earning assets of the bank, and the amount of interest paid to depositors is termed as net interest margins (NIM). India’s average NIM was at around 3.1 per cent in 2014, as compared to the world average of 5.9 per cent (US 3.6 per cent, China 2.9 per cent).
Further, the cost of funds in India for PSBs is higher as banks have to rightfully undertake social initiatives. For example, under the hugely successful Jan Dhan Yojna scheme, a total of 10.63 crore accounts were opened, 8.45 crores of which were by PSBs alone. If we do a rough arithmetic, the aggregate cost of these is more than 3 per cent of PSB profits. So, by this logic, will the banks leave aside such financial inclusion where the longterm benefits are enormous?
Fourth, PSBs are regularly beaten up for their capability gap. Indeed HR is an area of concern for PSBs and was discussed in detail at the Gyan Sangam. It is generally accepted that the best of talent goes to government-funded institutions such as the IITs and IIMs.
Indian PSBs or FIs also fund some good institutions such as MDI, Gurgaon and NIBM, Pune. But surprise — PSBs are not able to recruit from these institutions supported by public funds as students of such institutions get jobs through campus recruitments. This opportunity is denied to PSBs through a judicial mandate. So intriguingly, public funds nurture talent for the private sector and PSBs need to do the entire hard work of developing their own talent post-recruitment.
Interestingly, MoUs with the government do spell out budgetary targets on important parameters, which over the past two years or so are no longer toplinefocused and are monitored on a periodic basis by the finance ministry.
In summary, I hope I have been able to convince the reader that even after being a part of a PSB, my views are rationally exuberant!