Capital Crisis In Public Sector Banks

Volume of Non Performing Assets and stressed assets hiding  just below the NPA set by RBI norms have been increasing quarter after quarter even though RBI Governor and our learned and economist Finance Minister have been telling the nation and The Parliament that public sector banks are safe and healthy. Though Government from time to time infuses capital in sick banks, these banks continue to face crisis of capital to comply Basel norms. This has forced RBI to postpone Basel III compliance by one year.

It has been rightly said by me and other unbiased analysts that top officials of banks are working in close nexus with Ministry of Finance and RBI and it is officers and ministers associated with all three organs of the economy are solely responsible for the present poor health of public sector banks and such poor health is definitely and undoubtedly not creation of one year of two but the consequence of dirty politics and policies of last one decades and more. 

Under pressure or under oral guidance  of ministers and RBI officials, bankers continued to hide bad debts and continued to book profits by manipulation and by violation of RBI’ norms on some plea or the other. It is UBI only which has been exposed during last few months but when other banks will exposed, the crisis will be more critical.

It is politicians and bankers who damaged the fundamentals of banks by forcing Loan Mela culture ( Credit Camp Culture ) and Loan waiver culture ( Special Settlement Schemes ) on banks and it is they who caused loss of lac of crores of rupees to public sector banks and which is actually a direct loss to investors and customers of these banks.

Banks booked artificial profits and distributed dividends to earn false image among investors, But now when bad debts are getting exposed, bad debts of only one big corporate can eat away the profit earned by that bank in last ten years.

Regulators of banks and Ministry of Finance under the umbrella of liberalization, privatization and globalization gave ultimate freedom to bankers to decide their loan policy and their Human Resource policy. Banks in turn framed policies to look attractive and claimed to be staff friendly and corporate sector friendly. But in fact this freedom caused all indiscipline and great loss to banks.There is no doubt in it that current problems of banks is generation and creation of dirty bankers, dirty regulators  and dirty politicians 

In fact, merit oriented Promotion Policy and recruitment policy gave unbridled freedom to top bank officials and slowly became tools in the hands of top officials to promote corrupt and flatterers and sideline honest and real performers. They started working and acting strictly as per their whims and fancies and this in turn propagated the same culture down the line. This culture adversely affected the work culture. Punishment to persons like Khemka is very common in banking too.

Survival of fittest became an outdated policy and survival only by flattery and bribery became the fittest formula to rise in career for bankers. It is only in banks that promotions are fully dependent on whims of top officials. It is only in banks that some officers are not promoted even in two or three decades but on the contrary flatterers get four or five promotions in one decade.

Similarly, loan policy framed by top officials gave higher powers of  lending to bank officials. Though powers of all delegatees were increased  to reduce turnaround time for sanction of loan proposals but in practice it became a tool for reckless, careless and bad lending. Hundreds and thousands of crores of rupees were sanctioned to big corporate either in pressure of RBI and MOF or due to their own vested interest. Freedom without regulation is usually dangerous and harmful.

Farmers, Small traders and low level industrialists which are part of erstwhile priority sector became Non-priority advance in practice because people of this class  could not afford pleasure of bank staff which high value big corporate could do easily. Banks started achieving their target by lending to one or two corporate houses. Instead of financing to Micro level needy persons, bank preferred lending for Home and cars to please wealthy real estate developers and car manufacturers.

Unfortunately now when these high value loans are turning bad, bankers are feeling the pain of their bad habits. But clever bankers are again using their talent and their convincing powers and telling the nation that banks are sick due to economic recession or global slowdown.Clever politicians and regulators continue to say that crisis will be overcome in next quarter and so on.

To add fuel to fire, banks under advice from their mentors RBI and MOF took the path of rapid branch expansion. Number of branches almost doubled during last one decade without increase in manpower.

Branches are forced to function under acute shortage of manpower. To add fuel to fire, top bankers started giving promotions to untrained, inexperienced and incapable officers to man the branches. This resulted in further deterioration of bank’s assets. Surprisingly, all regulators remained silent spectators of all such  ill-motivated actions.

Banks framed merit oriented promotion and recruitment policy but in fact merit was nowhere visible in functioning of any branch. Officers who do not even  ABC of lending are posted as Branch head. Loan proposals are sanctioned sometimes in a day without actually carrying out due diligence and proper inspection of the borrower and the unit to be financed.As a result, quality of assets became the real casualty and victim of so called merit oriented policies. Honest, experienced and sincere officers were posted at remote and critical places which in turn made them frustrated lot. Monitoring of loans attracted less weightage and almost neglected.

This is why, loans though sanctioned in hurry by Branch head or Regional Heads to achieve the target are not properly monitored and safeguarded by branch level or administrative officials in true manner. 

Consequences of bad loaning are now visible though regulators and clever banker sitting at top positions still do not accept the bitter truth. Top officials still do not accept their fault, they blame world economy, they blame nature and they blame economic recession.

Anyway RBI can postpone the infusion of capital for the time being for one year but cannot postpone it forever. Critically Sick patient can survive for some time on ventilator but cannot be survived and cured if proper treatment is not done in time .