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The United Bank of India fiasco once again brings into focus the bloated NPAs (non-performing assets) of the banking sector.
The recent Reserve Bank of India’s report on financial stability tries to grapple with the NPA problem, including its possible contagion effects and remedial measures.
There seems to be an overemphasis among public sector banks on the growth of business rather than profitability. In their zeal to achieve new milestones in business, PSBs do not follow prudent risk management practices. They extend credit to borrowers with lower ratings, which make the asset vulnerable to slippage.
The RBI’s study reports that while the share of ‘A and above’ rated corporate exposures of SCBs, attracting less than 100 per cent risk weights, declined from around 45 per cent of the total long-term rated advances on March 2009 to 22 per cent on March 2013, the share of those rated ‘BBB and below’ (attracting risk weights in the range of 100 to 150 per cent) increased from around 55 per cent to around 78 per cent during the same period.
Though the report does not provide the numbers separately for PBSs and non-PSBs, anecdotal evidence suggests that lending to lower-rated borrowers is more prevalent among PSBs. PSBs have a low share of retail loans — around 16 per cent of all loans, compared to 30 per cent in the case of new private banks (NPBs), as on September 2013.
The larger share of retail loans has helped NPBs contain their NPAs. The risk is less when it is spread across a number of borrowers. The PSBs should make a conscious effort to increase the share of retail loans in their asset portfolio.
Structural change The exposure limits permitted by the RBI are at variance with international best practices. The RBI report acknowledges this. In India, a bank’s exposure limit for a single borrower is 25 per cent and group exposure limit is 55 per cent of its total capital.
This is much higher than the international practice, where the threshold for large exposures has been recommended at 5 per cent of tier-1 capital. The RBI should enforce norms to reduce concentration risks.
PSBs are instructed by the government to lend to certain sectors which may carry higher risk. In this context, to improve financial stability. While government as owner can ask banks to lend to riskier sectors like infrastructure, it should also be ready to infuse the necessary capital to support such lending.
Given the limited fiscal space, the government can reduce its stake to below 51 per cent to garner the required capital.
The last few years have seen many experienced banking professionals retiring from PSBs. Though PSBs have recruited on a mass scale in the past five years, there is a dearth of experience.
The limited managerial competence available in PSBs especially at the top management level can be harnessed better by merging some of the smaller PSBs.
Governance issues The government’s interference in day-to-day functioning, lack of a fixed tenure for CMDs and the appointment of independent directors on the basis of merit are governance issues that need to be addressed.
By reducing its stake to 26 per cent, the government can retain power to give strategic direction while subjecting the bank to market discipline.
The PSBs are encumbered both by legacy issues and misplaced priorities. Both need more attention.
(The writer is the dean of the Xavier Institute of Management, Bhubaneswar. The views are personal)
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