Time to ask bankers tough questions
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New skeletons keep tumbling out of the closets of Indian banks.
YES Bank revealed in its annual report, released earlier this month, that its estimate of bad loans was far lower than what an audit by the Reserve Bank of India had estimated. The gap was a huge Rs4,176 crore. Analysts say that two other private sector banks—Axis Bank and ICICI Bank—admitted in conference calls that they too have accounted for fewer bad loans than the central bank auditors believe they should.
It is useful to remember that it was the banking regulator that forced lenders to recognize the mess in the books. The banks themselves would have preferred to keep the sunlight out. The information asymmetry that we see right now—with investors having far less clarity on the quality of bank balance sheets than bank managements have—would have been even worse had the recognition policy not been enforced (those with long memories may remember an earlier time of bank stress when the dividend yield on shares of the old ICICI was higher than the yield on its bonds. It took inspired leadership to turn the lender around).
The asset quality reviews were not a popular idea when they were first mooted. Till then , senior bankers had refused to accept that they were sitting on a pile of bad loans. Regulatory forbearance by the central bank—aka loan restructuring—did not help either. What has happened since then shows that it required regulatory action to blow the lid off the banking crisis.
There are several ways to explain the bad-loan problem. The United Progressive Alliance government leaned on banks to fund infrastructure projects that they did not have the expertise to assess. Regulatory tangles in areas such as coal supply to power plants blindsided bankers. The downward shift in demand projections after 2008 upset the economics of several projects. The collapse in global commodity prices after 2014 put pressure on large steel companies that were investing in new projects. The list goes on.
Each of these explanations is like an exogenous shock. Bankers often say that they had little control over them. This is a little too easy to digest. Those who lead commercial organizations eagerly take credit for success. They should bear part of the blame for failure as well. In that context, is it right to treat senior bankers who first eagerly participated in the credit bubble and then only minimally revealed the extent of the problem as mere helpless bystanders? This is especially true for private sector banks where the leadership is more stable than in the public sector banks, where tenures are typically shorter.
The Indian banking mess is as much a governance crisis as it is a policy crisis. The Indian government needs to pose tough questions to the leaders of the banks it owns since taxpayers may at some point have to step in to foot the bill of a clean-up. The boards of private sector banks may similarly have to ask tough questions since shareholders will suffer either through bad loan provisions or equity dilution.
The private sector banks have overall managed to maintain healthier loan books than their public sector peers. A large part of this can be explained by government interference in the latter. Governance failure was one of the key issues identified in the report submitted by the P.J. Nayak committee. The Banks Board Bureau that was set up as a result has been, as our banking columnist Tamal Bandyopadhyay has explained, a paper tiger.
A recent report by consulting firm McKinsey shows that the total stressed assets of the Indian banking sector are more than its net worth. The provisions gap is in excess of Rs6 trillion. The McKinsey data shows that private sector banks are in better shape than public sector banks—but the recent news reports about the lower bad loan recognition by YES Bank, Axis Bank and ICICI Bank makes us wonder whether the gap is less stark than is commonly believed.
The most immediate task for policymakers is undoubtedly how to clean up the bad loans mess as well as provide fresh capital for banks. The task ahead should be dominated by governance reform. Bank boards have to rise to the occasion by asking tough questions to those who run Indian banks. This is true of the private sector as well as the public sector.
Should the bank management be held responsible for bad loans? Tell us at firstname.lastname@example.org