New brooms & bank results

New brooms & bank results

It has been called sweeping with a new broom. A new chairman of a state-owned bank declares disastrous results—implicitly blaming the previous incumbent. There have been many such instances to merit the label of a pattern. The latest involving State Bank of India (SBI) that witnessed a 99% plunge in its fourth quarter profits for 2010-11.

The trend has been decried by K.C. Chakrabarty, a deputy governor of the Reserve Bank of India (RBI) who on Monday said: “See our banks, I see when the chairman retires the profits go down."

Had the matter been merely one of personalities, it could be overlooked for a while. It is not. There are two systemic issues at hand. For one, every bank has auditors who are expected to keep an eye on numbers around the year and not merely when quarterly or annual results are to be declared. Clearly, in public sector banks, this is not happening.

The performance of private banks, in this respect, is a study in contrast. Many banks in that space have declared robust profits, quarter after quarter, without any gap. This predictability of profits is much prized by investors and is reflected well in the stock prices of these banks.

This issue is partly linked to another one: that of rising non-performing assets (NPAs) in the banking system. This is expected when growth tumbles or slows. But what explains the rising tide of NPAs during a period of robust growth? Banks say that the downturn in 2008-09 is a big factor in this. It is also being argued that interest rate increases, too, may lead to an increase in NPAs.

While this may be true to an extent, the picture gets muddled because of the weak management practices within state-owned banks. The weakness of internal auditing shows this clearly. Seen from that vantage, slow growth and high interest rates appear to be excuses. SBI’s drive in recent years to capture greater market share that lead to bad loans is one example. In SBI’s case, the situation had deteriorated to an extent that the bank was finding it hard to maintain the 70% provision coverage ratio—the percentage of loan amount that a bank has to set aside to cover an eventuality in which the loan goes bad— mandated by RBI.

Clearly, these are not personality issues and have more to do with management practices. Instead of blaming past chairmen—and they may have made mistakes—it is best that banks tighten their lending habits.

What is causing bank NPAs to swell? Tell us at