PNB, other state-owned banks and the writing on the wall

Punjab National Banks (PNB) valentine day disclosures about diamonds turning to coal, is yet another wake-up call that the state-owned banks need a cure. What remains unsettled is what ails these banks. And till this question is resolved, there can be no repair.

There are worrying signs that the debate is being misdirected by focusing on the wrong issues. For example, that because this happened in a government-owned bank, there has been no run on the bank or the banking system. Ergo, the apologists argue, government ownership is not just desirable, but the needed lifeblood for our economy.

For the banking aficionados this will quickly morph into discussions about risk-based supervision of banks – and how this is where the problem is and why it needs to be strengthened. There will be talk of audit failure. Astonishingly the government owned banks have numerous audits: concurrent audit, internal audit, statutory audit and then one by Reserve Bank. The CAG may also somehow be in this mix – perhaps it is time they revisited the basis of empaneling audit firms. PNB says it has a credit audit, risk-based internal audit, revenue audit, information systems audit, snap audit, segment audit, compliance audit, legal audit, FEMA audit. This list ends with ’etc’ (- from sheer exhaustion of listing the various audits, I guess). Another bank has all these audits plus management audit, foreign office audit and audit of outsourced services.

Is it that PSU’s don’t pay their auditors fair wages, and so get mediocre service? Just the contrary. The PSU bank auditors, in the aggregate are paid much more than those minding private sector banks. PNB paid its auditors Rs 670 million for FY 2017, State Bank of India a whopping Rs 2.16 billion (- that’s right), while HDFC Bank the lodestone for managing risk, spends just Rs 21.8 million (and Rs 257 million if you include certification). Both amounts HDFC Bank sheepishly admits, includes taxes. So powerful is the auditors lobby, that Pranab Mukherjee, when politically at his most powerful, is purported to have refused to intervene regarding audit fees in PSU banks, as being too sensitive even for him!

Given the desire to apportion blame in the quickest possible time, the easiest to corral are those who were on-site and signed the documents. They are already in custody. But this will not prevent a repeat. Nor will yet more oversight by the three C’s – the Central Bureau of Investigation, the Comptroller and Auditor General and the Chief Vigilance Commissioner. Their shadow has not straightened many backs.

India Spend reported that an RTI query to RBI reveled that banks lost Rs 19,356 crores because of fraud in 2014-15 alone. The first 17 with the most to lose in this list were all PSU banks – and you guessed right, PNB held pole position, with Rs 2,310 crores or reported frauds. Their presence does not sharpen decision making, rather it leave more boxes to be ticked. And exotic cures suggesting that whistleblowers letters need to go to the chairman of the audit committee are not even band-aid.

There was a brief period, when state owned banks reeling with losses, were starved off capital. A low share price and a government diktat that their shareholding cannot fall below 51%, meant that these banks were staring into an abyss. This also gave rise to what can only now be described as a conspiracy theory: that the government will let these banks – except for State Bank of India, shrink and over time the problem will go away. Or it won’t matter much.

The Finance Ministry’s announcement in October that PSU banks will be recapitalized over two years through a combination of funds left over from Indradhanush programme (Rs 18,000 crores), fresh capital from markets (Rs 58,000 crores) and recapitalization bonds (Rs 135,000 crores), tightened the governments grip when it should have cut its umbilical cord. Rs 211,000 crores is humongous by any count.

With no real sense of ownership and no way of enforcing performance, it is difficult to understand the government’s desire to hold on.

The private sector banks - HDFC Bank, Kotak, Indusind, Axis, ICICI – name any, are staffed with people who joined them from government owned banks. How is it that these very same people do most things generally right, when sitting in a different office? Lend to the right corporates, recover money in time, spot frauds, trade smarter, build a non-fund-based franchise extracting money from the same customers that PSU banks are serving, and have happier retail customers (- ok, maybe not happier retail customers).

Any of the Indian private sector banks will be happy to step in and help in any way they can, including taking some of these banks from the governments protective hands, if asked. Why not take help, when it is so close to hand? Is Kotak bank any less Indian than Bank of Baroda? For that matter are any of these private sector banks any less ‘national’ than those that have been nationalized? The same directed lending norms apply to them than to the PSU Banks. They are manned by the people carrying the same passport. And they all serve Indian customers – be they farmers, retail borrowers, Indian SME’s and corporates. Have they not bolstered the exchequer rather than hoovered taxpayers money? By coincidence there are seven private sector banks and seven PSU banks in the top 100 taxpayers in India. The private sector banks shelled out Rs 17,650 crores as tax, while the seven state owned banks gave back Rs 7,300 crores. Leave out State Bank of India (- it is the only one worth keeping), and the contribution of the remaining six drops to Rs 2,930 crores. (And mind you, some of the seven in the private sector are much smaller than their state-owned rivals). Not counting the money already pumped in over the years, the Rs 211,000 crores earmarked now – despite the book entry nature of the financing, pays for just about every social scheme in the budget many times over. Holding on is an expensive decision.

That the NiMo story has so rapidly become a political slugfest reduces the chance of rational decision. But for those who want to see, the writing is on the wall. And it is what difficult reform is about.

A modified version of the above comment appeared in Business Standard on 28 February 2018 as PNB and state- owned banks: The writing on the wall. You can read by clicking the following Link or cut and paste the following on your url http://www.business-standard.com/article/opinion/pnb-scam-and-state-owned-banks-the-writing-on-the-wall-118022701313_1.html. Note this is behind a paywall