Lack of any overt measures to solve the problem of non-performing assets in the banking industry, is a disappointment, feels Suresh Ganapathy, banking analyst at Macquarie.In an interview with CNBC-TV18, he says it remains to be seen how the proposed Bank Board Bureau is different from the current selection panel. He says the reforms proposed in the Indradhanush package for state-owned banks need to be taken with a pinch of salt, and is skeptical if the appointment of private sector personnel in leadership positions will make a big difference. Below is the transcript of Suresh Ganapathy’s interview with Sonia Shenoy and Latha Venkatesh.
Sonia: The title of your report is ‘Chasing Rainbows.’ I know you have been sceptical on this pocket for a while; don’t you see any hope because of what was announced on Friday?
A: Most of the things announced by the government were just a mere encapsulation of what they were already planning to do over the course of last 6 to 12 months. The real problem is that of asset quality which they are not necessarily addressed in the particular Indradhanush program that they have announced and that is where my reservations are. If today an investor wants to buy a public sector undertaking (PSU) bank, the biggest scepticism arises from the quality of the balance sheet that these guys have and there there isn’t any confidence at this point in time and that is where our reservation stems from.
Latha: There were some incremental positives one thought. The targets that were given to PSU banks up until recently used to be topline targets. In fact up until the 2000s it used to be balance sheet targets, at least then it got brought down to revenue targets. Now it is clearly return on equity (RoE) and return on assets (RoA), profitability targets. Won’t that change the DNA of the bankers and the way they think?
A: If you look at it, just three years before, under DK Mittal’s tenure, the profitability targets were introduced and then RoE and RaA target was given. However, today if you look at it, three years down the line, the RoAs and the RoEs are one of the worst for the public sector banks, so things haven’t changed.
The broader malaise remains in terms of the trade unions that are not incentivised properly. The age-old workforce or productivity levels are low. So merely giving top management RoA and RoE targets unless and until the incentive systems across the organisation is aligned in the right way, will not necessarily result in improvement in RoA and RoE. So, that is where the reservations again come from.
Latha: At least you won’t have silly things like going and accessing big bulk deposits before March 31 just to bloat your balance sheets but you think that was already done?
A: No, partially it was already done. If you look at it, all these guys had actually reduced bulk deposits very significantly and that again was a criteria imposed. If I am not wrong, there is a particular gap of about 15 odd percent which was kept on bulk deposits. So, many banks actually followed that but the DNA still hasn’t changed three years down the line. So, we have to take these reforms with a big pinch of salt.
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Sonia: You think private sector candidates like Ravi Venkatesan and PS Jayakumar coming into Bank of Baroda (BoB) is a boon or is it a bane because some of these PSU banks could have Human Resource (HR) issue, right, because a person from the private sector coming into the PSU space?
A: These guys have been appointed by the government themselves, so the trade unions may have issues but then at the end of the day these are confirmed appointments.
At the margin let me honestly admit that it is positive considering that you have of course got a good Chairman who is going to supervise the board and of course the CEO comes from a private sector guy but then his ability to bring about institutional changes in the bank is something where we have our own scepticism or reservations because what happens is that today if you look at from a return ratio perspective, a BoB has an RoA of about 50 odd basis points. The private sector banks have RoA of 150. Can that 50 be brought to 150 under the current existing structure? No.
There can be some marginal changes which can be done which can improve the RoA but dramatic changes is going to be more driven by more reforms coming from the non performing loans (NPLs) front and obviously along the HR issues in the public sector banks which need to be addressed in a big way.
Latha: Do you see incremental changes in the sense that more stress on profitability parameters, perhaps more access to an employee stock ownership plan (ESOPs) and the Bank Board Bureau, it could mean that we are going to have more professional boards and not politicians and government yes men appointed to the bank boards, there could be a qualitative improvement in strong boards for instance an ex-RBI Executive Director as Chairman just ensuring that political meddling is not there, aren’t these incremental positives?
A: The major suggestion by the PJ Nayak Committee was that Bank Board Bureau need to be quite independent and if you look at the current composition of the Bank Board Bureau which has been suggested by the government, it does have two to three government representatives and RBI representative. How is it different from the current selection committee? Just trying to do marginal changes from the current selection committee and re-term it as Bank Board Bureau is not going to really resolve things.
Latha: Three external guys and three internal guys...
A: Why you need to have government representatives? If you are saying that you want autonomy to be given to all these guys and you still have government representatives dictating the Bank Board Bureau, how is it giving autonomy to the entire situation? For all the autonomy that the government has been talking about, as you rightly know that on the financial inclusion accounts 95 percent have been opened by the public sector banks and the market share is 70 percent, so where is the autonomy.
Latha: I agree, that is a big grouse I have. Every Wednesday a Joint Secretary (JS) in the banking secretariat calling out to Executive Directors (EDs) and reprimanding them for meeting targets is not the way autonomy is defined in any book.
A: Even capital raising - these guys have to go to the government and ask for a permission.
Latha: He is the shareholder, I wouldn’t doubt that much. As a shareholder that much right they have, but I completely with you that autonomy is still very poorly defined and understood in the Finance Ministry’s financial services department, at least the way it is practiced now but let me come to the non-performing loans (NPL) issue that you raised. There is constant reference from the Finance Minister that state government should not think that the losses of Discoms can be endlessly funded by banks. Now that is the right stance to take. As well we understand Piyush Goyal has met with couple of Chief Ministers with respect to the troubles at their Discoms, isn’t all this in the right direction? May be in a few months we are going to some of these resolved, probably higher tariffs or more control over transmission and distribution (T&D) losses?
A: I am just worried whether this just gets stuck up in the bureaucratic meddle or mess because what happens is that you try to take consensus building among different ministries and every ministry will try to extract their own pound of flesh. So, obviously the power minister will have its own set of agenda and objective whereby would demand more financing from banks and banks have to exceed too. So, the problem really is discipline enforcement at various levels which is where is lacking at this point in time.
We really need to see the framework of the revised set of restructuring in case they are deciding to do but the problem here is if that is going to happen by more financing and again laxity in rules in regulations, then clearly banks are going to be the sufferer at the end of the day.
Latha: Yes, any forbearance from the RBI is going to be taken very badly. One hopes that they are allowed to stand pat.
A: So, we need to really get a more –how do you solve a global commodity sector like steel? Hiking import duty by 2.5 percent is quite meaningless in the sense it is not going to impact the sector in a big way. So, there are still quite a lot of issues in these sectors and we need to get the greater amount of clarity and that is the reason we don’t think necessarily that asset quality situation is improving and one of the most important indicators which everybody needs to track at this point in time is credit growth because if the system actually is not growing and banks are only lending at 9 percent levels which is lower than a nominal gross domestic product (GDP) running at 12 percent, it clearly means there are serious issues. There is no demand recovery in the system.
Partially it has to do with capitalisation of the public sector banks; a large also has to do with the stressed state of the balance sheets of corporate and the ability of the banks to take more risk on their balance sheet.
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