The public sector bank (PSB) loan write-off saga is like an onion. While it makes tax-payer cry in agony, layers are still peeling off, revealing more and more rot. And the regulator and the government are running around like headless chicken, waiting for the traffic light, to cross the road. After the dramatic loss announced by SBI, it is the turn of PNB to reveal a massive fraud running into thousands of crores.
Every PSB has been subjected to severe bleeding by the nexus between executives, politicians who use their clout and businessmen who play both ends. And it also proves that all the ‘risk management’ and audits are just another useless embellishment.
In the old days, there used to be a system kno-wn as “Credit Authorisation Scheme” or CAS as it was abbreviated. All credit sanctions over '4 crore had to be approved by the RBI. It was relaxed after legendary delays in credit sanctions made sure that businesses planned for it. And if someone wanted 10, he would ask for 30. The bankers would be happy if they just lopped off something from what was asked, and feel happy. Not that this supervision had any impact on credit quality. RBI credit cell used to merely go by the forms that were filled and then too, as now, influence was key. The first round of write-offs in late 1980s or early 1990s wiped out bank capitals. The bad debt recognition norms were as good as non-existent. Over time, things have become more demanding and in the last four years, the chickens are coming home to roost.
The bank nationalisation by Indira Gandhi infected our financial system with a cancer that is now spread so bad that it is terminal. Privatisation is the solution, but political consensus is unlikely to be there on this and no ruling party will take such a bold step. So long as the owner of the PSB is unchanged, do not expect any improvement.
As far as investing in shares are concerned, it is best to keep away. Surely in the world of 5,000 plus listed stocks, these handful don’t stand out as compelling buys.
The bigger issue is of future. PSB are structurally designed to fail. Depositor money is totally unsafe with the banks, except for the fact that the governme-nt promises to repay the depositors with taxpayer money.
In the sense, they are robbing Peter to pay Paul. Depsitor money is frittered away in many ways — lending to friends, government directed lending to farm sector, etc where there are no recoveries etc.
Legally, the government of India is not obliged to repay the depositor. Each bank is a separate legal entity. There is a deposit insurance where the cover is limited to '1 lakh per depositor.
Recently, there was some talk about this in the media and the government quickly had to step in to prevent panic. They had to give verbal ‘assurances’ that depositor money is safe. In effect, the social and public pressure is what keeps the depositor money safe. However, this ‘safety’ of depositor money is a myth.
The latest reports indicate that the banks could have holes as large as '2 lakh crores which has been caused by businessmen not repaying the banks. Of course, this '2 lakh crores excludes the ‘farm’ loan write offs etc that have been made good by states. In effect the politicians have used the tax payer to ‘buy’ votes.
As an investor, should I invest in public sector banks? If proper accounting were to be done, most banks in the PSU segment would have book values close to or less than zero. Some analysts say that we should also revalue all the land and buildings owned at historical cost. But this is a pointless exercise. Unl-ess there is a real sale, the value is meaningless.
One thought. If the nu-mber of PSBs are reduced to three or four, a lot of duplication can be avoided. Unprofitable branches can be shut down. This could throw up free property that can be sold and proceeds used to shore up capital. Ideally, so long as the owner is unchanged, PSU banks should be barred from lending.
What they could do is to lend to private banks or simply put all deposits in to government paper. This can be done with minimal costs and the ba-nks would be profitable. What about lending? Over time, NBFCs, microfinance and private banks will pick up the slack. Financial inclusion? That is a debatable. At what cost financial inclusion? Let the government give out the loans or gu-arantee the loans if PSU banks have to lend. Keep depositor money safe.
