De-stressing banks is no short-term process

A week after the Central Bureau of Investigation (CBI) pounced on Syndicate Bank Chairman and Managing Director S.K. Jain, a branch manager of Central Bank of India in Jabalpur, Madhya Pradesh, was convicted by the CBI special court in a bribery case. The branch manager R.R. Das, who has retired now, has been sentenced to three years imprisonment and has been fined Rs 5,000. Das actually demanded a bribe of Rs 5,000 from a customer for clearing the 'Kisan Credit Card' loan of Rs 80,000. Das was caught red-handed by the CBI on receiving a tip off from the customer. Das' conviction came after seven long years. He has a right to contest the conviction in higher courts.

This is not an isolated case of bribery in a PSU bank. There are dozens of such cases handled by the CBI every year where the bribery amount is as low as Rs 5,000. The officers involved are often branch managers to senior managers. Imagine the waste of human resources and also of CBI's time in taking such cases to their logical conclusion. The arrest of Syndicate Bank's Jain, however, is an exception. And it is not just a coincidence that the new government under Prime Minister Narendra Modi is now committed to wiping out corruption from the system. Modi, who often says Na Khaunga, Na Khane Dunga (neither will I take bribe, nor will I allow anyone to take it), has reportedly given a free hand to the agency (CBI) to go after the high and the mighty without any fear.

"A message has been clearly sent out that bribery and corruption are unacceptable, particularly with custodians of public money," says Nikhil Shah, Senior Director at Alvarez & Marsal India, a firm that specialises in turning around stressed cases.

There are some who smell political vendetta in all this. Jain's relative, who was also arrested by the CBI in the bribery case, is former Congress spokesperson Vineed Godha. " Syndicate Bank is a small bank-one-seventh the size of the SBI. CBI should have gone after bigger banks," says a banker on the condition of anonymity.

But whatever the critics may say, the arrest of a CMD of a PSU bank in a bribery case will act as a deterrent to those officers who take the depositors money for a ride.

The PSU bankers are already under scrutiny for a higher share of non-performing assets (NPAs) in their books as compared to their counterparts in private and foreign banks. With a 76 per cent lending share, the PSU banks contribute 85 per cent to the overall NPAs, as on March 2013.

Clearly, the disproportionate share of PSU banks points to poor governance structure, lax credit appraisal systems, near absence of concept of risk and also corruption. These systemic issues are directly linked to the  way CMDs are appointed, the short tenures, musical chairs at top management, etc. While the government (be it the Congress or BJP) as a single largest shareholder of PSU banks will always play favourite to appoint a CMD, the stability at the top or fixed tenure will surely go a long way in bringing out a change.

The previous Congress-led UPA government had already made a beginning in the country's largest bank, the State Bank of India (SBI), by setting in motion a gradual road map for a five-year fixed tenure for Chairman. Arundhati Bhattacharya, who assumed the role of Chairperson last October, has a fixed three-year tenure. Bhattacharya's successor, in October 2016, will have a four-year tenure, while all chairmen thereafter will get five years. "The new policy change will also allow all the four MDs to compete for the Chairman's post  irrespective of their residual service on the date of the retirement of the Chairman," Bhattacharya told Business Today in an exclusive interview last month. The government should also replicate the fix tenure in all other PSU banks for effective leadership.

The PJ Nayak Committee on reviewing the governance of PSU boards has suggested splitting the post of Chairman and MD. The bifurcation will allow an outside professional of eminence to come as a Chairman.  "This change will improve the governance, board deliberations and bring fresh thinking to deal with risks," says MD Mallya, former chairman of Bank of Baroda. The private sector banks such as ICICI Bank and HDFC Bank have separate Chairman and MD. Take, for instance, KV Kamath, who is ICICI Bank's Non-executive Chairman, and Chanda Kochhar, who is the MD and CEO of the bank. Today, large borrowing proposals go to a credit committee at the headquarters where the CMD, executive directors and senior general managers take a call. "The splitting of CMD post will help in a focused role of a Chairman looking after the larger issues than sitting on a credit committee," says Mallya.

There are some  banks such as SBI which are proactively reviewing the concept of risk in lending and also tightening, but the PSU pack as a whole needs a lot of prodding. The RBI has also come out with a new framework for containing NPAs to force banks to take early action. On his very first day, the new RBI Governor Raghuram Rajan had said: "The system has to be tolerant of genuine difficulty while coming hard on mismanagement or fraud." The RBI has introduced a new prudential framework from April this year for early detection of stressed assets. The regulator has asked banks to create a new asset classification called 'Special Mention Accounts' to identify early signs of stress based on stress indicators. The purpose is to increase the accountability of bankers.

There has been a shift in the banks's approach in addressing stressed assets. They are moving towards using the services of external professional management agencies who can provide transparent oversight and objectively drive operational improvements to increase the borrowers's cash flows. "While used extensively in markets like the US and UK, it is a relatively new concept in India. The banks who have used this route in India have seen tangible value created in their stressed assets," says Shah of Alvarez & Marsal. SBI had engaged the services of Alvarez & Marsal to help them in restructuring cases.

The RBI has also set up a credit central repository for information of large borrowers of banks. P. Rudran, MD & CEO at Asset Reconstruction Company (India) Ltd, says in a multiple lending, the credit information from a borrower doesn't come together-such as drawing power, utilisation of funds, monitoring of loans, default if any, non-fund facilities availed by borrower, etc. "The repository will help lenders to know all the credit information at one place. This will help in knowing the credit worthiness of a borrower," says Rudran.

Therefore, if a large borrower defaults, the information will be shared with other lenders on a quarterly basis. This measure will not only reduce the banks's leverage, but also keep the bad borrowers away from the banking system. A PSU banker narrates a case where a private sector bank took exclusive security (against the loan) from a corporate borrower, which the other bank didn't know. "We are now fighting with the borrower in a CDR (corporate debt restructuring) forum. The repository will help in knowing all the information well in advance," says the banker.

S Ravi, a Non-executive director on the board of IDBI Bank, says, "The turnaround time for restructuring a stressed assets should be faster." Today, a lot of time is wasted as every lender in a consortium (lending) has to go back to head office for approval. "If the patient is on the death bed, you need to act fast," says a banker. The matter again lands at the doorstep of PSU bankers. And then there are limited DRTs (debt recovery  tribunals), lack of faster bankruptcy laws, etc. A lot needs to be done to fix the structural issues at the PSU banks. "The positive action in the PSU space is happening too late. Don't expect any result too soon," remarks a private banker.