Enhancing transparency is the only way to prevent private banks from piling up NPAs

Are private sector banks catching up with their pubic sector counterparts in piling up non-performing assets (NPAs)? Well, that seems to be the case, if one were to go by latest data. True value of NPAs with private banks hitherto undeclared or little known seems to be emerging from the woodwork after the asset quality review undertaken by the Reserve Bank (RBI). Though it has come very late in the day, yet the review has set the ball rolling for top private banks. They have been forced to disclose more than what they have hidden thus far from public eye and investors. Actual numbers in several cases are still unclear given that the RBI is yet to come out with a divergence report on NPAs. Case in point was ICICI Bank, though its CMD Chanda Kochhar claimed that the build up in bad assets were on decline.

But, there’s no denying the fact that ICICI Bank and Axis Bank account for 70 per cent of non-performing assets in the private banks line up. As per a Care Ratings analysis, as of June this year, while ICICI Bank piled up Rs 43,148 crore, Axis Bank has Rs 23,031 crore sticky assets. Two other significant players in the bad banks business were HDFC Bank with Rs 7,243 crore and Yes Bank at Rs 1,364 crore. More are likely to add. In Axis Bank’s case, the divergence is significant and extremely worrying. What’s most distressing is that higher provisioning and consequent lower profits reportage has not helped these banks. Stress is so deep and wide that growth in fresh lending, net interest income, profits, earnings from fees and consultancy has not helped these private banks do any better.

While a firm re-capitalisation plan of Rs 2.11 lakh crore has been announced for PSBs ‘dubbed’ as inefficient and politicians running them down, there’s no light at end of the tunnel for private banks. The biggest fear is whether the sticky assets bubble will burst in the light of fresh RBI disclosures? What’s the kind of haircut banks have to take and consequently what is the size of the hit for promoters? While a part of write offs are being currently financed from profits, the question is how far will the banks sustain from this strategy?  The RBI will have to undertake a scientific analysis of these the governance issues bogging these banks to ensure that such recurrences are minimised in future.

Unless this is done, the public confidence in banking system is likely to take a big beating. In both Axis Bank and ICICI Bank, some level of forensic audit needs to be initiated.

Puzzlingly low quality of borrowers built up over the years in their enthusiasm to beat their public sector counterparts in the name of efficiency should narrate enough of a story. For a long time the market rewarded retail banks over corporate lenders, but equality now seems to be setting in, with private banks also going rogue. Similarly, several state-run banks shy away from questionable borrowers fearing external audits and CAG reviews. Such third party independent audits may have to be prescribed for private and foreign banks as well. Here Standard Chartered Bank has a dubious history in India, both in the 1992 securities scam and more recently with the Indian bad loans leaving egg on the face of the global behemoth.

Firewalls set up by private banks to camouflage bad businesses and assets will have to be decisively breached to bring about transparency in their operations.