As reported by this paper in its Monday edition, government has indicated to public sector banks that it should be focussed on their profitability of their loan book instead of chasing top line growth. Government has given suggestion that banks should consider swapping loans so that they have higher exposure to their area of expertise rather than having a loan book which has every thing but is still not profitable.
As intentions go, this one is absolutely fine. But the question is, will PSU banks implement it?And even if they do, will macro structure of Indian banking system allow such drastic step to be taken by individual banks and their boards?
Given the fear that either the of vigilance department of the bank or other investigative agencies may question bank officials even after years of a transaction been done, bankers are going to be cagey in taking any decision that involves discretion, especially with regard to loan book where pricing is bound to be involved.
Our policymakers should understand that banking is not just a mathematical exercise involving numbers. It involves decisions based on future projections, which can go haywire due to reasons beyond the control of the banker taking the decision. Given the fact that there is no foolproof way to prove or disprove that the decision taken was without any harmful intent, it would be worthwhile for our policymakers to think out of the box. They should come up with guidelines on the kind of loans that can be swapped amongst public sector banks and at what haircut. It can use the expertise of RBI for this purpose. Being the majority shareholder of the banks, government needs to tell the banks that they should define their strong and weak areas. This is not a difficult thing do, long-term track record of NPA and growth numbers in good time will clearly show which banks is good in which segment. For instance, there are banks whose balance sheet and NPA profile clearly show that they are good in retail and SME lending, while there are others with a strong corporate lending.
The banks that are strong in SME should be asked to focus on their strength, which means that non-performing SME loans of other PSU banks that are stronger in corporate lending can be bought by the bank. If the banks don’t want to block their capital in such loans they can swap their loans. But this swapping or selling of loans will only happen when different banks are supervised and are given a time line to achieve this. Besides, there must be guidelines to decide the valuations of these loans. Otherwise, every individual bank would claim that their portfolio of non-performing assets has higher probability of recovery and hence they would ask for more from other bank.
This is merely the first step. To finally ensure that PSU banks are able to achieve the required level of profitability on sustained basis, policymakers will have to ensure that the practice of consortium lending is discouraged. This consortium lending, in which a bank does the due diligence and decides to give loans and then ask the other banks to also give a part of the total loan — supposedly to cut cost and speed up the process of a large loan, besides diversifying the risk — has turned out to be the source of the trouble. The companies that managed to get a due diligence done by the lead bank were able to take the whole banking system for a ride.
Let every bank do its own due diligence so that if one bank is missing on something it is pointed out by the other, and, depending on its appetite for exposure to a particular sector, decide whether it wants to take even that small exposure to that company or not. Most private sector banks had been avoiding this consortium lending and that is the reason why some of them don’t have any exposure to companies that are facing insolvency proceedings today.