An Open Letter to Finance Minister, GoI ‘The Problem of PSBs is …

July 11, 2020

Dear Madam
Finance Minister, Government of India

You may be aware
of RBI
Governor’s speech at the 7th SBI Banking & Economics Conclave on July 11,
2020. After all, (technicalities apart) he is the  arm of the Government of India looking after
Indian financial system on day to day basis. He represents the monetary
authority of India. By the way, Monetary Authority along with the Ministry of
Finance (Treasury in USA)  are the new
Gods of economic and financial life of general public, including households and
businesses, in any country.

Mess We Are In

are in  a mess, is to state the obvious.
To quote numbers that he shared, “ For the five years between
2015-16 and 2019-20, the Government had infused a total of Rs.3.08 lakh crore
in public sector banks (PSBs)…The gross NPA ratio… of SCBs stood at 8.3 per
cent in March 2020, compared to 9.1 per cent as on March 2019…”

Who would not know that the infusion of
capital in PSBs is an admittance of the (recurring) gaps and holes appearing in
the sinking ship and the band-aid approach of the Government to plug it, that
has been now a lore of 70+ years, and never worked?

The Gross NPA of SCBs at 8.3 per cent are much above international standards. And there is yet another play. I don’t know why the Governor shifted his gear to SCBs when talking about NPAs. A recent study had shown that “PSBs’ NPAs levels exceeded combined NPA levels of private and foreign banks in India after FY-2015. As of March 2019, while SCBs Gross NPA was 9.1 per cent as reported by the Governor, the PSBs’ Gross NPAs, as of that date, were 11.6%” (Indian Banks’ High NPAs And Abysmally Low Recovery: Revamp Or Perish, June 5, 2020,

Causes of Weak Financial Institutions 

The Governor, conscious of weakness
(mess) stated that in order “to strengthen the internal defenses, higher
emphasis is now being given on causes of weaknesses than on symptoms. The
symptoms of weak banks are usually poor asset quality, lack of profitability,
loss of capital, excessive leverage, excessive risk exposure, poor conduct, and
liquidity concerns. These different symptoms often emerge together. The causes
of weak financial institutions can usually be traced to one or more of the
following conditions: inappropriate business model, given the business
environment; poor or inappropriate governance and assurance functions; poor
decision making by senior management; and misalignment of internal incentive
structures with external stakeholder interests.”

The Immediate past RBI governor Dr. Raghuram Rajan had also
pointed out the causes for PSB crisis, as follows:

Far too many loans are done without adequate due
diligence and without adequate follow up. Collateral when offered is not
perfected, assets given under personal guarantees not tracked, and post loan
monitoring of the account can be lax. The lessons of the recent past should be
taken seriously, and management practices tightened.

Incidentally, this wisdom of Dr Rajan had come after
demitting his office. Believe you me, those like me, who have been watching
Indian banking system for years, don’t see anything new, at all, in the
statements of either of the two, past or present, Governors.

Please note ‘usually’ and ‘one or more of the following
causes’ in the statement of the present Governor. That shows that he doesn’t
know, for sure, what the causes of weakness actually are, at this time.

The Solution

As a solution to the existing problem, the
RBI governor added that “We are placing special emphasis on the assessment of
business model, governance and assurance functions (compliance, risk management
and internal audit functions), as these have been the areas of heightened
supervisory concern. Supervised entities generally tend to focus more on
business aspects even to the detriment of governance aspects and assurance
functions. There was also an apparent disconnect between their articulated
business strategy and actual business operations. The thrust of the approach,
therefore is, to improve the risk, compliance, and governance culture amongst
the financial institutions.”

It is like reading a textbook of the
early 2000s.

Madam, needless to say, you can’t solve a problem, unless you
recognize it, and recognize it correctly, and well in time.

The Problem of PSBs is NPP and not NPAs

The real problem of PSBs is not NPAs. It is Non- Performing
People (NPP) at the top.

What PSBs need is
a sound performance management systems (PMS), at the C- suite level of PSBs. I
am not talking of Memorandum of Understanding (MoU) or Balanced Score Card
(BSC) kinds. I am talking of Management Control Systems (MCS) and Individual
Responsibility Accounting. Like in USA, the compensation of the top should be
linked to meeting or exceeding levels of performance of the top leadership of
the benchmark banks, which in India should be private sector or foreign banks. The
fear of Central Vigilance Commission (CVC) and political intervention should
not be confused with administrative acumen and responsibility of the top
management of the PSBs.

Since it is a
matter of having appropriate performance management systems in place, it is
doable, even with all the mess that we know!

Dr. Sat
Parashar, PhD is former Director, IIM Indore. He currently teaches Money and Banking
at Rady School of Management, University of California, San Diego. He has been
associated with banking in India, Middle East and USA, for more than two

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