Warning signals from RBI

State-run banks must realise days of being overfed and underworked are over

Sourav Majumdar

Walk into the cavernous interiors of a state-run bank. What are you most likely to see? Peeling paint, yellowed ledgers piling up from the floor to the ceiling, and dreary-looking employees gossiping among themselves as resigned customers wait to access their own hard-earned money. Hyperbole? Not really. Though some public sector banks have travelled some distance in improving their productivity and service, by and large, the majority of them still care precious little about customer service, technology or bottomline. The basic assumption at these banks is that the government is stoutly behind them, and therefore, they can give profitability the go-by.

The Reserve Bank of India’s latest, and excellently crafted, Report on Trend and Progress of Banking in India 2000-01, comes as a warning signal to these public sector giants which have become overfed, underworked and fattened with sloth. For a number of years now, the RBI has been trying to drill sense into the heads of these PSBs, and urging them to increase per employee productivity, use better technology and upgrade customer service with an eye towards profits and, hence, depend less on the government. And it’s not just the three “weak” banks which have to be told to shape up. Overall, there is a general decline in performance of the state-run banks despite the best efforts of the central bank. And all this after the government has pumped in a huge Rs 20,446 crore by way of recapitalisation funds for these banks over the years.

As the RBI report points out, even after allowing for additional infusion of capital through internal generation and access to subordinated debt, the gap between the capital required by these banks and the leeway available to raise the same from market sources is likely to remain significant. “The question which merits attention is whether the gap should be filled by the government or alternately, whether the legislative ceiling for public subscription should be raised,” the RBI points out. The government has already taken steps in the direction of reducing its stake in these banks to 33 per cent to enable them to raise fresh equity from the markets. But what the RBI says on the capital needs of these banks is even more alarming: “Assuming that the economy grows at the current rate and capital adequacy norms are the same as at present, it is estimated that the banks (barring the three weak banks) would require Rs 10,000 crore over the next five years.”

But what has been the result of the recapitalisation exercise itself? As is evident from RBI’s report, the 19 recapitalised banks, after adjustment of recapitalisation bond interest income at 10 per cent, had cumulative operating profits of Rs 6,257.85 crore, and net profits of Rs 299.61 crore. This compares to the pre-adjustment figure of Rs 8,053.33 crore and Rs 2,095.09 crore. Of these 19 banks, as many as nine had net loss figures if you took the recapitalisation gains away. A sad state of affairs indeed, despite the government’s best efforts. And more important, a clear sign that even if the government reduces its stake to 33 per cent as envisaged, there will be no investors in the market willing to pick up stocks in these banks even if you paid them for it.

But the writing is now on the wall for all concerned: shape up or down your shutters. The regime of indefinite dole and subsidies for the state-run banking sector is over. If the other segments of the banking system — foreign and private banks — are playing by the rules and do not have access to this kind of “unproductivity dole”, as it were, it’s time the state-run banks, highly unionised and unwilling to learn from past mistakes, were made to conform to stricter norms related to business expansion and growth of the balance sheet. If you can’t handle your weight, go on a crash diet.

The RBI, not surprisingly, has made this amply clear in the report. The central bank promises “a prompt corrective action framework, based on certain indicators like CRAR, net NPAs and return on assets.” The PSBs will soon have to live with the reality that they cannot have bloated balance sheets with sub-standard assets which do not generate adequate returns. All this, even as the exchequer is clearly affected to the tune of the recapitalisation amounts. Banks have to learn to turn leaner and meaner with an obsession for the bottomline. The days when banks could boast of sheer balance sheet growth is over: the bottomline is clearly the king. And that will happen only when business strategies are oriented towards new products, branding, better customer service, with every single employee chipping in with his or her bit for the overall growth of the bank. If this simple reality is not acknowledged by the state-run banks, they may soon be relegated to the yellowing pages of history, just like the ledgers they have so carefully stored all these years.