Even though the SLR requirement has been cut to 24 percent bank holdings of SLR are over 27 percent. Both private and public sector banks are above the requirement some holding 29 percent. Three points of SLR convert to about Rs 120,000 crore of liquidity. So what is happening? The proximate cause for this is the expectation of interest rate cuts makes banks holding government bonds enjoy the prospect of risk free capital appreciation due to increase in the bond prices with the cut. As long as there are expectations that interest rates are likely to be cut further, banks will continue to want to profit in this manner.
A chairman of an NBFC told me last week that the same banks that are buying his company?s commercial papers (CPs) are asking for 3 percent more to disburse a loan. Why is that? The reason is that CPs are liquid, not counted for priority sector advances, and bought by the bank?s treasury department on the basis of an external rating of the instrument, while credit is given by the credit department of the bank on the basis of internal risk assessment. This takes us on to another discussion and that is of incentives. Even when interest rate expectations stabilise, will lending pick up and to which segment? My sense is when interest rates expectations stabilise, then banks will start lending but only to projects they believe are of very high risk quality.
Public sector banks will also not shed their inhibitions and start lending loosely despite government diktat. Public sector bank manager?s incentives are coming in the way of the government diktat. Contrary to lay opinion, there is very little intrinsic difference in the quality of public sector and private sector managers. However their incentives are truly different. They work hard to meet tough targets and be respected. But unlike in the private sector, their performance alone cannot get them promoted or a higher bonus. Promotions are done by promotion committees with very little knowledge of the candidates (very senior people sometimes from outside the bank) and with no voice for the immediate superior of the candidate being interviewed. The sheer absurdity of an external interview to determine internal performance after 20 years of service is lost on everyone. The career killer is any vigilance comment. Vigilance remarks for people who are action oriented are easy?one procedural lapse doing the right thing will put your career on hold for ten years. Given that it is difficult to assess credit quality unfailingly in the best of times, which right thinking manager will take any risk in turbulent times? Given that their salaries are so low at middle and senior levels, there is a lot of smear on public sector bankers about their corruption, their sloth and their incompetence.
I am sure we can find public sector bankers who fit all these terms, but the majority don?t. They do wish however, to succeed as much as their private sector counterparts. Thus, in today?s environment lending, especially to SMEs, it is not the way to go for their career. A manager who can show growth and profitability can be docked because of the suspicion of motive in a loan approved by him that went bad. The vast government vigilance apparatus hangs as a sword over the head of the proactive. This is also the reason that credit to the SMEs always grows slowest?consortium lending is board approved and so safer, retail lending is smaller and rule based and in priority lending the same standards don?t apply. The actions of a government desperately trying to push credit and lower interest rates to spur investments is falling on deaf bank manager ears. The chairmen can?t help either because the managers who have to do the lending worry about making bad calls, not showing growth may earn some displeasure but will avoid inviting vigilance attention, especially at a turbulent time like this. If the government wants public sector banks to lend, it will need to shift from a vigilance culture to a transparent performance culture. But in the meantime, who will help the SMEs as they go under?
The author is managing director, The Boston Consulting Group. These are his personal views