India’s banking zombies pose a problem

By: | Published: June 28, 2018 8:29 AM

India’s state banks are beginning to resemble the walking dead. Of 21 government-controlled lenders, eleven face growth restrictions and the same amount will soon be without a boss. Some chief executives have been arrested, while others face corruption investigations.

India’s banking zombies pose a problem (Reuters)

India’s state banks are beginning to resemble the walking dead. Of 21 government-controlled lenders, eleven face growth restrictions and the same amount will soon be without a boss. Some chief executives have been arrested, while others face corruption investigations. New Delhi may be letting these entities run deep into the ground as part of tacit plan to privatise by stealth. The real thing would be less embarrassing and more efficient.

State lenders account for about 70 percent of total bank assets, in a system choked by $150 billion of bad loans. There are a handful of large names, led by the $35 billion State Bank of India, that trade at book value and can still raise capital from the market. Beneath those are smaller banks with crippling bad loans and returns so ghastly that the Reserve Bank of India has imposed strict curbs. To make matters worse, many of the deeply troubled banks are also headless. Three lenders have been without chief executives since the end of December, including Dena Bank which has gross dud loans amounting to 22 percent of its total and is no longer allowed to offer customers new advances or hire staff.

Other institutions have lame duck bosses. Bank of Maharashtra Chief Executive Ravindra Marathe was arrested last week, accused of misusing his authority to make improper loans to a property developer. Last month, Allahabad Bank stripped Usha Ananthasubramanian of her responsibilities as chief after she was named in a probe at her previous employer, Punjab National Bank, which revealed a nearly $2 billion fraud in February. In total, eleven state banks will soon be without CEOs, author and consulting editor at Mint newspaper Tamal Bandyopadhyay reckons.

Part of the problem is the failure of New Delhi’s efforts to professionalise banks. In 2015, the government recruited P.S. Jayakumar, an ex-Citibank man, to run the $4.5 billion Bank of Baroda. The experiment turned out to be a one-off. His term is due to end this year, and local media tip him to return to the private sector to lead the $19 billion Axis Bank . In the current climate of heightened scrutiny – with even innocuous missteps potentially attracting political heat years later – state banks are unlikely to attract outside talent. That’s especially true with an unusual number of top jobs coming up for grabs in the much better-paid private space in the coming months and years.

One theory for the shambles is that the government is quietly trying to smother weaker banks by restricting their growth. New Delhi has no obvious use for entities that can’t lend and are unable to support economic growth. Politicians have made no secret of their desire for fewer, larger, lenders but the idea of merging weak banks with those doing only slightly better seems increasingly inadequate, as more entities run into trouble.

Letting weaker banks rot would be industry privatisation of a sort, allowing healthier private lenders like the $80 billion HDFC Bank grow faster by meeting demand for credit. New Delhi remains averse to the genuine article. More than two years ago, Finance Minister Arun Jaitley said the government would consider giving up control of IDBI Bank but failed to find a buyer. Local media say the government is now trying to offload shares to the state-run behemoth Life Insurance Corporation of India, essentially getting taxpayers to fund a bailout. But LIC can’t rescue all the banks.

Real privatisation would be controversial, but less messy. One reason India has struggled to find buyers for banks is the regulator’s reluctance to allow tycoons to own large chunks of lenders. Asia’s richest banker, Uday Kotak, for example, must reduce his near-30 percent stake in the $37 billion Kotak Mahindra Bank to 15 percent by 2020. Waiving that rule might help to flush out new potential owners. India could then offload weaker banks to large storied corporate names with experience in finance, inviting the likes of Bajaj, Birla, Mahindra and Tata to turn them around.

Prime Minister Narendra Modi’s government has shown it does have an appetite for state sales through its efforts to sell IDBI and Air India, the national carrier. Though both processes ultimately failed, it suggests the broader idea of flogging assets could be revisited if his Bharatiya Janata Party can win another majority in the general election due to be held by May 2019. Until then, banking zombies will roam.

– Three Indian state banks are without chief executives and another eight bosses are due to step down soon, according to Tamal Bandyopadhyay, consulting editor at Mint newspaper and author of “From Lehman to Demonetization”.

– The CEOs of Andhra Bank, Dena Bank, and Punjab & Sind Bank retired in December and the heads of Central Bank of India and Canara Bank will step down soon, followed by the chiefs of Bank of Baroda, Syndicate Bank, Indian Bank, UCO Bank, United Bank of India, and Corporation Bank, Bandyopadhyay wrote in Mint newspaper on June 25.

– On June 20, police arrested Ravindra Marathe, chief executive of Bank of Maharashtra, accusing him of misusing his authority to make loans to a property developer.

– Allahabad Bank in May stripped Usha Ananthasubramanian of her responsibilities as chief executive after she was named in a probe related to fraud-hit Punjab National Bank, where she earlier worked.

– Current and former officials at some other state lenders, including IDBI Bank, Indian Bank, Syndicate Bank and Canara Bank have been investigated over alleged loan fraud cases.

– India has 21 state lenders which account for about 70 percent of total lending.

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