Selective outrage by RBI at Axis Bank

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New Delhi | Published: April 11, 2018 4:10:40 AM

If high loan-losses are the reason why Shikha Sharma had to go, the same should apply to most heads of PSU banks.

rbi, pnb, central bank, axis bankRBI and the government need to be fair whether they are looking into the performance of a CEO or a fraud or corruption.

RBI’s concern about the performance of Axis Bank’s managing director and CEO Shikha Sharma is somewhat surprising. While it is true Axis Bank’s non-performing assets (NPAs) shot up after the asset quality review (AQR), so did those of public sector banks (PSBs), many of which are now bankrupt or nearly bankrupt. In all these years, RBI doesn’t seem to have been as concerned about the performance of the CMDs of PSBS, which together account for close to 87% of the total NPAs.

The central bank has recently bemoaned the fact that it does not have the powers to dismiss CMDs of PSBs, but it would be interesting to know if the regulator or even the government has, in all these years, shot off letters to the boards of PSBs expressing concern and asking them to reconsider the tenures of the CEOs. If Sharma is being asked to go because of the high loan losses, at least a dozen CEOs of the state-owned banks should have lost their jobs.

The AQR, which was initiated in the December quarter of 2016, by the then governor, Raghuram Rajan, showed most banks needed to reclassify—read downgrade—corporate loans and make the accompanying provisions. It is surprising the clean-up wasn’t pushed through earlier, and that the businessmen to whom these loans were given weren’t pushed to pay up. Even if RBI was slow to act, the government, as the biggest owner and promoter of the banks, could have initiated the process.

In Axis Bank’s case, the jump in the NPAs, post the AQR, was almost five-fold, but the clean-up also left a host of PSBs with large loan losses. In the last couple of years, 11 PSBs have been picked by the regulator for prompt corrective action (PCA). Again, it is true that slippages at Axis Bank, on at least two occasions, turned out to be higher than that indicated by the bank. But there have been divergences—between the assessment of RBI and the lenders—in other banks too. For perspective, NPAs at IDBI Bank are close to 25% of outstanding loans and those at Punjab National Bank (PNB) are running at 12%.

These toxic loans didn’t pile up overnight at banks like PNB or Bank of India or a Central Bank, they have been in the making for several years. In how many instances did the RBI recommend to the board that the CMDs tenure be reconsidered? RBI was probably five years too late in asking banks to correctly recognise the quality of their assets. In how many instances were the CEOs questioned on why these exposures were taken? One former chief of PNB went on to become a deputy governor (DG) at the RBI.

Again, the loans given by Bank of Baroda (BoB), surely weren’t all disbursed post October 2015 when a private sector banker took over as managing director. Given the very large loan losses at BoB—now 11%—surely previous incumbents had a role to play. It is quite possible all the loan losses were due to bad business decisions, and that there was no element of corruption or fraud. Nonetheless, did the regulator write to the board and surely this should apply to Shikha Sharma as well? Former CMDs of state-owned banks, which are now nearly bankrupt, have made to the position of DG at RBI.

Post the Nirav Modi-Mehul Choksey fraud, it is evident PNB’s IT systems weren’t exactly top class. It is also clear now that the former CEOs weren’t paying any attention to these glaring gaps in the processes despite RBI having red-flagged them. Also, while the central bank may have alerted PNB on its weak systems, did it pull up the CEOs—past and present—for not linking the SWIFT with the core IT system? And, should the previous CEOs accept responsibility in some form. What were all the board members at a government-owned bank doing?

The fact is the state-owned banks, thanks to their relatively bigger balance sheets, have taken large exposures to the country’s top industrialists—many of whom are defaulters, and some willful defaulters. While some of the loans that have turned bad are probably due to wrong business decisions, it is also true that bankers were forced, by those in power, to sanction credit to certain industrial groups. When these promoters failed to pay up, wilfully or otherwise, the banks ever-greened the loans, at times at the request of those in power and at times because they wanted to keep their balance sheets clean.

RBI and the government need to be fair whether they are looking into the performance of a CEO or a fraud or corruption. They must, by all means, investigate alleged corruption by top management at private sector banks —as is being done in the case of Chanda Kochhar and ICICI Bank. But, the same standards must be applied to the chiefs of PSBs; they are the ones who sanctioned disproportionately large sums to industrial groups. If ICICI Bank’s loan to the Videocon Group is the smoking gun the government is investigating, PSBs have lent more than 10 times that amount to Videocon.

As a general rule, the government should be wary of letting loose investigative agencies—whose every move the press laps up despite their obvious poor track record—on banks since, if lending slows down, the entire economy will suffer. But, if investigations are being done, the targeting of private sector banks seems a case of selective outrage.

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