PSB laggards have their tasks cut out on revival

Recently, rating agency Moody’s downgraded the Central Bank of India and the Indian Overseas Bank’s local and foreign currency deposit ratings, anticipating low level of support from the Centre to these banks.

The move is considered a fallout of the Centre’s decision to identify these two banks among the non-performing public sector banks (PSBs), while announcing the infusion of Rs 6,990 crore of capital into nine performing PSBs.

But Indian Overseas Bank MD and CEO R Koteeswaran denied apprehensions that the ratings downgrade would affect business. In an email response to Deccan Herald, he said, “There has been some speculation that the ratings downgrade would have an effect on our business, which is totally false. The downgrade will have an effect only if we go for a medium term note (MTN) issue and that is not likely any time in the near future, for about six to nine months. By then our ratings would quite likely have been upgraded again.”

Banking expert and RBI chair professor, IIM Bangalore, Charan Singh too downplayed fears that non-performing banks are on a sticky wicket, “I think that non-performing (NP) public sector banks are owned by the Centre and, therefore, there would not be any problem. The government is correct in expressing its agony and conveying it so transparently.”

To identify the performers among the PSBs, the Centre adopted new criteria. Efficiency was determined by taking the weighted average of return on assets (RoA) for all PSBs for the last three years. Also, the return on equity (RoE) for these banks for the last financial year was considered. In both instances, those which performed better than average were rewarded, identifying the nine banks.

Originally, Rs 11,200 crore was set aside for PSB capitalisation in Budget 2014-15. Now that Rs 6,990 crore has been disbursed, it’s expected that the remaining Rs 4,210 crore would be disbursed this month. In Budget FY 2015-16, Jaitley has proposed to infuse Rs 7,940 crore funds to PSBs. In order to raise funds, banks have been allowed to reduce government stake to 52 per cent as well.

Bank Bureau a factor
It’s not known whether the efficiency criterion would be adopted again during fund infusions. Another aspect is the proposed autonomous Bank Board Bureau visualised in Budget FY 2015-16.

The Bureau will be mandated with searching and selecting heads of PSBs. Also, it is expected to help banks in developing differentiated strategies and capital raising plans through innovative financial instruments. The budget says this would be an interim step towards establishing a holding and investment company for banks.  
  
Charan Singh too stresses the importance of careful selection of top management in public sector banks. He goes a step further, “The government should hold auditors and chartered accountants also responsible for such non-performing PSBs.”
Other non-performing banks too await rating downgrades from Moody’s and other rating agencies.

What corrective measures can they take? In Charan Singh’s view, the recovery on non-performing assets (NPAs) have to be strong. “I would like a road map that clearly delineates step-by-step as to what would the bank do, when an asset or a portfolio appears to be stressed. The trigger should be identified and the bank should immediately shift to cautious mode with that specific client. Also, sectors in which NPAs emerge should be identified and banks cautioned by the RBI and the government, so as not to tread that path.”

On his part, IOB chief Koteeswaran said that the revival measures he has kicked off “will ensure that our bottomline becomes healthy again, resulting in upgrading of the rating within a short term”.

Charan Singh also wonders why the recent pay hike announced was made uniformly applicable to all PSBs. “This needs to be reconsidered for public sector banks  which are non–performing. It is contrary to expectations and prudent principles of finance that pay hike to employees is similar despite such varied performance,” he said.