Monday, November 26, 2012

The challenges of an Indian state-run banker.

By Kaustav Roy. 

It is an peculiar management challenge to head any of India's dozens of state-run commercial banks (there are scores of them), especially the one listed on the local stock exchanges. It is not similar to managing any similar sized private bank or even the local operations of a global bank. Here, I am not even talking about the so-called social responsibility of reaching out to remote areas where the operations many not be that remunerative.
On one hand, as the chairman and managing directors of the banks, you are accountable to the banks' largest shareholders (the government), minority shareholders and customers who expect you to improve the overall performance of the bank. All these within the tenure of just few years.
On the other hand, as the government owns the lion's share in those state-run banks, ministers and politicians try to use them as much as they can to please their vested interests. That has been one of the main reasons behind the huge amount of bad loans reflected in the books of these banks recently.
A recent audit by India's finance ministry revealed instances where a state-run bank's internal due-diligence warned against extending any further loan to a particular firm as its founder had already pledged around 70% of his stake and hence the chances of recovery of any fresh loans were less.
Nevertheless, a consortium of banks went ahead and gave fresh loans to that firm, allegedly because the founder used his political influence and that of his own post of a Parliamentarian to force the bank chief to clear the loan.
In another much smaller incident of retail loan default, a borrower had pledged a small piece of land to take some loan from a bank and when he defaulted, the bank had put up a notice in the local newspapers to auction that land and recover its dues.
The borrower approached the local legislator and convinced him that the ground was once used by Mahatma Gandhi and hence be protected. The local legislator, eager to score brownie points in his constituency, immediately fenced the ground and declared that it has been 'taken over' by the local municipal authorities. However, there were no mention about the recovery of the bank loan and local media, oblivious of the larger implication, hailed it as a great 'social service' without bothering to find out about the fate of the bank's money, which, in turn, is the taxpayers' money gone into the pocket of some individuals.
These kinds of political pressures are usually absent in case of private banks and hence their share of bad loans in much lower. Moreover, the chiefs of most private banks remain at the top for many years and hence get enough time and freedom to create a strong growth foundation for the banks unlike chiefs of state-run banks whose tenure is usually for few years, during which they often resort to window-dressing of the balance sheets to show good performance.
Some of the private sector Indian banks have been consistently delivering strong financial results for the last several quarters while their state-run peers have not been that consistent. This was reflected in their stock performances too. It was only as late as August when many local brokerages had recommended "Buy" on some state-run banks as they felt those stocks had not gained as much as their private sector peers during the preceding market rally.
However, their views turned the opposite after a month or so as news started trickling in that most state-run banks were going to post poor results for their July-September quarter due to higher bad assets and hence higher provisioning towards them.
This resulted in sharp falls in the stock prices of most state-run banks and prompted the managements to undertake recovery process on a much more serious method. To add some steroid to the damage control exercise, media reports indicated the finance ministry has also asked the management to talk to market analysts and market makers more often to influence positive views on the banks' stock by the brokerages.
However, notwithstanding these quick-fix solutions, it is high time local politicians stop thinking state-run banks as their personal fiefdom and fulfill their vested interests through them at the banks' peril. It is only then that India, a big emerging economy, also has a state-run bank which is among the largest in the world.
End.

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