THE PAIN OF PSU BANKS - CANCEROUS GROWTH IS WITHIN

By Ruma Dubey

If nothing we need to give a resounding clap of applause to Bank of Baroda, Punjab National Bank and Bank of India. These three big banks declared dismal numbers for Q4FY16 and their losses sent a shock wave throughout the country. But the applause is for the courage these banks showed to put the entire provisioning at one–go instead of prolonging this pain. BoB has indicated that its pain is almost over and its clean-up is done. Yes, this came at the cost of its profits taking a big hit but at least it is over and done with.

Or is it? With PSU banks it is very difficult to say if the pain is over or not even when the Chairman says that its over; this is simply because we know these Chairmen are mere remote controls of the Govt. These PSUs to a large extent are in this state of despair thanks to the interference of the very Govt which is today pointing fingers at mismanagement by the banks.

There is talk today about bank mergers to create big banks. But that is really a very contrived and skewed way to resolve the crisis. The problem was never the size; it is not the balance sheet which was a problem but the poor lending decisions and more-then-required exposure to large companies. More than the size of the balance sheet, it is the bank’s credit appraisal process and the risk control systems which need a complete overhaul. A big profitable bank taking over smaller stressed banks will put the bigger bank at a disadvantage. The case of SBI and the merger of its subsidiaries though is different, they are as such subsidiaries, duplicating work and too small to really make any difference. Thus, in case of SBI merging its 5 subsidiaries into itself is the right move in the right direction. But what is not right is say, a PNB taking over Dena Bank or something in the similar vein.  Creating too big a bank to clear this mess is simply no solution. What is indeed required is reduction of interference by the Govt.

Really, why does the Govt need its representatives on PSU boards? How are they contributing to the growth of the bank? The CEOs unfortunately have to spend a lot of their precious time in looking at the way in which the political wind is blowing, kowtowing with ministers and their secretaries rather than concentrate on the business at hand. Those working in some of the PSU banks confer that their banks rarely and in some cases, never talk about business strategy of the bank in each city, no talk on clients and sectors to avoid, target criteria for clients and sectors; no research goes into the working; it runs traditionally, merely adding computers and ATMs and online banking have given them the appearance of moving with times; internally though it’s all very much the same.

SBI will declare its numbers on 27th May and its picture will not be any different from what its peers – PNB and BoB have declared. This is the pain we will have to endure for the rot of corruption in the banking system. RBI has done the right thing by cleaning it all up at one go but how to ensure that the same mistakes do not repeat?

Unfortunately, what this now means is that small and medium term borrowers will pay the price – probes, rules and regulations will go up following this and they are ones who will be subjected to them. The top companies will continue to flout and make merry.  A systemic overhaul is required. Of course a change in the entire value system of India is needed but seems like an impossible task…

PS: Many are asking if this is the time to buy contrarian – buy the banks which are suffering. It’s best to wait for one more quarter; let the Q1FY17 numbers come and that will reveal if the pain is over or not.  Bank of Baroda, Bank of India and PNB are huge banks – they will not close down. So if you don’t mind holding for the long term, ignore the numbers for first half of this fiscal, then maybe buy when the chips are down. The conviction to buy is less about the banks and more about the country. Ready for that?