Cornered bankers have much to tell RBI

With the Reserve Bank of India (RBI) clarifying its stance on Aadhaar linkage with bank accounts, bankers at branches implementing the scheme can heave a sigh of relief.

Discerning customers have been challenging bank staff on the proof that the central bank had indeed asked banks to force customers to link Aadhaar numbers with their accounts. Apart from a government notification, the staff had little to show. This led to some unpleasant experiences, say bankers.

There are other issues, too, where bankers feel they have been given the rough end of the stick. For example, in digging up bad debts to forcing down resolution through the tube in a short period to steep provisioning, it is not a happy time for bankers at branches or the head office. All these when the government is not clear on a strategy to recapitalise the lenders, which bankers say is the need of the hour if an impending collapse of some of the weaker ones have to be checked.

The banking sector’s gross bad debt book is close to Rs 10 lakh crore, entailing huge provisioning. Analysts say the government must put at least Rs 1-1.5 lakh crore immediately into its banks to meet the capital needs in the short- to medium-term. 

The latest issue is linking their lending rate to external benchmarks, to force a transmission on any change in central bank policy, even when the cost of funds remains elevated. Frequent changes in lending rate methodology has also confused bankers. Since the RBI is the regulator, few have been openly complaining. Privately, however, they say economic growth is unlikely to take hold if the hands of banks are tied through myriad regulations and want of funds. A senior public sector bank executive said many employees, especially from branches, often express resentment, as they face customer wrath. And, customers often complain about the language used in instructions, like the threat of freezing one’s account. It was seen as unduly harsh and raised fear in the minds of small account holders, he said.

A senior executive with the Indian Banks’ Association (IBA) said in implementing the directive on mandatory Aadhaar seeding, many customers were reluctant and raised questions about its need for those transacting regularly. It has been difficult to execute the seeding exercise, he said. The issue was taken up with the government and RBI for clarity, said another IBA official.

Bankers have been making their cases felt to the regulator and pleading for some leniency on the provisioning part at least. And, not to bring out a list of companies that need to be dragged to the insolvency court for resolution within six months. Not only does this cause steep provisioning (50 per cent when a company is referred to the insolvency code and 100 per cent if a liquidation order is secured), banks are also staring at a huge haircut in such cases. In the Synergies Dooray case, the haircut was 95 per cent. Even if that was an exception, the general haircut could be as high as 75 per cent.

To be sure, had the RBI not been tough with banks on NPA recognition, we would have never known the extent of the rot. FY17 was the second year when Axis Bank  threw up huge surprises in hidden bad assets. RBI auditors found the bank had under-reported its bad assets by about Rs 5,000 crore. The bank stock went down nearly 10 per cent the next day.

Banks Worried

• Bankers welcome Aadhaar seeding clarification by RBI
• They say customer resistance on Aadhaar was a huge issue
• They face high provisioning when capital is low
• As bad debt book nears Rs 10 lakh cr, capital need rises by at least Rs 1 lakh cr
• But the government is non-commital on recapitalisation
• RBI pushes for high provisioning for companies in stress
• The central bank has given lists of companies to banks for quick resolution

However, bankers say it’s all been too sudden. “Banks have been eager to do the resolution part for a long time. We have had several discussions with the central bank on this,” contended a senior bank official, requesting anonymity. “RBI has been slow in the resolution part but when they went for it, it was at very short notice; too little time was given.”

Aditya Puri, managing director of HDFC Bank has been openly critical of RBI’s bankruptcy code mandate in the recent past, terming the referring of companies to the stringent law’s provisions as “not the best solution… Ideally, we should be able to help him (the stressed company) to breathe, and only if he is a wilful defaulter do we opt for the insolvency court,” Puri told HDFC Bank’s annual general meeting in July.