SBI comes a cropper

State Bank results track its chiefs' careers

The State Bank of India has turned in disastrous results, the likes of which have not been seen in the last 11 years. Net profit for the quarter ended March is down to virtually zero (Rs 21 crore), compared to over Rs 1,867 crore in the corresponding quarter of last year. This has been attributed mainly to the new chairman deciding to clean up the mess inherited by him, thus resulting in a rise in provisioning for non-performing assets by a stupendous 49 per cent year-on-year to reach a staggering Rs 3,264 crore. This resulted from the previous chairman, O P Bhatt, defying the Reserve Bank of India and under providing. The new chief, with his entire tenure ahead of him, could have hardly carried on with the old act. The bottom line has been further hit by a massive additional setting aside of Rs 1,024 crore towards income tax payment. There can be an element of discretion, or even arbitrariness, in the way the regulator asks banks to provide for assets, good and bad. There can also be two opinions on whether teaser loans of the SBI kind are as risky as those that almost wrecked the US financial system three years ago. But surely income tax is another matter and being behind time on that score is indefensible.

In keeping with the above, the bank also did not provide for the liabilities which resulted when pension rates were hiked several years ago. The bank has made up for it now in one go by transferring Rs 7,927 crore, not from the profit and loss account (that would have formally put the bank in the red) but reserves! This has lowered the capital adequacy ratio, causing the management to announce that there has to be a rights issue down the year so that the bank can keep growing. What if the centre is in a tight spot and finds it difficult to fork out its share of the Rs 20,000 crore capital infusion projected by the management? Most depressingly, the pain is not over yet. The cleaning up is not entirely done and the arrears in provisioning will continue for two more quarters, thereby depressing performance through half the current year.

The RBI has also to answer for this state of affairs. How could it have allowed under funding to go on to this extent? Even more serious, there is a systemic issue at stake. The results of public sector banks now follow a pattern. They keep improving under one chief executive, climaxing at the time he is to retire or is waiting to move to a bigger bank. And there is a sharp setback as soon as a new incumbent takes over as he seeks to start with a clean slate. Then, as his tenure progresses, results improve, until he goes and the next chief decides to begin with a clean slate again. Clearly, bank results are not what they are made out to be. Despite all the elaborate rules laid down by the RBI, bank chiefs find it possible to window dress results to suit their career paths. The RBI has a lot of answering to do.