Asset quality problem more of a governance issue: Mundra

Reserve Bank's recent review of top defaulters has revealed that the asset quality problem is largely due to governance issues at state-run banks as well as borrowers and the government cannot be blamed for the mess, Deputy Governor S S Mundra said today.
"One thing has come out quite clearly, that the issues that we are seeing today have not much to do with the ownership of the banks. It is more a governance issue than an ownership issue," Mudra said at a banking conference organised by industry lobby CII here.
While there are external factors which have affected asset quality, internal ones are also as important and "governance deficit" is a big issue, he said, adding bank boards need to put in place risk management practices as per their appetite.

The comments come amidst rising criticism by ex-public sector bankers and government officials following a series of reports saying that between 2012-13 and 2014-15, 27 public sector banks have written off loans worth a whopping Rs 1.14 trillion.
Many of these officials have accused the government and RBI representatives on the banks' boards of not doing their jobs well and blamed the resultant lax lending practices at state-run lenders for the surge in bad loans.
It can be noted that Deputy Governor Urjit Patel and the banking secretary are on the SBI board while many EDs and GMs of the RBI and senior finance ministry officials are on the boards of other lenders.

Stressing on the need to look at the written-off assets, Mundra said the overall stress (including NPAs, restructured and written-off assets) surged to 14.1 per cent as of September 2015, up from the 13.6 per cent in March.

He said for state-run banks, the overall stress stands at 17 per cent, while for private ones it is 6.7 per cent and 5.8 per cent for foreign lenders.
According to reports, the RBI has come up with a list of 150 top accounts and asked banks to classify them as non-performing assets, which is expected to entail provisions of Rs 70,000 crore.

The state-run lenders have been blamed for poor
underwriting of loans, which leads to difficulties on the asset quality front.
Complimenting the lenders for cleaning up their balance sheets, Mundra, who was heading Bank of Baroda before moving to the RBI, asked borrowers to cooperate, saying it will bode well both for them and the economy in the long-term.
Hitting out at crony capitalism, Mundra said many promoters take loans without an ability to repay either the principal or service the interest, but just on the hope of improving conditions in the future.
Such "ponzi borrowers" start projects not with a long-term commitment, but with the knowledge that "in our country, there are specific issues which need skill-sets to put up a project...Which others cannot do".

Such promoters have been seeking to create quick value and sell-out, but are now forced to sell the assets in distress, Mundra said.
He also asked banks to use strategic debt restructuring (SDR) as the last resort.
Mundra expressed optimism that the ongoing exercise will lead to better days for the banking system in the future.
"We all should be optimistic about sustained recovery and continuous well-being hereafter," he said.
As for the ongoing results, where banks are reporting a surge in asset quality issues, Mundra said the numbers reflect divergence in the industry, where banks which recognised the stress early have started reporting stress now, while those who are late will report it later.

"That essentially reflects at what point of time the individual bank has started on this journey. If a bank has started on this journey a little earlier, probably the reflection is there in the result. It is also an indicator that those who are starting on the journey now can have a similar kind of outcome in future," he said.
On the prompt corrective action which the RBI has suggested, Mundra said it is a comprehensive framework which banks are still implementing and we should not form our views based on isolated instances.
"The banks are in the process, once the industry cycle is completed, we will have a relook and assess what has to be done going forward," he said.