State Bank of India's (SBI's) results for the fourth quarter of 2012-13 have severely disappointed the markets because of a deterioration in several key indicators such as net profit, net interest margin and non-performing assets, or NPAs. This is in sharp contrast to the positive picture that the bank had presented a year ago, even after making up for shortfalls in provisioning that the bank's chairman, Pratip Chaudhuri, had inherited. The fall in net profit can be partly explained by the sharp 40 per cent rise in provisioning that SBI has gone in for; but that creates the need to explain the fall in its asset quality, as depicted by the year-to-year changes in NPAs. Current asset quality is disturbing - the net NPA ratio for 2012-13 has crossed the two per cent mark for the first time in eight years. The ratio had improved through the 2000s. Sadly, the hopes raised for a secular improvement in SBI's performance when Mr Chaudhuri took over in 2011 have been belied. When he retires later this year, he will be leaving behind a less profitable operation. The saving grace will be that some small degree of health will have been restored to its balance sheet, through better provisioning for not just NPAs but also pensions.
As befits a bank of SBI's size - indeed, national character - the best explanation for SBI's numbers can be found if it is seen as being no different from public sector banks as a whole, whose performance has diverged sharply from that of the new private sector banks. The latter seem to be unaffected by the current economic downturn. If SBI has fallen behind its earlier benchmarks, the slide of Punjab National Bank, the second-largest public sector bank, has been much more remarkable. From a stellar net NPA level of 0.17 per cent in 2008-09, then better even than that of private sector leader HDFC Bank, it has fallen to 2.35 per cent. The loan books of public sector banks are suffering from a governance deficit as much as anything else. Indeed, public sector banks have been magnificently generous - they have been lenient to almost all borrowers, whether small, medium or large, and particularly those who have strong political connections. In contrast, they reserve the most unfair treatment for themselves. Farmers' defaults are a product of both political pressures and new methods of cultivation; defaulting large borrowers are often the beneficiaries of crony capitalism.
If Finance Minister P Chidambaram wants public sector banks to help him balance his books by paying good dividends, then some cultural changes will be needed. These banks have to be professionally run by competent managers. The latter have to get the staff to be more disciplined and productive - which should not be difficult, since UPA-II does not have to depend on the Left for its survival. Once independent and effective managers have been chosen, they must be given operational independence and should not be made subservient to dictates from the finance ministry. SBI's stuttering results should be a wake-up call for the government.