State Bank of India (SBI) has put in a poor performance in the first quarter of the current financial year, going by more than one parameter. Not only has its bottom line dropped by 13.6 per cent (year on year), its asset quality has also deteriorated - the gross non-performing asset (NPA) level has gone up by 57 basis points to reach 5.56 per cent. In the past, when provisioning was raised to take care of the rise in NPAs, it could be argued that the balance sheet was healthier than what the bottom line indicated. That cannot be said about the latest numbers. The provisioning cover has deteriorated by nearly four percentage points to 60.6 per cent. SBI's poor performance would not have raised serious concern if it had been out of line with that of other public sector banks. But many of them have underperformed in varying degrees, with their total NPAs going up by a significant 13.5 per cent in a single quarter, that is sequentially. The fact that the new private sector banks have become a category apart and manage to buck the overall economic downturn tells its own story. All this has again brought to the forefront the issue of whether public money is best used in remaining invested in public sector banks, particularly when the government will need to pump in an additional Rs 90,000 crore in the next five years to enable them to meet Basel III capital adequacy norms, while retaining its existing stake.
Two specific suggestions have been made in the last few days. One is by the financial services secretary that banks should push for a change in the management of borrowing firms that are wilful defaulters. He has topped this up with the observation that banks are sometimes too lenient in cases leading to non-performance and restructuring. While the former is unexceptionable, the latter is a well-known reality. But raising these points will not make a difference. It is well known that public sector banks mollycoddle business borrowers for a combination of reasons. But most important perhaps is that many borrowers are politically powerful enough to exert undue influence on the terms of their repayment, especially to public sector banks. A lot of corporate debt restructuring, which involves an element of write-off, can be traced to the clout of the borrower.
As for the regulator, the governor of the Reserve Bank of India has drawn attention to the unequal size of different public sector banks - with the second-biggest being one-third the size of the first - and suggested that there should be four or five banks of similar size to prevent a monopolistic situation. Right now there is no dearth of competition among public sector banks and this is unlikely to change if some of the larger banks merge with troubled smaller banks. Where all commercial banks fall down is in their inability to take financial inclusion further, thus leaving many poor people at the mercy of dubious deposit takers.
