Uco The Danger Bank

The government should stead fastly desist from putting in any capital into UCO, says S S Tarapore

The United Commercial (UCO) Bank is one of the three identified weak banks. If one were to, prima facie, accept the financial indicators put out by the bank it would appear to have the least problems among the three weak banks. The bank has operating profits in each of the past three years and its net losses in 1998-99 were only Rs 68 crore. The gross NPAs in 1998-99 were 23 per cent while net NPAs were 11 per cent. By all indications 1999-2000 would show a vastly improved performance.

 

Of the three weak banks the UCO has the largest number of employees (32,086 in March 1999) the business per employee in 1997-98 was the lowest (Rs 48 lakh as against an average of Rs 76 lakh for public sector banks), the ratio of staff costs to total income in 1998-99 was the highest at 25.74 per cent as against the public sector banks average of 19.14 per cent. These negative features by themselves would not be a cause for any alarm.

What is most worrisome, is the unreliability of the basic data of the UCO. While the overall banking system does have some data infirmities, the integrity of the data system of the UCO is suspect. It needs to be clarified that what is under question is not the integrity of personnel but the inherent weakness in the data reporting, processing and collation system.

Once it is accepted that there are fundamental flaws in the system, any policy decisions based on these data can be hazardous. Thus, a census data audit is necessary to ensure against infirmities in the basic parameters of the bank. It is conceivable that the census audit may not reveal very large deviations but once a system has been contaminated, it is difficult to assume that the contamination has been excoriated from the system.

This is a failure of an information system almost 20 years ago. We should remember Oskar Morgenstein's caution that even in the US certain important decisions are taken on the basis of small variations in data series which themselves have inaccuracies of +/- 30 per cent. Thus, data credibility of the UCO is a basic prerequisite for considering any restructuring programme.

The results for 1999-2000 no doubt show a vast improvement by UCO with operating profits of Rs 170 crore. It would also show a significant reduction in the proportion of NPAs. It is well known that the UCO had a dare-devil strategy of rapidly increasing credit in 1999-2000.

The figures when released to the public would indicate that in 1999-2000 credit expansion of the UCO raced well ahead of the system and the recipe seems to be to grow out of the problem by a rapid credit expansion. The success of UCO is meant to be the great hope to put the final nail in the the coffin of narrow banking!

This should give momentary glory to the opponents of narrow banking. How naive can we be? The UCO has set out a medium term strategy of an annual growth of 22 per cent in credit and 14 per cent increase in deposits, which is a sure way of embarking on a disaster path. Which sane corporate of standing would move its account from a strong bank to UCO? The only ones who would woe UCO are corporates whose credit applications have been rejected by strong banks.

Thirty years of public sector banking should juggle the visceral memories of the authorities that rapid credit expansion is a sure way of ensuring a quantum leap in NPAs. The authorities have been warned sufficiently in advance. By March 2003 UCO will show the results of the present policy of rapid credit expansion, a corollary of which is a rapid escalation of NPAs.

The authorities are at the crossroads and have to act here and now. They must either publicly endorse the strategy of rapid credit expansion or immediately ensure a cessation of the mad frenzy of credit expansion. The government should steadfastly desist from putting in any capital into UCO. If we are to believe the numbers, the bank had a capital adequacy ratio of 9.63 per cent in March 1999. Why then does the bank need further recapitalisation?

It is here that the truth comes out. The pleas for recapitalisation are to enable the bank to zoom the incremental credit deposit ratio. It would appear that RBI has forgotten to monitor this ratio. It is incumbent on the government to immediately appoint a Chairman for UCO and to give a broad mandate whether he is to be cautious or to continue the recent policy of rapid credit expansion. Whoever be the next Chairman will need the full support of the authorities and the choicest blessings of God.

The age profile of the staff is reported to be adverse with 11 per cent of the staff above 55 years and 50 per cent of the officers above 50 years. But this adverse feature could also be an advantage. Thus, with a total staff strength of nearly 33,000 it should be possible to reduce the staff strength by say 30 per cent over a five year period with a blend of normal attrition through retirement and inducement through a VRS. Any governmental support should be on a post facto basis but only for a reduction in the staff strength above the normal attrition rate of 3 per cent per annum. Moreover such support should be provided with an appropriate lag to ensure performance.

It would be a serious error of judgement to allow the bank to continue to hold on to its foreign branches. If these branches are profitable they should be sold to other public sector banks. In the absence of such a decision there would be a gun at the head of the government which would be forced to provide for recapitalisation as the host countries would not show forbearance. The decision to let weak banks to hold on to their foreign branches is, to say the least, a reckless decision.

A major strength of UCO is the strategic locations it holds through the length and breath of the country. The bank should consider a systematic sale of its properties and move over to operating out of rental premises. Furthermore, it could, in the urban and metropolitan areas, shift the location of its back offices which are presently at high real estate value sites. There is no great shame in undertaking such rearguard action and the best of international banks have used this procedure to fight out of a hole.

In fairness to UCO its management has been trying all sorts of rationalisation of its organisational structure but much of the management efforts have come to nought because of the power of the unions. The government should not, in this situation, fall in the trap of providing money for recapitalisation.

To sum up infirmities in the information system in the bank, the recently acquired ardour of the bank to expand credit and the bank being left headless render to UCO the dubious distinction of being the most dangerous bank in the Indian banking system. Depositors beware.