NPAs of PSBs: Reforms are the need of the hour

The issue of non-performing assets (NPAs) or bad loans of banks, especially public sector banks (PSBs), has been hogging the headlines in the print and electronic media for a while now.

The layperson is flabbergasted by the immense magnitude of defaults and downright frauds committed by corporate honchos such as Vijay Mallya, Nirav Modi and MehulChoksi. The general perception about these frauds and defaults is that these could have happened only with the active connivance between the bank officials and promoters of businesses. This perception holds true in cases such as Nirav Modi’s, but the corruption of bank officials and dishonesty of the promoters are not the only reasons why such mega frauds and defaults happen.

The issue in the case of PSBs is fundamental and need to be addressed at multiple levels, starting with the top management. Many a time, the top management at PSBs are political appointees who thrive on political patronage rather than on professional competence. As a result, managements are obliged to take business decisions under political influences, interventions and pressures, rather than on commercial considerations. This is crony capitalism at its worst, because the politician-banker-businessman nexus loot the bank of the hard-earned money of the common people. In all this, corporate governance becomes the casualty, which ultimately leads to burgeoning levels of NPAs. The poor levels of corporate governance among PSBs

To cleanse the system of such quid pro quo politician-banker-businessman nexus, the government needs to appoint professional bankers on the boards and top management of PSBs and grant them complete autonomy to run the affairs of the PSBs on commercial considerations. This might entail complete privatisation of the PSBs or divestment of majority stake in the PSBs so that these the PSBs effectively become private banks. This, of course, is easier said than done, as it is a political decision that might stiff resistance from various stakeholders and would require the political will and determination of the government to push it through.

Apart from the political angle, the corruption aspect needs to be addressed. The low levels of compensation of the PSB management as compared to the private sector banks breeds corruption among the officials, who can be lured by borrowers with fraudulent intentions by offering lucrative kickbacks to do their bidding. The PNB official who issued illegal and indiscriminate LoUs to Nirav Modi is just a case in point.Apart from breeding corruption, the low levels of compensation packages cannot attract the competent banking professionals, due to which the PSBs have to make do with poor quality of management which may not understand the inherent risks associated with lending to companies from diverse sectors, industries and services. Therefore, besides corruption, professional incompetence may one of the major reasons for the huge NPA problem faced by PSBs. That apart, inefficient  monitoring of creditworthiness of the borrowers and ineffective recovery mechanisms post disbursal contributes majorly to the NPA mess of PSBs

The poor quality of internal and external auditing may be also one of the reasons that has led to the NPA problem. The auditors of PSBs may not be well-equipped to detect and flag potential frauds or defaults. Some of the PSBs may also not have the best IT systems and data analytics for effective implementation of the framework for giving out early warning signals and for monitoring red-flagged accounts.

Only the implementation of all these reform measures can save the PSBs’ ship from sinking in the ocean of NPAs.