Increasing attention, concerns expressed and debates in recent times on bank recapitalisation has drawn attention for a deeper inquiry. The brewing obfuscated issue surfaced with the fall of the stock market, particularly fall in prices of PSU bank stocks and the bank stock index. One can only speculate on the sequence of events that led to the current situation, in the absence of clear precedence relationships characteristic of our system overshadowed by cacophony, motivated media activism, obfuscation, selective disclosure and high decibel statements masking reality. Diversionary tactics, loosely drafted rules, systems and practices to serve the interests of the upper crest, influential and those wielding power, have evolved as distinctive trademarks of the PSU bank sector.
Rumours, sporadic shocks, exploitation by operators and insiders, orchestrated obfuscation, denial, silence, reassurance and blame game by the government / management / regulator combine leave the helpless stakeholders (shareholders / depositors / public) to speculate and in the lurch.
PSU bank financials are notorious for wild swings whenever there is a top man / woman change. The much awaited first annual reports after every change of the CEO is known to present and project depressing results, silently blaming the predecessor for past practices of provisioning, classification, recognition of losses, bad assets, write offs, accrued liabilities and so on. It is shocking to learn that our PSU bank performance reporting standards are no standards, with plenty of bushes to hide behind, but only a legitimate shield to take cover under. This is due to (a) the new CEO wanting to save his/her skin while in office during his/her tenure, laying the foundation for a low base (legitimate poor performance when he/she took over the reins from the predecessor) to overestimate and laying claims over own future improved performance (b) wanting to project a holier than thou image of efficiency, integrity and transparency to the government, investors, analysts and the media.
Why is it that the government shies away from acting upon these disclosures on the predecessor’s performance? Is it that legitimacy is built into the system for unbridled discretion in reporting to shareholders? Do PSU bank CEOs enjoy immunity from prosecution after their tenure?
This game survived for long in a business as usual scenario (public memory being short and using cacophony to cloud one’s clarity of issues), but the accumulated muck seems to have crossed all levels of sanity for any obfuscation. What were the regulators, oversight agencies and the government doing all this time, when this national crime was being enacted right under their nose? Can they plead ignorance or shirk responsibility for the state of affairs?
Such a crime is inconceivable without the active involvement or passive connivance of key official and unofficial actors in the game: bank managements, large borrowers who are the who is who in higher social, business and intellectual circles lending their face and voice to adore screens of prominent TV channels, and the silent influencers in the government / bureaucracy who are also the implicit beneficiaries (direct / indirect) of the loot. A loot; when the banks are bleeding, lenders and borrowers prosper: the proverbial industry is sick not the industrialist syndrome.
Commercial lending which PSU banks are supposed to be doing are expected to be based on prudential analysis of risk and economic value of the asset to the bank over its maturity. It appears PSU banks are inflicted by veiled targeted lending (informal directives by those at the helm of affairs – the politician / bureaucrat combine to favour interested business houses for lending and even in recovery actions on NPAs) than based on prudential analysis of risk and economic value by bank managements.
The argument that directed lending to social sectors is leading to NPAs doesn’t hold water from data. Interference by extra-legitimate forces in the professional functioning of PSU banks is a potent drug for adventurism and a convenient veil for diluted accountability, violation of prudential governance practices and adventurism. Government being the largest shareholder insulates the banks from shareholder activism to demand performance, as an interfering governmental system cannot demand accountability. Contrary to perception that bank managements detest interference, they in fact seem to silently devour it and use it as a shield for their own adventurism, and join the loot. The government obfuscates and discourages granular root cause analysis to block visibility into the real affairs to the public. It is a sophisticated orchestrated game of collectively looting the victim.
Recapilatisation is bringing in funds into the banking institution to make good the losses from Non- Performing Assets (NPAs), Strategic Debt Restructuring (SDRs) Initiatives to clean up the books - meaning, stretching the repayment period and terms in favour of the borrower, a sophisticated term legitimising the let go of the criminal (villain) with a wrap on the knuckle; conversion of debt to equity and so on. Recapitalisation is also an obligation to meet Basel norms on banking supervision.
These initiatives are generally the outcome of innocuous open threats for media consumption and closed backroom negotiations to strike the deal. Is this what is meant by Ease of doing business in India: allow the villains to loot and scoot at the expense of the common man, the victim, without any questions or holding the borrower accountable for compliance with contractual obligations? If so why would anyone toil to earn his/her livelihood and create wealth? The easiest method is to take loans from PSU banks and don’t honour commitments (repayment of principal and periodic interests) under the mask of adverse business environment, bad weather, poor demand pick up, aggressive competition from domestic and overseas, higher taxes, input problem and so on. Are we sowing the seed for macroeconomic disaster?
Where does the funds for recapitalisation come from, where does it go and what character it takes? Funds are needed to fill the void from write offs of dues (debt and interests), meet operational expenses and continue the business of borrowing and lending, in compliance with globally acceptable prudential banking norms. Funds come from the government budget (tax payers’ money), external borrowing (another liability for which a price is to be paid in return in some form or other such as conditionalities) that result in systemic legitimate erosion of value to shareholders - individual, institutional and the government representing the public.
Conditionalities are license to invisible but legitimate plunder over a long term with strategic intent. It amounts to loss of autonomy for managements and the government in decision making and other invisible costs. It amounts to a case of legitimately robbing Peter (the victim - citizens, tax payers, shareholders) to pay Paul (the villain - bank managements, policy makers / influencers by giving them a long rope to continue playing their game at someone’s cost) and rescue the Thomases (the defaulting borrowers).
If the funds come in the form of equity (held by the government, strategic investors or anyone), it results in dilution of value to existing shareholders without they even realising what is happening and having no say in the decision, as the majority voting rights lie with the government, being government promoted and owned. Does it not amount to the government cheating the minority shareholders? This equity coming from tax payers’ money is a clear case of imprudent investment by government (held in trust) in loss making businesses, only to pre-empt collapse of the system. This amounts to erosion of wealth for one section (victim) to protect and enrich another section of society, the bank managements and save other villains.
If funds come as debt from government, it is again an imprudent investment in an unviable project, as this loan (dole) is never going to be returned. Either way it is robbing one section to serve interests of another. Government generating funds to meet equity / debts financing by printing currency (devaluation) is also a sophisticated plunder of citizen’s purchasing power. Whichever way one looks at it, the only solution to right the wrong is stringent action on all members of the gang to recover what is rightfully due to the citizens of this country. Will our government rise up to the occasion to safeguard citizen interests as against that of vested interests?
I would be happy to be educated if there is a saner interpretation to the state of affairs