It is now an accepted fact that Raghuram Rajan decided not to seek extension at the Reserve Bank of India (RBI) top job because he could not live up to the expectations of the government besides the differences on the way he conducted monetary policy. All holders of the key positions in the government are supposed to toe the government line without questioning.
Rajan clearly did not fit the bill.
An IIT, IIM and MIT alumnus, a former chief economist at the IMF and a professor at the prestigious Booth School in Chicago University, could not be expected to behave like Pahlaj Nihalanis or Gajendra Chauhans who have called themselves self-professed sycophants of the prime minister. Rajan’s persona, his international reputation and powerful articulation as a public intellectual only added to his halo and increasingly pit him at odds with the government. So Rajan had to go.
There is a lot of speculation now about who would be a pliant successor to Rajan. The government sources have revealed to the media some names – names of economists, bureaucrats and even some bankers as prospective Rajan successor.
Any of them could eventually make it; it would be, however, truly a sad day if someone who has messed around with thousands of crores of taxpayers’ money as a top banker and is now seeking to institutionalize the process by creating a ‘bad bank’ is rewarded with the job of the regulator of the banking industry.
Let us not mince words.
Just Ponder over the name of Arundhati Bhattacharya, the chairperson and managing director of the State Bank of India (SBI), India’s biggest public sector bank. It is true Bhattacharya made waves when she broke the glass ceiling of a male bastion and occupied the top job of this public sector behemoth.
But then look at the state of affairs at the State Bank of India which she has served for more than three decades in various managerial positions before ascending to the top job.
First, let us look at the non-performing assets (NPAs) – the current buzz of the banking sector. The SBI has written off Rs 41,640 crore in the last 10 years – public money virtually going down the drain, though the bank maintains the fig leaf that even as it is cleaning up its account books, it would continue its efforts to recover the money over the years.
It is left to one’s imagination as to what proportion of the lost money which stood as an eye sore in the account books for decades (but could not be salvaged) would be recovered when the bank has removed it from the account books to present a rosy picture about its profitability.
Bhattacharya has been hailed as a doer who turned around the fortunes of the SBI as its helms-woman – she made it to the Forbes’ coveted list of women leaders who have transformed the enterprises they led.
Let us take a look at the bad loan management during Bhattacharya’s tenure so far. In the last three years, she has been at the top job at the SBI, the write-offs at the bank have grown at a faster pace. In 2014-15, whereas 14 other public sector banks together wrote off Rs 8,883 crore of bad loan, the SBI alone cleaned up Rs 15,509 crore of public money from its accounts as lost. Mind you, in 2011-12, the SBI had written off just Rs 982 crore.
Clearly, Bhattacharya proved to be a past master in dressing up the bank account – to make it look honourable. Not surprising that she won plaudits when she declared that the bank’s profit had soared under her dynamic leadership. To be sure, SBI’s case should be seen in the context of RBI’s prodding to clean up bank balance sheets. Also, in relation to other larger PSB banks, SBI has done well in terms of absorbing bad loan shocks and maintaining profitability.
When information was sought under an RTI application as to who allowed such large-scale write-offs in 2014-15, the bank only responded that the discretionary power was vested in a committee but refused to divulge the names of the members of the committee.
Bhattacharya successfully maintained the impression of a hands-on top banker – but this impression was just a charade. It was stupefying how many academically trained economists endorsed this charade. Of course, some of her shenanigans were exposed when Raghuram Rajan asked the banks to make Asset Quality Review and make provisions for their distressed assets. All window-dressing fell apart – SBI’s profitability dipped significantly.
SBI’s portfolio quality in December 2015 had declined with gross NPA at 5.1 percent of gross advances as against 4.25 percent a year ago (in December 2014). In absolute terms, the gross NPA stood at about Rs 73,000 crore as against Rs 62,000 crore during the same period. However, in March 2016 quarter, gross NPA jumped to a whopping 6.5 percent of the gross advances. Again, this should be seen in the context of industry NPAs.
But, the big question to Bhattacharya is the logic of proposing the creation of a ‘bad bank’ or an entity where the bad loans of the bank will be hived off to. This was an idea that failed from the Day 1.
The idea of creating a bad bank was to make SBI free of its debt burden and it could concentrate on core banking services. It wants to house Rs 1.37 lakh crore of NPA or 9 per cent of total advances in the Bad Bank. As per the larger contours of this plan, as and when further loans go bad, that would be transferred to this Bad Bank so that bankers would continue to lend recklessly without any personal responsibility; and lakhs of crores of public money would continue to be siphoned off, without a finger raised at the lenders and receivers of the booty.
This was clearly a bad idea since PSBs lack the expertise to revive bad loan accounts especially in an economic downturn.
If Bhattacharya is catapulted to the position of the chief regulator, she would be in a position to transform the Bad Bank idea into a reality. Bankers and business class will, therefore, have reasons to applaud her elevation; and, of course, the taxpayer will continue to pick up the tab for this extended session of merry-making.
But, the bottomline is that this may not be a good news for the banking system in the long term. One could question Bhattacharya’s candidature for the RBI governor post for this single reason.
Updated Date: Jun 27, 2016 15:54 PM