Why state-run Punjab National Bank, the big bad boy among Indian lenders, needs better parenting

The Punjab National Bank (PNB) never fails to be in the news, and for all the wrong reasons. Nothing could have better described the pitiable state of affairs within India's second-largest government-owned bank than the panic-gripped faces of its top management at a press conference not so long ago to announce how one Nirav Modi and his uncle Mehul Choksi allegedly defrauded the lender for a good six years via fake letters of undertakings (LoUs).

Ever since, there has been no respite for the bank, making it the big ‘bad boy’ in Indian and foreign press.

Representational image. Reuters.

Even as PNB battles to wriggle out of the Modi-Choksi mes, the latest shocker has come from its Jan-March results.

The bank reported a quarterly loss of Rs 13,417 crore in Q4, its biggest ever loss in any quarter, bogged down by high provisions on bad loans and the losses gifted by the uncle-nephew duo.

But it’s not just that number. None of the key economic parameters of the bank are in good shape, or in other words, are in dangerous shape.

The lender's gross non-performing assets (GNPAs) are now at 18.38 percent, still the seventh highest among all state-run banks. In other words, Rs 18 out of every Rs 100 that the bank has lent has turned sour. There are at least 18 banks with their GNPAs above 10 percent of their loans. This figure was close to 12.53 percent a year-ago.

Worse, its capital adequacy ratio (CAR) as per Basel III standards is just 9.2 percent, a tad above the mandatory nine percent. Any further capital erosion, will see the bank fall below the minimum, which can take the game to an altogether different level. Panic buttons will be pressed and the PNB epidemic can cast a big shadow on the entire system if the deterioration continues.

But, one must also look at the PNB business beyond Modi-Choksi to understand its business trajectory and what it means for shareholders. The bank's loan book has begun shrinking since the previous quarter—from Rs 4.52 lakh crore in Q3 FY18 to Rs 4.33 lakh crore in Q4. Overall, provisions skyrocketed to Rs 20,353 crore from Rs 5,754 crore in the year-ago quarter. Operating expenditure ballooned nine times to Rs 5,072 crore from Rs 555 crore in the year-ago period. Other income (typically fee-based) almost halved to Rs 1,561 crore from Rs 3,103 crore in the corresponding period of the previous year.

Ever since the Modi-Choksi bomb went off, the PNB share-price has fallen 53 percent and was last trading at Rs 75.35 apiece (and market cap is down by Rs 18,000 crore) but the benchmark BSE Sensex has gained 3.1 percent during the period.

The PNB management's move to disclose the fraud was no heroic act. It was an admission that stemmed from a realisation that the wrongdoings couldn’t have been kept under wraps beyond a point.

The government has, so far, acted against former PNB MD Usha Ananthasubramanian and two other officials, for failure to implement an RBI circular. But Usha was at the helm between 2015 and 2017 while the fraud play began in 2011 as admitted by the bank management themselves.

Furthermore, what about all the other biggies in the bank since 2011? Also, there were many other banks who may not have linked their core-banking software plaform (CBS) to the SWIFT software -- a central character in the Nirav Modi drama.

The government, the Reserve Bank of India (RBI) and various managements have, from time to time, failed miserably to guide the bank within the right risk-management framework. A higher NPA reporting can be attributed to the RBI’s banking system clean-up plan, but that’s no excuse for the mess built up over a period of time, leading to serious flaws in risk management, compliance and operational inefficiency.

If PNB is a bad boy in the banking sector, a big reason for that is bad parenting.

(Data from Kishor Kadam)