Soon after he took over as the SBI chairman in April last, Chaudhuri, an SBI veteran himself knew that all is not well with the banking behemoth. He decided to revisit the bank’s books of accounts for the final quarter of 2010-11 that led to discovery and subsequent declaration of huge ‘bad’ assets and resultant bottom-line crash. The re-audit exposed SBI’s gross non-performing assets (GNPAs) at the end of 2010-11 at Rs. 25,326 crore or 3.28 per cent of its advances on 2010-11. In banking parlance, GNPA means assets which do not currently earn any return. GNPA also suggests potential losses leading to write-offs by providing from profits. SBI’s net profit plunged 99 per cent to only Rs. 20.88 crore during January-March, 2011, compared to Rs. 1,867 crore in the corresponding period a year ago.

What followed soon after the announcement of SBI’s 2010-11 results, its stocks prices plunged by eight per cent. As it was the market had been quite bearish since June. The bank’s proposed rights issue of Rs. 23,000 crore became highly uncertain. On top of it Moody’s downgraded SBI, earlier this month, by a notch – from ‘C-‘ to ‘D+’ — with a warning that the bank’s NPA is likely to increase further in future. The bank’s capital adequacy ratio (CAR) for ‘Tier I’ capital dropped to 7.60 per cent as against the recommended benchmark level of eight per cent. Again, in banking parlance, ‘Tier I’ capital – the core measure of a bank’s financial strength – consists of paid-up equity plus cash reserves. Moody’s has estimated the requirement of an additional cash infusion of $ 8 billion to maintain a healthy CAR. The government seems to be prepared to infuse up to only $1.6 billion in SBI by the end of this financial year.

While Chaudhuri deserves full support and praise from the government for raising an early alarm by providing a somewhat true picture of SBI’s financial health which could be a matter of future concern, senior bureaucrats in the union finance ministry are blaming the bank’s apex management comprising him and three other managing directors for the ‘policy change’ particularly on ‘provisioning’ that took the hit on the banks net asset and net return and led to Moody’s downgrade. The latter will make SBI’s bid to raise loans in the overseas market costlier. Although the union finance minister, Pranab Mukherjee, and the Reserve Bank governor, D. Subbarao, rightly chose not to make comment on the issue, the response from some of the top finance ministry officials on the act of the SBI management shows, if anything, their lack of respect for financial prudence and good accounting standards expounded by the new SBI management in the long term interest of not only this giant bank but, with it, the national economy itself.

The official level reaction to the SBI decision gives an impression that our bureaucracy refuses to learn any lesson from the 2008 collapse of some of the top global banks, under which the global economy is still reeling. The rogue management of all those once-high-profile long-serving global banks did what the traditional short-sighted bankers would always do — overstate assets, under-report liabilities, cook up profits and manipulate stock prices to raise cheap capital when required. The high-risk accounting malpractice may go undetected until ‘bad assets’ balloon beyond recovery and bust the system. Like their predecessors, Chaudhuri & company in SBI could have easily understated the GNPA and manipulated the bank’s net NPA to show higher profits for the comfort of those government bureaucrats at a possible future cost to the national economy and the country’s global image. The net NPA of a bank is the number after deducting balance in interest suspense account, claims received pending adjustments and total provisions from the GNPA number.

It is possible that a section in the government is unhappy about the timing of the SBI management action. The unhappy combination of the on-going economic downturn, continuing high inflation, the impact of growing corruption scandals on economy and business morale, bearish stock market, regional agitations, nationwide power shortage, Rupee’s slide in the forex market, the falling feel-good index, the Congress party’s latest by-polls debacle, in-fight in the UPA, etc. has put the entire government machinery on the defensive and projected the government in a negative light. The SBI management action, which according to some senior bureaucrats and economists in the planning commission, finance ministry and the prime minister’s office was taken in haste, has made the matter worse. They argue that SBI’s asset woes could have been brought to light after a year or two without any possible adverse impact on the bank’s finances.

However, Chaudhuri and his colleagues in the apex executive management certainly disagreed. Obviously, they were more concerned about the immediate financial health of the bank than managing the image of the government, which is the function of the bureaucracy and political masters. Hence, the latest spat between the SBI management and a section of over-jealous bureaucracy, which may, unfortunately, harm both the controversy-ridden current government and the bank.

SBI is not just a bank. It is the mother of all banks. Together with the nationalised banks, it controls over 70 per cent of the country’s banking assets. It is a ‘Fortune 100’ global bank. Globally, SBI ranks second in terms of branches and employment. SBI has 21 subsidiaries, some 11,000 branches and 2,00,000 employees. The Punjab National Bank, the second largest public sector bank, has 56,000 employees. It is unlikely that the bank’s poor asset quality was an overnight creation. The bank’s previous management, under O P Bhatt, might have either ignored it or deliberately kept the matter under the carpet on unofficial instructions from certain ‘high-ups’ in the government. Considering the fact that the banking sector has earned the notoriety as the country’s fourth most corrupt industry, it may be worth an investigation into those behind SBI’s huge bad assets.

The good news is: the SBI management’s cautious approach towards managing assets has already yielded positive results. During the first quarter (April-June) of the fiscal 2011, SBI reported a 67 per cent (y-o-y) increase in the operating profit. The bank’s first quarter net profit rose to Rs. 2914.20 crore from Rs. 2330.37 crores in the same period, last year, showing a growth of 25 per cent. Most significantly, the net interest income went up by 45.35 per cent. Interest expenses have come down despite deposits increasing by 6.78 per cent during this period. The Bank’s interest income on advances during the first quarter had increased by 8.62 per cent. It was driven by 20.74 per cent growth in advances. The credit to this all-round improvement in the fund management by SBI must go to the new management, its early detection of understated NPAs and quick curative actions in all concerned areas. In fact, things could go much worse if Chaudhuri & Co did not act in time.

Most public sector banks, barring Canara Bank, Union Bank, Bank of Baroda, Allahabad Bank and PNB, are saddled with uncomfortable levels of GNPAs. It would be a good idea if the Reserve Bank of India (RBI) orders special audit into the asset quality of these under-performing banks and pull up their lethargic management in time to avoid any future financial crisis requiring massive fund infusion by the government at a short notice. (IPA Service)