PSBs performed creditably all through in respect of all parameters set for them. But in the early Nineties the truth emerged that PSBs were suffering from acute capital inadequacy and many of them were depicting negative profitability. This is because the paramters set for their functioning were deficient and they did not project the paramount need for these corporate goals. Incorrect goal perception and identification led them to wrong destination. What are the omissions that led to this debacle, that emerge suddenly, when all the while the Institutions were claiming to be performing well in respect of deposit mobilisation and asset accretion and other areas of development? This is discussed already in greater depth and detail in the web-pages Performance Assessment of Banks - Part: 1 and continued in the succeeding two pages linked therewith(parts 2 & 3).
Prior to the Nineties PSBs were functioning under the overall control and direction of the Finance Ministry. The MOF appointed all whole-time and part-time directors of these banks. Along with RBI it decided/directed all aspects of the working of the banks. Banks were not free to price their products in competition with each other. They cannot freely cater their products to any segment of their choice. They cannot park their funds in the best interest as they considered. In other words rate of interest, credit policy and investment policy were all directed. It was thus a directed banking and the role of the Bank management was "executory" and not in real sense management of the Banking Institution.
This phenomenon was aptly brought out in an earlier article as under:
Since the 70s the SCBs of India functioned totally as captive capsule units cut off from international banking and unable to participate in the structural transformations, the sweeping changes, and the new type of lending products emerging in the global banking Institutions. Our banks are over-staffed. The personnel lack training and knowledge resources required to compete with international players. The prevalence of corruption in public services of which PSBs are an integral part and the chaotic conditions in parts of the Indian Industry have resulted in the accumulation of non-productive assets in an unprecedented level. The future of Indian Banking is dependent on the success of its efforts as to how it shakes off these accumulated past legacies and carried forward ailments and how it regenerates itself to avail the new vistas of opportunities to be able to turn Indian Banking to International Standards." [Source: From the title page of the project - "Indian Banking Today & Tomorrow"]
As major policy decisions were taken externally by the Finance Ministry/RBI, the Board of Directors, were reduced to a status of insignificance. Though Directors were to be appointed based on their possession of specialised knowledge in Banking and related discipline, the environment of receiving decisions from a political background as distinguished from a professional outfit, prevented the best talents coming to occupy the position as Directors of PSBs and taking part an active role in the deliberations of the Boards of these Banks. Consequently the Directors were not assuming a role of real superintendence over the affairs of the Banks and correcting their path whenever they moved off-course.
"Audit and Inspections" remained as functions under the control of the executive officers. In fact it is the performance of these officers which needed to be audited. Such a subservient audit can never be independent or true and able to help to correct serious deviations in policies and decisions at the higher levels.
The quantum of credit extended by the public sector banks increased by about 160 times in the three decades after nationalisation (from around 3000 crores in 1970 to 475113 Crores on 31.03.2000). The Banks were not developed in terms of skills and expertise to regulate such stupendous growth in the volume and manage the diverse risks that emerged in the process.
The need for organising an effective mechanism to gather and disseminate credit information amongst the commercial banks was never felt or implemented. The archaic laws of secrecy of customers-information that was binding Bankers in India, disabled banks to publish names of defaulters for common knowledge of the other Banks in the system. Unscrupulous borrowers could easily indulge in availing credit from multiple institutions, or switching to other Institutions after defaulting the earlier ones, and still the affected banks were wholesomely remained unaware of these facts
While quantum of banks credit was expanding by leaps and bounds, problems surfacing in recovery management were never tackled. Effective recovery of defaulters and overdue borrowers is "hampered on account of a sizeable overhang component arising from infirmities in the existing process of debt recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of court decrees". The issue recovery of overdue credit is closely related to the state of legal framework. The legal framework sets standards of behaviour for market participants, details about rights and responsibilities of transacting parties, assures that completed transactions are legally binding and provides regulators with the backing to enforce standards and ensure compliance and adherence to law. But in India Legal remedies were beset with too many formalities and too very time-consuming. Laws favoured the delaying tactics of willful defaulters and the Banks were helpless. This in turn encouraged more and more willful defaulters in the segment of big corporate borrowers availing credit over Rs.5 Crores. In fact it is estimated that 40% of NPA heap is covered by this single segment (estimated at around Rs.30000 Crores)
Effective Corporate management functioning presupposes three successive layers of control and authority. The CEO and other executives in the first layer are accountable to the Board (which is in the second layer) and the Board in turn to the shareholders (the final layer). In respect of PSBs the boards were ineffective and the only/main shareholder was the Government of India. Government has multiple roles and concerns, and the instinct to act as a watchful shareholder and increase the shareholder's value of these corporate bodies (banks & Financial Institutions) was never felt/experienced by the Government. It is thus an instance of shareholder apathy.
Credit management also implies an ethical responsibility on the part of the Lenders to the borrowers to secure their genuine and bonafide interests. Lenders are thus liable to the borrowers to practice clear and transparent policies, to extend need-based finance, to convey timely sanction, and further to effect in-time disbursements. Recovery should be based on pragmatically calculated anticipated cash flows of the borrower concern, while recovery of installments of Term Loans should be exclusively out of profits and surplus generated and not through recourse to the corpus of working capital of the borrowing concerns. When the Bank ignores its responsibility and obligations as a lender to the borrowers and indulges in acts disregarding such principles it results indirectly later to recoil on the Bank itself, as the borrower-concern is adversely affected on account of bank's, one-sided actions. This eventually leads to the failure of the project financed leaving idle assets. Here emerges a sun-set industry for the country and NPA for the Bank.
Functional inefficiency was also caused due to over-staffing, manual-processing of over-expanded operations and failure to computerise Banks in India, when elsewhere throughout the world the system was to switch over to computerisation of operations.
