Last week, Reserve Bank of India Deputy Governor K C Chakrabarty slammed public sector banks for the strange phenomenon of profits dipping when a new chairman takes over.Although the outspoken deputy governor did not name anybody, the hint was clear. It was the State Bank of India which Chakrabarty was referring to.
Last month, the country's largest bank had announced its financial performance for the first time under its new chairman Pratip Chaudhuri.
Its net profit for the quarter ended March 2011 was down 99 per cent from a year earlier, due to the higher provisions made to cover delinquencies in the loan book.
The fourth quarter of 2010-11 was the worst quarter of SBI in more than a decade.
The poor show made investors jittery and they dumped the stock, pulling it down by 7.7 per cent.
Though the most recent one, SBI was just one among many banks with such a chequered history.
Consider this. Five years ago, Prakash P Mallya took charge as chairman and managing director of Vijaya Bank in Bangalore.
In his first press conference, Mallya tried to explain why the bank incurred a net loss of Rs. 34.5 crore (Rs. 345 million) for the quarter ended March 2006 when it earned a net profit of Rs. 155.9 crore (Rs. 1.559 billion) in the corresponding period previous year.
Despite his best efforts, Vijaya Bank's share closed two per cent down that day.
"It was a difficult situation. There were so many accounts where provisions had to be made. I was left with no other option but to take a hit on my profits," Mallya, who retired from Vijaya Bank in 2008 and currently a board member of IFCI, recollects.
A similar story unfolded in Mumbai when Bank of India's chairman and managing director T S Narayanasami retired in May 2009.
In the very next quarter ending September 2009 the state-run lender's net profit halved to Rs. 323.34 crore (Rs. 3.233 billion), prompting brokerages to downgrade the bank's share.
Gross bad loan of the bank increased by Rs. 1,132 crore (Rs. 11.32 billion) sequentially to Rs. 3,919.7 crore (Rs. 39.197 billion) during the quarter. Bank of India's share shed 12 per cent after the financial results were announced.
"Auditors were taking up classification issue (treating loans as non-performing assets)
with Narayanasami. When Alok Misra became the chairman (in August, 2009) he made the norms more stringent. As a result, provisions and bad loans increased," a former Bank of India official who worked in accounting and finance department during Narayansami's tenure told Business Standard.
Similar instances of declining profitability post chairman's retirement were also witnessed in other public sector banks.
It happened when AC Mahajan took charge of Canara Bank in July 2008, Anil K Khandelwal became the chairman and managing director of Bank of Baroda in March 2005 and SK Goel retired as chief of UCO Bank in July 2010.
Most bankers remained tight-lipped on this issue and none of them were willing to speak on record.
"It is messy out there. The chairman has the final say on how accounts are prepared. A retiring chairman often leaves the task of cleaning the books for his successor as he wants to show higher profitability during his term.
"This makes the task of the new chairman difficult and erodes shareholders' confidence," an executive director of a Mumbai-based public sector bank said requesting anonymity.
Bankers, however, said the standard of reporting could only improve if the past chairmen are made accountable for financial performance of the bank during their tenure even after retirement.
"We have a situation, where if you are chairman, the moment you retire you are absolved of all responsibilities. In such an environment it is impossible to avoid issues like these," a former general manager of a state-run bank said.
According to the RBI norms, an asset becomes non-performing when it ceases to generate income for the bank.
Banks have to classify a loan as non-performing if interest payment remains due for more than 90 days.
There is a silver lining, however, which can do away with the under reporting syndrome. The finance ministry wants all public sector banks to shift to a system where all non-performing should be identified by using technology.
The move is aimed to reduce discretionary powers of the bank management. The deadline to adopt such mechanism is September 30.
Bankers said though the move will increase NPAs in the short term, but it is beneficial for the banking industry in the long run.
