'Changes in banking norms a must'

Reserve Bank of India Deputy Governor K C Chakrabarty has called for changes in the rating and reporting standards of banks, saying a bank should not be rated just on the basis of its net interest margin and net profit, but from a non-financial angle too.

"A rating agency should not rate a bank only on the basis of its profit or net interest margin).

"A bank must be rated from its social sector initiatives as well," the senior-most deputy governor of the central bank told PTI in an exclusive interview in Mumbai.

Asked whether he is hinting at changes in the way how banks should be treated by the markets and market-related entities, he answered in the affirmative, saying, "Yes, the entire marketed related-systems and the methods governing them should change.

"When you analyse and appreciate the performance of a bank, you cannot simply look at the NIM and profit alone, instead you must also look at the purpose of a bank -- intermediation at the lowest cost -- and also the social sector initiatives a bank does, such as how many no-frills accounts have been opened, how many poor people have been funded, how many rural branches have been opened, etc," Chakrabarty said.

Chakrabarty was responding to query on why he is so cut up with the poor numbers of some of the leading state-run lenders, which reported a massive drop in their last quarter profit.

Without naming any particular bank, Chakrabarty, who oversees banking supervision, rural credit and customer service, said, "If a bank gets a new chairman and then its financial numbers undergo great volatility, there is a problem.

"We must ensure that it does not happen time and again, because at the end of the day, it is very important to maintain the quality of our banks."

When pointed out that most of the nearly Rs 9,000 crore (Rs 90 billion) provisioning that the nation's largest lender State Bank of India had made in Q4 last fiscal could have been staggered, he quipped, "I am not saying the accounts are wrong or for that the book has been cooked.

"But if everything is alright, why the numbers are so varying?

"My point is that such variations create doubts in the minds of the people. We must bring in consistency, we must bring in unbiased financial reporting. I am only expressing the concern, as the regulator."

It can be noted that SBI reported a massive 99 per cent plunge in Q4 numbers to a poor Rs 21 crore (Rs 210 million) on the back of massive Rs 9,000 crore (Rs 90 billion) provisioning, thanks to a mountain of bad loans and a legion of retirees.

Ironically, SBI had a record of reporting low numbers when it gets a new chairman. When both Janki Ballabh and Omprakash Bhatt became chairmen, the bank suffered huge losses.

Ballabh, who succeeded G G Vaidya in November, 2000, saw profit decline 45 per cent in the very next quarter, but only to show vastly improved numbers in the very subsequent quarter.

Bhatt, who was at the helm for five years until this March, also followed the same script. His first quarter numbers, after he took charge in 2006, saw a 35 per cent dip in profit, but only to see a 45 per cent growth in the bottomline.

Chakrabarty's views are, however, in polar contradiction to his colleague Shyamala Gopinath, who retired on June 20 as the deputy governor, who in her exit interview to PTI had defended the large provisioning that SBI had made, saying there is nothing wrong in SBI choosing to make complete provisions.

"The accounting or reporting

standards of banks cannot change. If at all there is an issue, it is about the rise in non-performing assets and not in other provisions, which SBI made. "RBI can only ensure that a bank makes all the mandated provisions for all the heads we ask for," Gopinath, who was the RBI nominee director on the SBI board, had said.

"If a bank chooses to make a one-time provision, it is their choice and there's nothing wrong with it.

"The provisions toward gratuity, pensions and other annuities that SBI made in Q4 could have been staggered," Gopinath had said and pointed out that the directors have no way to know the individual slippages.

"Only the top bank management and its auditors would know the specifics of fresh slippages. The directors, including those from RBI, have no means to know them," she said.

"Irrespective of the fact who is the chairman, those provisions are to be made in one quarter or other. So it is not about typically flouting norms, but about timing the provisioning.

"If at all previous chairman OP Bhatt had remained in office, he too would have made these provisions," she added.

Gopinath, however, admitted 'if a bank is hiding its NPAs, then it is something that the auditors and the regulators have to look into.'

On ratings agencies, Chakrabarty said a rating agency must also appreciate the value banks create by taking risks when they fund social sector initiative like funding green projects or gobar gas projects, etc.

"What I am saying is that the society has to change its outlook toward banks. If a bank says it is happy with lower profits and is ready to offer its services at the lowest intermediation cost by bringing down the operational cost, you must appreciate that.

"We cannot just say there should be better green laws and low emissions but just not appreciate those companies which help attain these social objectives and then take a hit on their profits," Chakrabarty said.

Calling for popularising non-financial reporting, he said it is time the markets and rating agencies appreciated the risks and losses that a bank takes while funding social sector projects.

"But so long as those who award banks for their higher profits and high NIMs don't appreciate these activities, non-financial reporting will only remain on paper and will never stabilise," he rued.

In this regard he also took a dig at the organisations that award banks for their higher NIMs and profits and ignore their social initiatives.

Stating that non-financial reporting is sustainability reporting, he said such reporting should talk about what a company does other than its core business, in adding value to the society.

"Unless you appreciate this aspect of a company's business, non-financial reporting will not stabilise.

"A bank has to be appreciated for adding value to the society by financing the poor, or by financing the socially or environmentally relevant projects," he said.

Ultimately, the deputy governor said, banks are in the intermediation business.

"For the good of the economy, intermediation has to be efficient, which means operating at lower margins or doing service at a lower cost. And who does the most efficient job?

"One who does its job with the least margins. But a bank that is doing inefficient intermediation, though may be making profits, gets all the appreciation because it reports higher NIM and profits.

"So, we must change our outlook to judge the performance of a bank or a company that creates social values and thus non-financial reporting," Chakrabarty concluded.