Banks Badly Bruised By Bears

Banks Badly Bruised By Bears
                                                                                                          - S. N. Ghatia

12 02 2016

With the severe beating of PSB shares by the markets, there is a lot of hue and cry about the mismanagement and bad governance in the PSBs. All these allegations are judgemental and, therefore, over- exaggerated.

Of course, there have been mistakes and irregularities in lending decisions, even gross ones in certain cases. Let us not forget that the nature of banking (lending) business is such that errors of judgement cannot be ruled out. Similarly, looking to the public sector composition, irregularities of all sorts also do happen for a variety of well-known reasons in the working of PSBs. And, these aberrations are bound to happen in any decision-making area. Let us not forget that all the big banking names of 2008 fame like Lehman Bros, RBS, etc. were all private sector banks and considered to be too big to fail. There are rogues, scamsters and black sheep in every business. Even the private sector is not immune from judgemental errors, external pressures and scams. The only difference is that the decisions and working of private sector are not subject to public scrutiny and RTI.

Besides, every accountant knows it very well that Balance Sheets are engineered universally across all the businesses and countries, though at varying scales. Even if the business is robust, there is a tendency to add further flavour to it. If there is weakness in the business, obviously there is an anxiety to camouflage it in fine print or through creative accounting. 

Having acknowledged the presence of some undesirable traits and external factors in any business, let us examine the current scenario. And, you will observe that the real culprit is the slow down in economy caused by global factors. The economic slow down and global trends have triggered the selling by FIIs. We cannot ignore the fact that the Indian equity markets are up or down mostly by the FII activity who hold a sizeable chunk in the stocks of most-traded scrips.

The equity analysts in their frenzy conveniently overlook the fact that the profits of all the big industrial names have plummeted and their share price are at 52-week or even at multi-year lows. Banking industry is the mirror of a country's economic condition and, therefore, the balance sheets of banks reflect the state of economy they are in. It is a well known fact that the PSBs have huge exposure to manufacturing (metals, cement etc) and infrastructure sectors. If these sectors have suffered badly, the banks will also be equally bruised.

We also know it very well that the market analysts and media are always in search of one or the other scapegoat to blow up the issue repeatedly on the screens with sensational subtitles so as to attract attention (TPR). The Regulatory and Government Authorities also have their own priorities and organisational needs to point the finger at some one.

And, this time the scapegoat is the PSBs. Otherwise, there is nothing wrong with the Indian PSBs and they are as strong or weak as they were in 1991 or for that matter in 2008 or at any other point of time!