Professor Vaidyanathan has been on the IIM-B faculty for 34 years teaching corporate finance, invest- ments, risk management, insurance, pensions and financial markets.
He has also been a consultant to
Hindustan Unilever, Life Insurance
Corporation, ITC, BPL, the World Bank,
Goldman Sachs, the Shriram Group, the
Dalmia Group, the Indian finance ministry,
IDBI among others.
Indian public sector banks that were mak-
ing profits till the last quarter are suddenly in
the red. What is the reason behind this?
We have seen situations far worse than
this, in the late eighties and the early
nineties. During this period, banks were in
an expansion mode with one branch opening almost every day with plenty of fanfare.
Banks had difficulty in funding and the
nature of lending was also different in those
days. For example, for every Rs 100 ($1.5),
roughly Rs 40 ($.60) would go to government security and 40 percent of the remaining Rs 60 or $.90 (which is Rs 24 or $.30)
had to be lent only to the priority sector consisting agriculture, small industries and
In the case of agriculture also, 50 percent
had to go to the small farmers and banks
could charge only 6.5 percent interest. To
small industries also, banks were supposed
to lend only at 8.5 to 10 percent interest.
When it came to lending to exporters,
banks could, however, charge the normal
rate of of 11 to 12 percent interest.
A hierarchy was followed while lending the
remaining Rs 36 $.50), which went to sectors like steel, atomic energy, coal, infrastructure, etc. Only in the end, they could
lend to (Indian multinationals) Hindustan
Lever or Britannia!
The gap between the two — weighted average lending and weighted average borrowing — is the margin for the banks. At
one point of time in the 1990s, it came up
to one percent for most of the banks.
Many committees were formed to look
into the issue and the percentage came
down from 40 percent to 24 to 25 percent. Branch expansions also slowed
In 2002, huge amount of VRS (
voluntary retirement scheme) was given to
bank employees and nearly 150,000 bank
Today, the problem is banks do not have
significant amount for fund rotation.
Has the 2008 economic crisis and the
subsequent slowdown in the economy
resulted in this situation?
2008 was more of a global crisis. Today,
there are three areas that give banks a big
headache — steel, power and infrastructure. The steel sector is more or less in a
better position today, with the government imposing import duty etc —
domestic steel is picking up.
In the case of energy, gas prices have significantly fallen and the energy sector is also
We know that a large number of projects
were stuck in infrastructure for various reasons. Now, many infrastructure projects like
roads, ports, etc are getting released because
of the faster decision-making process. This
can be helpful to the banks.
Will this result in the entry of global players
in the banking sector?
That is what I want to stress: The crisis
should not be overblown to create a situation
for people clamoring for global players to
enter India. This is very important. Many of
the global banks are also in crisis and they
are very eager to get a foothold in the Indian
Because of the size of the market?
Because of the size of the market and also,
they would not like to start from scratch.
They would like to swallow some big banks
here, which I think we should not encourage. In the process of making a hue and cry
about non-performing assets and bad loans,
we are making it look as if our banks are not
capable enough to run.
You should remember that most of the
independent directors of these banks are
political appointees like retired MPs, MLAs
and sidekicks of political parties. This
reduces the professional capability of banks.
They influence providing credit to parties
who should not be provided any such fund.
They also influence writing off loans which
should not be written off.
What banks need now are professionals to
Will it be possible? With the kind of nexus
that exists between capitalists and politi-
cians, is it not a big decision for any Indian
government to take?
I agree with you. But from whatever signal
I get, it appears this government (Narendra
Modi) is appointing more professionals like
chartered accountants, lawyers, company
Do you consider the current situation of
the public sector banks worrying?
I would not say that. It is not beyond
redemption. We can easily rectify these
Some people say privatization is the
answer, some say downsizing. Some want
merger. What is the solution?
Privatization, definitely, is not the answer.
Our PSBs (public sector banks) are much
better than the private banks. If you look at
the data, you will see that private sector
banks have also suffered a lot in NPA (
non-performing assets), in fact more than the
public sector banks.
But lending has increased significantly for
them, by 20 percent, while lending has come
down in PSBs. The status of private sector
banks like ICICI Bank and HDFC Bank are
unknown to the ministry also.
Some time back, they opened so many pri-
vate sector banks with so much fanfare.
Where are they? So many of them got
merged with PSBs eventually. It is not that
all private sector banks have done great.
No, they should not use this as an excuse to
privatize them (banks). Downsizing mainly
means reducing the number of employees,
which they did through VRS. Now there is
no massive recruitment also.
There is a talk about merging 27 PSBs to
make them six. Is this a right move?
Not at all. Different banks have different
strengths and it is not an easy task.
Do you feel the RBI’s asset quality review,
asking public sector undertaking banks to
clean balance sheets and declare all non-performing assets, led to them coming into the
red? At that time, the All India Bank Officers
Confederation had said such a decision
would put all PSU banks in the red.
You are correct. The RBI should act with
sobriety. The RBI’s decision to suddenly
pounce on them is not right. Every bank
board has a representative from the RBI and
the finance ministry. What were they doing
till now? How can they wake up one day and
come up with such a decision?
There is no sarvaroga nivarini (cure all)
for banks. Each bank has to be tackled differently. You have to be cautious in adopting
some of the Western standards blindly like
the Basel norms, which is more applicable to
European banks than here.
In India, it is both rule based and relationship based. Here, we have the smallest
farmer to the richest industrialist as bank
customers. Three Cs are very critical in lending — character, capacity and collateral of
the borrower. Everybody is not a willful
defaulter and there are honest business people too. Those who are in exports or infrastructure are finding it difficult to pay back
the loans. Even the IT companies are in the
doldrums compared to what they were five
years ago because the global economy has
not picked up.
Ideally, the government should look at the
other problems the PSBs face now. Now they
have mostly people in the 55 plus age group
in top positions who are going to retire in the
next five to six years. And there are not
enough people in the 35 to 50 age group
while they have many in their 20s. This is
going to be a huge challenge for the banks.
After most of the PSBs declared their
results, many started ringing alarm bells...
I don’t think there is any need to ring
alarm bells. The situation was worse in the
late 80s and early 90s and we overcame that.
It is not as alarming as it is made out to be!
We are not a banana republic and we have
excellent people working in the banking
industry. We Indians have this habit to
whip ourselves and we derive pleasure in
There is no need to push the panic button. The government should strengthen
the coordination mechanism between the
Enforcement Directorate, income tax
department, CBI (Central Bureau of
Investigation, SEBI (Securities and
Exchange Board of India and RBI.
There should be swift and severe punishment for defaulters — we should put
them in jail for 50, 60 years. Even the
cases of 1990 are still pending. If you
punish a few, things will fall in place.
We don’t need any new law for all this.
Like how the election process in India
changed with the arrival of one T N
Seshan (a former election commissioner).
He didn’t create any new law, used the old
ones to instill fear in the minds of politicians. And how things changed in India!
So you feel another T N Seshan is need-
ed to set right the banking sector?
‘We are not a banana republic’
‘… we have excellent people
working in the banking industry.’
R Vaidyanathan, professor of
finance and control at the
Indian Institute of Management-
Bangalore tells Shobha Warrier