No let-up in year-end window dressing by banks

Banks distributed a third of their loans for the last fiscal in the second fortnight of March. While for the whole of 2014-15, banks gave out about ₹7.5 lakh crore as loans, they lent ₹2.6 lakh crore in just 14 days.

That is an alarming skew. For the last three years, banks disbursed roughly ₹6.5-7.5 lakh crore as loans annually. About 10 per cent of the amount was given in the last fortnight of every fiscal. This was probably to maintain the façade of growth, or to window-dress the balance sheet.

No one in the banking industry is surprised at this long-standing practice. A banker stifled a yawn when asked to comment on the issue, though the quantum of the increase did jolt him a bit. Another banker chuckled and said nothing could be done about it.

Why does it happen? Banks want to show that they have done good business in the year that went by. And branch managers are judged by the deposits they bring in and the amount of loans they give. There is, therefore, an incentive to boost those numbers. This, they ensure by asking corporate clients to draw their sanctioned limits fully. Sometimes, they are told to deposit the same amount in another branch of the same bank — so that the deposit numbers also go up. A veteran banker revealed that there were borrowers who obliged bankers, provided the branch manager gave them good service and was honest with them.

Sometimes, there is pressure from the government to show improved numbers. Government departments contribute to the last minute surge by drawing their entitlement in the last fortnight and putting the funds into bank deposits. Another senior banker pointed to the practice of erstwhile term-lending institutions that usually made some disbursements to clients at the end of the fiscal even though the project being funded required money only in the next fiscal. But in order to ensure that the promoter did not misuse the money, they were directed to different bank accounts of the company, with the stipulation not to release it without the lending institution’s consent. This may still be happening with some banks, the banker speculated.

A different method What if branches are judged not by deposits and advances growth but only on profits? That has its downside too. Branches would then refuse to do business that doesn’t fetch them direct benefits. For instance, the remittance business is today a major activity in banks, given the growing level of migrant labour. This will be hit because the branches that facilitate such remittances earn next to nothing; instead, they find their staff and premises fully engaged with such low-ticket items.

So, can this practice of inflating the business numbers artificially be stopped? An experienced banker responded with a huge guffaw. He revealed that his bank tried to stop the practice by fixing a different day (an earlier date than the last day of the fiscal) as the cut-off for the calculation of business targets. But, as you may guess, the window-dressing simply moved to the earlier date!

Finally, a top banker said: “It is like catching a tiger’s tail. Once you have, you can’t get off it.”

Many Finance Secretaries and Ministers have issued dire warnings on the practice of window-dressing. Even that made no difference. No senior banker is able to stop it, having themselves practised such subterfuge in their younger days. To use the biblical analogy, therefore, let him who has not sinned cast the first stone. Meanwhile, let those who look at these numbers be armed with a ton of salt.