RBI pulls up State Bank of India for poor NPA management

Regulatory pressure might have forced the country's largest lender State Bank of India (SBI) to clean up its books and take a massive hit on its profits while announcing its annual results yesterday.

Rising level of bad loans, and consequent provisioning, was cited as one of the main reasons for the dip in the fourth quarter profits of the bank. The amount of gross non-performing loans of SBI has doubled in the past three years from about Rs 12,837 crore in March 2008 to Rs 25,326 crore as of March 2011.

The attempt to hike provisions and clean-up the books, although attributable partly to the change of guard at the top, could have been a consequence of RBI's displeasure with its NPA management. An inspection by the RBI earlier this year had downgraded about Rs 3,500 crore of assets and suggested additional provision of about Rs 650 crore to be made by the bank.

As part of its annual financial inspection (for the year ended March 2010), that was completed in January this year, the RBI had criticised the bank for a number of deficiencies — including poor systems, lack of proper policies, lack of follow-up, lack of proper staff accountability et al.

Valuation of assets

The inspection report highlighted several defects including the lack of a robust system to classify accounts as non-performing or otherwise. There was wrong input of data like date of commencement of repayment of instalments, amount of instalment, moratorium period etc and many branches had not taken any effective steps to correct the same.

The report said that SBI had not framed any policy for valuation of assets. Without specific guidelines, different valuations (fair value, realisable value and distress value) were used in different cases. It also highlighted procedural issues such as delays in identification of NPAs, irregular housing loan accounts being re-phased by increasing EMIs and reducing the amount of EMIs to retain the account as performing. Valuation of security was not carried out according to prescribed periodicity.

The inspection report also pointed out that no consolidated review of the quick mortality accounts (where accounts turn NPA within a year of sanction) was placed to the top management. The RBI also pulled up the bank for not carrying out any review of its restructured portfolio. It said that some NPA accounts were classified as standard assets; in some cases commercial viability was not examined; while in some cases of commercial real estate, accounts were not downgraded on restructuring.

Similarly, the bank had not placed a review of suit filed accounts to its board. The report expressed serious concern about the review and control of such accounts since the corporate office could not provide necessary details. It also pulled up the bank for not placing any review of staff accountability, its progress, action taken against delinquent staff, checking of vigilance angle, etc to its board of directors.

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