Why UBI should be sold to any credible buyer for Re 1. Or it’s money down the drain

The resignation of United Bank of India (UBI) Chairman Archana Bhargava for “health” reasons shows how poorly the government has been handling the situation in an obviously failing bank. The bank’s failing health is obviously beginning to tell on the health of its top bosses – and this suggests that any rescue has to come from changes at the top.

The simplest and best remedy to UBI’s problems is privatisation:  at today’s stock market prices, UBI can be bought for just Rs 1,350 crore by any bidder. Given its huge bad loan portfolio, the government should actually be happy to transfer all UBI shares for Re 1 to any private businessman who is willing to recapitalise it. But this needs political gumption – a sorely lacking commodity in the run-up to an Indian election.

This means UBI will face three more months of uncertain agony before it can be rescued or put out of its misery.

However, let’s be clear who can’t rescue UBI: the government of India. For three reasons.

First, it does not have the money. In the interim budget, P Chidambaram provided all of Rs 11,200 crore for recapitalising public sector banks, but this amount would barely be enough to rescue UBI, which has a bad loan book of Rs 8,545 crore. As we noted before, “the losses not provided for – also known as net non-performing assets – are at 7.5 percent of the loan book (or Rs 5,630 crore). If you add the bank’s restructured loans – loans that would have gone bad if not rescheduled – nearly 20 percent of the bank’s loan book is contaminated.” If all bad loans – disclosed or not disclosed - were to be provided for, the bank’s net worth would probably be wiped out.

Second, government simply does not have the expertise. The reason why public sector banks are falling sick is political pressure to evergreen bad loans made to corporate fatcats (consider the case of Kingfisher), and policy-induced pressure to lend more and more to favoured constituencies like farmers or priority sectors. This means half the problems of the banking sector are created by the government itself. The cause of the sickness cannot be expected to find a long-term cure.

Third, public sector banks, by their very definition, are not autonomous. More so in a venal political climate of irresponsibility and corruption. As Firstbiz noted two weeks ago, many public sector bank jobs are actually sold to the highest bidder. This makes crooked CEOs careless lenders because they are beholden to their political masters and believe they can anyway bank on the government to give them more capital.

If we accept this logic, privatisation is the best way forward. This might anger the unions and make all political parties, from BJP to the Left and the Arvind Kejriwals, froth at the mouth, so one cannot expect an early solution to the UBI’s problems.

This calls for interim measures. These could include:

#1. Making UBI a "narrow" bank – which can only raise deposits, and invest in government securities or AAA bonds. The RBI has already asked the bank to curtail loans, but it should make the bank narrower for a longer time.

#2: To prevent a flood of withdrawals, the government and the RBI should guarantee deposits even beyond Rs 1 lakh – for a temporary period.

#3: The entire bad asset base of the bank should be transferred to a new entity whose only job is to sell, recover or write off bad loans.

#4: Bring in a qualified private banker at the top to run the bank for the next three month before a final call is taken on its future.

#5: Merger with a larger, and more solid, public sector bank, should be avoided at all costs. Reason: this will only hide the problem. The challenge with UBI, and possibly a few other banks that are also on the brink, is that they have to either be turned around or shut down. If one keeps shoving their bad loans under another bank’s carpet, we are merely setting up a good bank for failure at a later date.

Time is running out, and UBI should be treated as a test case for how to intervene in the case of systemically or regionally important public sector banks.

FBiz  R jagannathan 22 Feb 14