State’s Bank struggles with bad loans and poor accounting

STATE BANK OF SIKKIM STARES AT FAILING FISCAL HEALTH - VISHNU NEOPANEY
The State Bank of Sikkim is under a fresh cloud of suspicion of misappropriation at some of its branches, and even as these allegations are being investigated, there is further bad news for the bank in that it has also started running up losses. As they say, when it rains, it pours, and the string of bad news for the bank continues with a realization that a majority of its cash credit loans have become non-performing assets, as have an unreasonably high number of construction loans. Unfortunately, the slipping fortunes do not appear to have triggered any major worry at the bank where it continues to be business as usual with the statement of accounts not having been reconciled for the past three years and the Board of Directors not having met for the past year.
Readers will recall that the last big scandal at SBS was the Sombarai Bank embezzlement suspected to have cheated the State exchequer of around Rs. 2.56 crores. That was back in the year 2001. In the latest instance, the Bank has reportedly been informed of suspected embezzlement of around Rs. 42 lakhs at four of its branches.
The SBS Managing Director, Hem Karki, when contacted, confirmed that such a report has reached his table and that the bank was re-verifying the facts to check whether there has really been misappropriation or misuse of money or not. He stressed that as things stand, the suspicions were speculative and that the Bank is convinced that there has been no misappropriation.
The SBS was established as the state treasury bank on 19 September 1968 by a proclamation of the Chogyal and continues to function as the lead bank for all State Government transactions. It is vested with the responsibility to receive money on behalf of the Government and make all government payments and keeping custody of the balances of the Government in current account as well as fixed deposits.
The Bank currently has 35 branches across the State. Despite these times of instant connectivity and online transactions, SBS has no facilities for even realtime connection between the branches and the headquarters. Needless to add, this leads to poor accounting and conflicting records. Take for instance the record on cash balance of the government at SBS as on 31 March 2013. As per the bank, it had Rs. 65.36 crore of govt money in cash balance while the Finance Accounts 2012-13, there was a balance of Rs. 19.50 crore, leaving an un-reconciled balance of Rs. 45.86 crore!
Needless to add, given such a scenario, Rs. 42 lakhs in unexplained expenses suspected to be embezzlement is hardly shocking.
What is a bigger worry though is that Bank, which was posting profits till 2009-10, reported losses for 2010-11. Its balance sheet for later years have not been reconciled yet and only once that is done will it become clear whether 2010-11 was an aberration or the start of a new trend.
As per data available with NOW!, the State Bank of Sikkim posted a loss of Rs. 705 lakhs in 2010-11; this, within a year of having posted a Rs. 567.46 lakh profit in 2009-10.
The Bank’s failing fiscal health is expectedly a result of increasing operational costs and falling revenue, but it would have easily tided over this situation if it had displayed more financial prudence and not allowed a staggering 82% of its cash credit loans to become non-performing assets.
Where the bank’s operational costs increased from around Rs. 7,875 lakhs in 2009-10 to Rs. 8,798 lakh in 2010-11, its revenue fell from Rs. 8,442 lakh in 2009-10 to Rs. 8,093 lakh the next year.
As mentioned, this would have been an inconsequential blip in the balance sheet if the bank’s debtors had not defaulted so astronomically. It is learnt that out of the 460 cash credit loanees [as of 31 March 2013], 380 have become non-performing assets collectively posting an inexcusable Rs. 188 crore in bad loans.
And then there are the 1,385 construction loans given out by the bank. Of these, 352 have become non-performing assets accounting for around Rs. 116 crore in bad loans.
The suspected misappropriation of around Rs. 43 lakhs currently being looked into by the bank pales in comparison.
The bank has not ascertained the annual loss from provisional accounts for the financial year 2011-12 and 2012-13 as of now. In the last session of the Legislative Assembly, SBS had tabled financial report for the financial years 2006 to 2008-09.
Cash credits, loans frequently taken out by contractors and business houses against work orders [in anticipation of business and not against any mortgage as such], are clearly a major concern, having consumed Rs. 188 crore in bad loans.
And before one jumps at SBS with more allegations to add to its already overflowing bag of woes, a short digression on how loans and finances are managed by the State Government might prove an enlightening experience. As per the CAG Report of 2013, departments [like Animal Husbandry, Agriculture and Forest] which disbursed loans to “beneficiaries” and the Finance Department [which maintains accounts of the Government], “do not even have information relating to details of the loanees, actual dates of loans, terms and conditions of the loans, schedule of recovery, rate of interest, penal interest for default in repayment, fulfillment of objectives for which the loans were given, etc.”
SBS is only continuing this casual approach, and while this cannot excuse what is happening at the treasury, it at least explains it.
Meanwhile, in response to queries from NOW! on why the annual summary report of the Bank has not been taken up for the last three years and what was happening with the alleged misappropriation, State Bank of Sikkim Board Member, Secretary MG Kiran, who is also Principal Secretary, Finance, Revenue and Expenditure Department, explained that the Board meeting could not be held in time due to enforcement of Model Code of Conduct earlier in the year and then the government formation process after which a new Chairperson of the Bank was appointed. This meeting, he adds, will now be conveyed shortly.
He also reassured that if any substance is found in the allegations of misappropriation, it will be taken up at the meeting.
When asked about the loss and non-recovery of loans, the SBS MD said that issuing of a series or notices and even publication of Notices in newspapers has had a good impact and a large number of loanees have come forward to settle their dues.
Mr. Karki further said that the Bank is trying its best to introduce Core-banking system at SBS as well and will have the system in place by next year, and that after obtaining the approval of Board of Directors, the Bank will float open bidding for supply software containing RFP [Request for Financial Performance]. Banking processes will be better managed then and proper and timely reconciliation of accounts will also flag worries and concerns before they become debilitating as the situation appears to have become now.