"Knowingly you give money to some unviable projects. That is a governance issue...In many cases, our public sector bankers have forgotten to say 'no', except to small borrowers. A banker's first characteristic should be to say no," Mr Chakrabarty told PTI in an interview.
The senior-most deputy governor, himself a commercial banker before being appointed on Reserve Bank of India (RBI) over three years ago, pointed out that "governance issues" in the functioning of public sector banks are leading to poor performance.
"The basic issue is that, the risk assessment capability and ability to price risks amongst the public sector banks is lower than the private sector banks or foreign banks," Mr Chakrabarty said. "The governance capabilities for the state-run banks are definitely inferior (to their private sector counterparts)," he added.
According to the RBI data, gross NPAs of public sector banks (PSBs) rose to 3.3 per cent as on end March 2012, from 2.4 per cent a year ago, while for private lenders, the ratio declined to 2.1 per cent from 2.5 per cent during the same period.
A recent Icra report warned that the bad assets book of banks are set to cross the Rs 2-trillion-mark or about 3.8 per cent of the total asset book this fiscal, driven mostly by public sector banks.
The case of the state electricity distribution companies is cited by many experts as an example, wherein banks kept on lending to the financially unviable companies and are now looking for a partial state bailout running into thousands of crores of public funds. Stating that the poor borrowers are subsidising the rich, he said it was not the small borrower who is a threat to banking as his repayment track record is much better than larger ones.
"Loans are not as bad in agriculture as loans to big corporates," Mr Chakrabarty, who is in-charge of banking supervision at the central bank, said.
He also cited a real-life example of public sector banks taking bad decisions which in turn result in stressed assets. He said foreign banks manage to transfer stressed portfolios and unfortunately these are lapped up by public sector banks thinking these are very good assets.
"So long as corporates can pay, they all deal with private sector and foreign banks. But when they are vulnerable, they come to state-run banks. Unfortunately, a combination of factors is responsible for this. Fundamentally, it is a structural issue, a skills issue and a governance issue."
He attributed the problem of rising bad assets mostly to poor administration and low risk management practices at state lenders.
"I call NPA as non-performing administration. We have to make the administration functioning," Mr Chakrabarty said, adding the change in the administration has to come in a slew of areas which would be both internal as well as external.
He also attacked the "herd mentality" shown by public sector bankers in lending to a particular borrower just because its peer is lending, saying this is a sign of weak governance and management.