Beyond P&L: The Case for Consolidated Performance Metrics in the Banking sector
The Reserve Bank of India's (RBI) recent draft guidelines preventing banks from having overlapping lending segments with their subsidiaries has sparked significant discussion in the banking sector. Examples include major players like ICICI Bank and Canara Bank, both of which offer home financing through the bank itself as well as their housing finance subsidiaries (ICICI Home Finance, Canfin Homes). Banks have expressed concerns about implementing these changes within the proposed two-year timeline, given that many of these subsidiaries are independently listed entities with established market presence and distinct stakeholders.
While the RBI's regulations address the issue of selective loan apportioning to subsidiaries, a more effective solution would be to mandate the publication of analytical indicators at the group level.
The Metrics Dilemma
The problem with overlapping business verticals extends beyond operational inefficiencies – it fundamentally affects the transparency of banks' core performance metrics. For instance, a bank could potentially route higher-risk home loans (issued to those with lower credit scores) through its housing finance subsidiary, thereby maintaining better asset quality metrics at the standalone level. While the RBI's new regulations aim to prevent such selective loan apportioning, they would still allow (and potentially encourage) banks to completely shift certain high-risk segments to subsidiaries.
The SBI Cards Case Study
State Bank of India's approach to its credit card business illustrates this complexity. Unlike peers such as HDFC Bank or Axis Bank that maintain their credit card operations within the parent bank, SBI has established a separate listed entity, SBI Cards. While SBI's consolidated financial statements capture the revenues and expenses of SBI Cards, critical analytical ratios like Gross NPA or Net NPA are reported only at the standalone bank level, potentially masking the true risk profile of the group.
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SBI's Liquidity Coverage Ratio (LCR) or Gross NPA percentage should ideally reflect the operations of all its lending subsidiaries, including SBI Cards.
The Need for Consolidated Metrics
For a comprehensive assessment of a bank's health, it's crucial to consider consolidated analytical indicators at the group level. For example, SBI's Liquidity Coverage Ratio (LCR) or Gross NPA percentage should ideally reflect the operations of all its lending subsidiaries, including SBI Cards. This becomes particularly important when comparing banks – for instance, HDFC Bank's NPA ratios include its credit card portfolio, making direct comparisons with SBI's NPA metrics potentially misleading.
While the RBI's regulations address the issue of selective loan apportioning to subsidiaries, a more effective solution would be to mandate the publication of analytical indicators at the group level. This would ensure that regardless of how loans are distributed across the group, consolidated indicators would always provide stakeholders with a true picture of the bank's overall health.