Bank of India sees improvement in NPLs ahead

Also read: Moody's downgrades Bank of India

Below is the edited transcript of the interview with CNBC-TV18’s Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: The first charge is about concern over asset quality by Moody’s. When you last reported your numbers, your gross and your net non-performing loans (NPLs) fell a bit from the quarter-ago levels. Have things got in a little more trying in this quarter?

A: We have just analysed the reason. The comparison is between March and December 2011. In this nine-month period, we had a very strong NPA in two quarters on account of our recognition of small-value accounts. In the December quarter, this trend was already reversed. Moody’s has extrapolated the nine-month working and then saw a significant deterioration in asset quality, whereas it is on account of one-off issues which came on account of recognition of small-value accounts.

Q: Their fear is that because of the downturn in the economy, there would be more stress on corporate balance-sheets. Do you estimate that your fourth quarter NPLs will be lower than your third quarter? Will FY13 be lower than FY12?

A: I concede that there is definitely a strain on account of corporate debt. But not all debts, which come for corporate restructuring, turn out to be NPL. Most of them are viable. They require extra cash in terms of retention and that is why re-schedulement of some those loans are required.

Wherever there is a NPL issue, we attend to it on a case-to-case basis. I don’t see a significant deterioration in asset quality on account of debt restructuring per se. We will definitely maintain what we have said — that we have made a reversal in terms of NPL. The fourth quarter would definitely see us in a much better position than the third quarter.

Q: The other point, which was brought up by Moody’s, is that the core tier- I capital level of the bank, which stood at 7% as of March 2011, compares weak against its peers. Is there any sort of measure that the bank would like to undertake, in terms of strengthening this tier-I capital or is your argument against this?

A: Basically, Moody’s has taken into account the capital raised on account of the profit generated. Apparently, when there is a higher NPL and higher provision, the profitability is under stress. The entire thing centres around how we handle our NPL and stress-assets.

We talk of 7%, which is not the tier-I capital as we calculate according to the Basel norms. It is only the capital that is generated on account of the retained profits, after declaration of dividends. In first two quarters, we had higher provisions, which resulted in a lower retained profits. Once we attend to this, we will definitely have higher capital generation, which is over 7%.

Q: What exactly is your capital adequacy at this point in time? What’s the Government of India holding?

A: Our capital adequacy as of March would be 8.33% on tier-I. And overall, we are close to 12%.

Q: What is the Government of India’s stake? Is there scope for the government to may be bring down its stake? You did a QIP sometime ago, could you strengthen this capital base in ways other than retaining profits?

A: The Government of India has a 66% holding. There is definitely enough headroom available there. We don’t see raising of capital, but what Moody’s has commented on, is in terms of retained profits.

Q: But still my question for the year is, will the full-year NPLs be significantly higher than the full-year NPLs of last year?

A: No, I don’t see that. In fact as I told you, we have already reversed the trend and we would definitely see – compared to last year, the NPL going lower.

Q: Now that this downgrade has come, how does it worsen your position of fund-raising? Will you be raising any MTNs lately in the dollar market? Will that become a little more expensive?

A: If you remember, in December 2011, Moody’s downgraded the country’s rating.  The rating of ‘Baa3’, what we have been accorded, is basically the country’s rating. And I don’t see our rating being lower than the country’s rating, because we can’t pierce the whole country’s risk or rating. And it is not going to have any impact on the cost of raising of funds.