DK Mittal, secretary of financial services, GoI, shares his view on banking regulation amendment bill. He says that the RBI being the regulator will be the notifying authority, and they will issue the guidelines for the banking regulation amendment bill very shortly maybe in next two weeks time.
On asking the RBI to drop the condition that restricts promoters with an exposure to real estate and stock broking, he says that India is not a capital surplus country. If we are asking to put in Rs 500 crore, then how many entities would be able pull in Rs 500 crore.
On the government's Rs 30,000 crore disinvesment target, Mittal opines he is confident of the Government meeting the target. "I can say very firmly that the target of Rs 30,000 crore shall be met. With this target being met, the Budget promise which has been made before the parliament should be complied with," he adds.
Below is the edited transcript of his interview to CNBC-TV18.
Q: You have been in the finance ministry for over one and a half years now. Your tenure has been marked by key milestones. Eight key legislations have seen passage including the banking regulation amendment bill. The bill sets up the regulatory architecture for banking licenses. You discuss with the RBI, when do we see the issue of new banking licenses and at what stage are these discussions?
A: First, the guidelines will be issued for inviting applications for new licenses. We expect and as finance minister mentioned about two weeks time.
Consultation between the government and the Reserve Bank of India (RBI) are complete and we are together in terms of the proposed guidelines. So, RBI being the regulator will be the notifying authority, and they will issue the guidelines very shortly maybe in next two weeks time maximum. After that the whole process will start.
Q: You have asked the RBI to drop the condition that restricts promoters with an exposure to real estate and stock broking. So, effectively allowing them to get banking licenses and this comes at a time when the International Monetary Fund (IMF), global economist from Joseph Stiglitz to YV Reddy in India have highlighted the fact that industrial houses should not be given banking licenses because that is the prudent policy. Aren’t you going to significantly increase the risk to the financial system by allowing such companies to get banking licenses?
A: The regulatory framework of the western countries is different from our framework.. Secondly, it is one thing to say a class of persons being ab initio ineligible and it is a different thing to say ab initio everybody is eligible. I will apply fit and proper criteria which is the domain of the RBI. Thirdly, we are not a very capital surplus country. If we are asking to put in Rs 500 crore, then how many entities would be able pull in Rs 500 crore. After seeing this limitation it was agreed by the RBI and the government that there will be an ab initio don’t apply filter, but after that one can apply filter by looking at the background check and whatever parameter one wants to apply.
Q: In the first draft guidelines the RBI had put a filter of 10 percent of exposure to real estate. So, is that filter now going to be removed?
A: No I will not reveal anything on the guidelines. However, I am saying a basic principle, what has been agreed to and which Finance Minister (FM) has said that don’t make any class of entities ab initio ineligible. After that you apply fit and proper criteria and for that you can evolve parameters.
Q: What type of criteria?
A: That Reserve Bank of India (RBI) will have to evolve.
Q: So effectively you will allow tem but on the basis of the strength of their balance sheets, is that what you are saying?
A: No, they will have to see whether they are fit and proper. That is a phrase which is a very standard phrase in the banking sector and also in all the regulators. So, that criteria will have to evolve.
Q: Has the RBI got back to you on this? What is their opinion on this?
A: I will only say that we have him in close consultation on this issue and we are on the same page. On what is the same page that RBI will have to come finally, I will not reveal that out.
Q: But can I take this that finance ministry is keen that corporate houses be given banking licenses and exposure to real estate and stock broking is not a problem?
A: No, what FM has said I am only saying that much that why should you make anybody ab initio ineligible? It is a question of you applying filters. Suppose you have person better than anybody then you can grant them licenses; now that is a filter to be applied by the regulator.
Q: You have spoken about minimum capital requirements, you have also spoken earlier about the need to have segments of banks so local banks, national banks, international banks with different capital requirements because if you ultimately have to push financial inclusion you need the NBFCs to banking licenses. So, is there going to be such segmentation in the final norms?
A: That also we have suggested to RBI that we should have a policy framework. We have different committees which have recommended this and we requested RBI that kindly look at it and also frame a policy framework. Our country because of different agro-climatic zones, because of different language, different cultures, we need to have local banks, we need to have regional banks and we need to have national and also global banks. So, we requested RBI that please prepare a framework and you notify it out. So, RBI is working on that.
Q: Let me talk to you now about equity infusion. What is the equity infusion that will be required in public sector banks to comply with the BASEL III norms and you had proposed the idea of a financial holing company when does that actually take shape?
A: Public sector bank will need something like Rs 2 lakh crore over next 6-8 years. Financial holding company idea has been discussed with RBI and it is in the direction in which RBI in general is moving for a financial holding company for banking sector. So, it is in line with that and it is in synchronisation with that.
I think the idea has been finally accepted by everybody and now it is having a legal vetting and after that it will need approval of the cabinet and then the parliament.
Q: The RBI in fact had done a working paper on this in terms of the contours of the company is the entire government equity in public sector banks going to be shifted to this holding company?
A: No, I am afraid I can not reveal that at this stage that you will have to see when it is approved by the cabinet. At this stage it is in consultation with law ministry, we will have to go to cabinet and take final approval.
Q: But this is something that – I know you can not reveal but this is something the working paper had revealed but it also raised the question of the fact that how will then the government maintain its majority shareholding in such a financial holding company?
A: No, these issues have been agreed to, discussed, legally examined and now they are waiting for the final approval of the law ministry.
Q: So you are not saying anything on what the proposed structure is but any timeline on by when the holding company will be setup?
A: If everything goes well then the bill should be introduced subject to approval of the cabinet in the next session of parliament.
Q: Staying with public sector banks, non-performing assets (NPAs) and corporate debt restructuring (CDRs) have been a key cause of concern across the banking sector, but particularly so with public sector banks. Private banks have actually seen in some places some marginal decline. Where there has been an increase, it has only been incremental. As the majority shareholder in public sector banks, have you flagged this issue off with them? What precautionary measures have you suggested to them?
A: There is a quarterly interaction at the level of the minister with the public sector banks chiefs and this is an issue which is regularly discussed there. Bank boards are fully sensitive to this issue. When we meet our directors, we informally discuss these issues within us. The broad areas that we discuss are improving our credit appraisal and follow up systems. That is a broad concern and broad acceptance of this concern that we need to work on it. I must compliment public sector banks who are working hard on that. Infact, in many banks, gross non-performing asset (GNPAs) have come down in this quarter. Most Q3 results have already come in.
The second point is that unfortunately, when the economy was doing well, public sector banks were the lenders. Large corporates, large projects, public sector banks were the ones who lent the money. Private sector banks have not, because they have limited capacities and also they were more prudential in terms of not putting money into these projects which are comparably high risk projects.
Unfortunately, when there has been a slowdown in infrastructure and other sectors, the private sector banks are the ones who are getting it first. I don’t think that just by becoming an NPA, it means that the asset has been lost. The asset is still operating. Only thing is that their capacity to repay has been impaired temporarily. As and when this improves further, they will again become standard assets. So, NPAs are only indicating that for the time being, the asset is not having paying capacity. We are not talking of lost assets, we are talking of assets which are not able to pay. So, while we have a concern, there is no anxiety on the part of the government on this ground. This is an area which is under focus and all banks are monitoring it closely.
Q: Is that the reason why banks are not selling off NPAs to Asset Reconstruction Company (ARC) because the government has taken several measures to empower ARCs and yet we don’t see public sector banks (PSBs) selling those NPAs. Why is that?
A: Firstly, ARCs were not doing the development alone so far. They were more doing it as the managers of the bad debts. With the amendment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), they can convert debt into equity. All that can happen now. So, they can take a more leadership role in terms of putting the assets back which was not possible earlier. Then, they can give good value to the banks when they take over the assets because if the intrinsic value of an asset is very good then certainly they can pay well to the banks. So, that has been enabled today. It will take some time, a few months time before they start operating.
Q: So, with the SARFAESI Act, in the next few months do we see portfolios such as Kingfisher, State Bank of India (SBI) considering selling off such debts to ARCs?
A: Selling of a portfolio is a decision of a bank. It is their opinion whether they can get better value by selling a portfolio or by keeping it with itself. We must value the judgment of each bank on that.
Q: Where would you expect gross NPAs to be for this fiscal for public sector banks?
A: They will be about 3.5 percent.
Q: You are comfortable with that?
A: Yes that is okay.
Q: Let me move to the monetary policy. We have seen some movement, 25 basis points that is something that the government has wanted for a long time but the Governor himself has spoken about the conflicting pressures going ahead. Inflation is likely to be above 7 percent once the full impact of the diesel price hike comes in. Do you think that the rate cut cycle is going to continue because the market is expecting 50 basis points by June? Do you think it is going to be feasible?
A: I think what Governor of RBI has said that puts the right perspective that there are conflicting pressures in the economy and unless they come together, to a level that they can reinforce each other for reducing inflation and increasing gross domestic product (GDP). I think that is a challenge both to the RBI as well as to the government.
Q: We have seen State bank of India (SBI) move ahead with passing on the benefit of cut in interest rates to consumers by a cut in base rates. But you see with several banks that they cut rates in other schemes but not in the base rat. Is there going to be gentle nudge from the finance ministry at least to the public sector banks to pass on the benefit in terms of lending rate?
A: These decisions are taken by the assets and liabilities committee (ALCO). We always suggest them and that is a general understanding that whenever there is a change in the policy stance, let the ALCO decide because they have to manage the asset and liabilities both. If they cut the rates in lending, then they have to look at the rates in the deposit also and by cutting that, whether they will have deposits to support the activity. So that challenge is before them. So, that we will leave it to the judgment of ALCO that how they take care of it and how they manage it.
Q: Until very recently you were also the Disinvestment Secretary, in fact you led the National Mineral Development Corporation (NMDC) issue. You have seen about Rs 6,000-7,000 crore with that and with Oil India you will see about Rs 10,000 crore but the target is Rs 30000 crore. You are still Rs 20000 crore away, do you think it is feasible to meet the disinvestment target?
A: During the time, one looked after that assignment as additional charge, we had a full plan and Oil India offer for sale (OFS) is a part of that plan only, National Thermal Power Corporation (NTPC) is a part of that plan only. I can say very firmly that the target of Rs 30,000 crore shall be met. With this target being met, the Budget promise which has been made before the parliament should be complied with.
Q: According to Securities and Exchange Board of India (SEBI) norms PSUs have to meet to a minimum 10 percent listing norms and SEBI has clearly said that they will not give a carve out to PSUs. Will this be achieved specifically with loss making PSUs where the government’s disinvestment policy is that no disinvestment should be allowed in them?
A: That is a challenge. I think the entities which were making profit they have been identified and the concerned department has agreed for increasing the stake or float up to the level, which is required by SEBI. For others this issue has been flagged to SEBI and we have to come to some understanding with SEBI on that.
Q: You are part of the team making the Budget document up till now. Budget is just a month away. What is the theme of this Budget? What are the key areas of concerns that are going to be looked at in this Budget?
A: The FM already said that it will be a realistic, prudent and very balanced Budget. Areas of concern are same like, how to get growth? How to control fiscal deficit? How we take more investment into productive sectors? The challenges are the same for any finance minister.
Q: You are very closely involved with direct benefit transfers (DBT). You have had pilot studies but only four percent of the total subsidy outlay is covered under the DBT and there have been a lot of questions about whether actually on the ground it will be a success. From a banking point of view, banks have been opening accounts, what is your sense on this?
A: Electronically, we are capable to transfer money in any scheme. Secondy, we must do it based on verification on Aadhar, so that same beneficiary does not draw more than one benefit in the same district, in the same state and in the country. A huge benefit is happening. It cannot be achieved in day one, has to go along. We have a banking structure and a tested Aadhar format. And that gives us a confidence that it can be done. It will take some time before it is fully covered, but with Aadhar. It has been proved that it brought benefits to all of us. As a country, we should be proud that we can make all payments electronically. The last leg which is the district level is getting money transferred electronically to the bank account so there is no need to issue cheques, make cash payments it is hugely beneficial as it avoids unhealthy practices. Whether we need to change the processes that is happening, it is done in consultation with the state governments.
Q: Do you see this contributing to fiscal consolidation by plugging leakages in the subsidy burden?
A: We expect a reduction in the subsidies because leakages will go away, but we need to test it out, how it will pan out. It is not happening for kerosene oil, slight reduction in subsidies will happen in liquefied petroleum gas (LPG). However, if one has to do Public Distribution System (PDS), kerosene oil, everything else then there will be huge saving in the subsidy.
Q: Will we see quality in fiscal consolidation in terms of expenditure cuts in the Budget?
A: Fiscal consolidation has two parts; first, we compress the expenditure or increase the income. In a generic sense we have to attempt both. Certainly, if we compress expenditure it should not lead to curtailment of expansion in welfare schemes which are very well targeted and very well delivered and secondly, the capex expenditure, because that fuels the economy. There should be attempt to see that we have more income and that could be by way of increasing growth rate of the economy so we have more taxation happens, more tax income happens or may be mobilising other resources. Both the challenges will be before any minister to take care of it and these principles will have to be applied.
Q: Kelkar had recommended divestment of the Specified Undertaking of the Unit Trust of India (SUUTI) stake. The Cabinet had approved setting up of an Asset Management Company (AMC) to manage that, but we haven’t seen any progress on that. Is divestment of the SUUTI stake on the governments agenda or are we going to see the AMC being set up?
A: It is a cabinet decision that if disinvestment is to be carried out it then cabinet approval is required. I am not aware of anything beyond that.
Q: What do you feel has been your biggest achievement during your time here?
A: In this assignment, I found it very challenging. One feels very satisfied that every aspect of the financial services we could really take them forward, whether it is debt recovery tribunals, Regional Rural Banks (RRBs) or the non-life insurance companies, apart from Life Insurance Corporation (LIC) and the public sector banks which are always in focus, I think every segment which is managed by this department directly also having close interaction with the regulator, either Insurance Regulatory and Development Authority (Irda), Pension Fund Regulatory and Development Authority (PFRDA) or with the Reserve Bank of India (RBI). We work very closely with all of them and we had our own share of difference of opinion but it was never a kind of confrontation with anybody. Difference of opinion should happen and they are very desirable but they should be backed by very dispassionate principles and opinions should not be self imposed. So, we follow that principle and I am very satisfied and very happy.
Q: Any regrets?
A: I could have done much better but I had no time to look at the human resources (HR) issues in my banks that is a very serious challenge. I started a framework, I hope my successor will certainly take it forward and I have already briefed him about it. That is one area where we could do better.
We could do still better; the debt recovery tribunal, e-Governance I could not implement but I am happy that is getting sort of approved and it will get implemented over next six to nine months time, that again is a great thing for our country.
Q: What would be your advice on the top three areas that need immediate attention in the banking system?
A: In banking, one is the capital; long-term issue would be the capitalisation. That is a very serious issue which needs to be addressed. We need to focus on the RRBs. They need to improve upon substantially. We have improved them but there is still a distance to travel.
Second part is the e-Governance in all institutions has to improve. If we don’t improve we will die. There is absolutely no choice and that talks not only of e-payments part but the total e-Governance. We should be moving towards paperless offices.
Thirdly, in insurance sector lot many areas are still uncovered. Insurance sector, we have succeeded in opening about 2000 offices of non life insurance companies, maybe about 300 offices of LIC in different parts of India, which were not covered so far. But then we need to use this opportunity to take the policy and bring these policies to the customers. So, these are the challenges.