MD Mallya, outgoing CMD, Bank Of Baroda explains on CNBC-TV18 that there will be some more pain before the economy posts a comeback. He therefore advocates the need for optimism and patience as for improvement and recovery in the overall situation.
Below is an edited transcript of the interview on CNBC-TV18
Q: On your last day in office as chairman and managing director of Bank of Baroda, how do you gauge the banking system? Do you think the worst is over with the increased risk from NPLs or is there a little bit of tail risk left?
A: It is difficult to say whether the worst is over. The Indian banking industry has always been resilient in facing challenges. So to my mind, the banking industry should be able to do better in the days to come once the economy bounces back. At this point in time, the sector is in a slowdown phase and maybe for another six months the pain is hoped to continue. But as far as the outlook is concerned, I would say it is still optimistic.
Q: Even in the equity markets, there is a feeling that the economy is bottoming with at GDP of 5.3 percent. Do you believe that the economy is at a trough right now?
A: That could be possible. This 5.3-percent growth was not totally unexpected. It will take some time for the economy to bounce back, so the rest of the current fiscal and thereafter could be much better.
The high rate of NPLs is an account of the deceleration in economic growth and was not an unexpected. Therefore once the economy starts move on a right note, the situation should improve substantially in terms of improvement of asset quality. Overall, the current incremental slippages are still manageable as far as industry is concerned. It’s not a great concern though there is a need for caution in terms of proper monitoring and recovery.
Q: Where do you see pockets of stress?
A: In the recent past, some of the larger lumpy accounts have turned into NPAs. There are quite a number of cases which have been referred to CDR and ultimately, if bankers think there is a possible turnaround, a rehabilitation package is discussed and put through.
Overall, there have been NPLs in both the larger accounts as well as the SME segment. What is now required is a turnaround of sorts in economic growth, reduction in inflation levels and increased investment decisions.
Q: Do you think the RBI will initiate a cut in December or January and will a 25-bps cut make a seminal difference to the SME segment where interest costs really matter?
A: I would certainly say, yes. Interest is one of the major components as far as the overall operating costs are concerned in the SME segment. Therefore I would advise patience with optimism.
Q: If a rate cut were to happen, would there be an impact on the number of slippages in the fourth quarter? At the moment, there is an additional slippage of Rs 1,000 crore and a restructuring of Rs 1,000 crore according to results reported in the previous quarter. Will that be the position in third quarter and in the fourth quarter or would the situation change if there was a rate cut?
A: The overall impact of the improvement in the economy will set in with a lag effect and not overnight. So there maybe some pain, overall, for industry over the next few quarters.
Q: Is there any sector which will suffer due to deterioration in asset quality?
A: Overall, the economy maybe slightly improving from current levels. Incrementally, there is not need to worry about difficulties or new challenges from any sector in the economy. There is a need for improvement in impacted sectors such as infrastructure, power, roads and steel and to my mind, it will take some time before these sectors start operating well again.
Q: How would you address investor concerns about huge asset quality write-downs when a new chairman takes over at the helm?
A: We have been very transparent in our communication to our investors of the Bank of Baroda's attempt to ensure that the governance standards are at the highest level possible, the current status of all developments and the likely guidance for the future.
The bank will continue with business as usual and is quite sound to proceed on a very strong footing in the days to come. I think that is the legacy I would leave behind.