Mar 20, 2017 09:20 PM IST | Source: CNBC-TV18

Bad bank a possible solution for resolution of NPA: HSBC India's Stuart Milne

In an interview to CNBC-TV18's Latha Venkatesh, Stuart Milne, Group General Manager & CEO HSBC India, said, "Creating a bad bank is one possible solution for resolution of non-performing assets (NPA's)". He says, India needs a strong banking system to fund growth.

In an interview to CNBC-TV18's Latha Venkatesh, Stuart Milne, Group General Manager & CEO HSBC India, said, "Creating a bad bank is one possible solution for resolution of non-performing assets (NPA's)". He said, India needs a strong banking system to fund its growth.

Recent UP election results are an endorsement of governments approach by the electorates of India and he hopes that with the strong mandate, the government is able to tackle some of the more difficult problems that India faces.

Milne expects the government to achieve its disinvestment target of Rs 72500 crore this year. He also opined that the government needs to take some bold steps to resolve issues and get Goods and Services Tax (GST) implemented.

Below is the transcript of Stuart Milne's interview to Latha Venkatesh on CNBC-TV18.

Q: The prime reason for inviting you to our studio is that the world view of India appears to have clearly changed after the mandate of the recent state elections. What exactly is your view? Do you think this is a paradigm shift in the political economy of the country?

A: First of all, it is an endorsement by the electorates in India and that is really important for foreign investors because what foreign investors want is stability and foreign investors like what they see in terms of what the BJP government is doing. What I am hoping is that as a result of these elections and the very strong mandate that they give the Prime Minister that we will see tackled some of the more difficult questions, some of the more difficult problems that India faces.

To my view, this is not so much about what new reforms are going to come down the track. It is actually more about really good execution and daring execution of some of the things that are already there.

Q: Could you exemplify? What do you see happening better or differently in the remaining three years of this government?

A: You can take any number of factors. Take for example, disinvestment. The government has set a very ambitious target in the recent Budget. Last year, it was only able to reach about two thirds of the target it set, so this year, it will be very good to see the government actually achieving the targets it set. So, these are very large targets, Rs 725 billion worth of disinvestment. This is one area.

Another area is in goods and service tax (GST). GST is still not fully implemented. There are some issues there. The government needs to take some bold steps and get these issues resolved because ultimately, GST is a very positive development for the Indian economy. These things are things that really matter to foreign investors.

Q: You out two things on the table that he will probably be able to tackle disinvestment or privatisation better and of course GST. I will come to GST, but before that what difference does it make to a banker? The key problem the sector faces today is non-performing loans (NPL), the big default loans that banks are sitting on, 9.5 percent of total book already recognised as gross non-performing assets (NPA), but most analysts would tell you that the correct number should be 15 percent. How would a stronger polity tackle this?

A: The real challenge is that India needs a strong banking system to fund growth. The fact is most growth is funded by the banks, not by the bond markets. So, you need really strong banks. Having said that, the banks are actually in a weak position and if you look at where they need to be in terms of incremental capital over the next two years, we are talking about a short-fall of something like USD 90 billion. So these are very big numbers.

When you then factor in that the government owns 70 percent of the banking system, you can see that a large part of that burden will fall upon the government and the government needs to have the revenue in order to be able to fund that. The money has to come from somewhere.

Q: A strong polity does not necessarily mean a richer government.

A: No, but being able to redeploy capital, take capital out of certain types of businesses, for example, the insurance companies, the general insurance companies the government is talking about, some of these other investments like Axis Bank, Larsen and Toubro, and redeploying that capital into that banking system which is critical for growth would be a very good move.

Q: That of course, is recapitalising the banks. But separately the NPA resolution, just what any banker will tell you was already slow and has gotten almost paralysed after the arrest of some bankers. What would your suggestion be? There are some who have talked about the bad bank? Is that the way out? How are you thinking through this problem?

A: There are many ways to skin a cat and creating a bad bank is one possible solution. The advantages of that solution is that you take out the assets from the business-as-usual banking system and you hire a specialised team to manage that. That can be a very effective way of doing it.

I think the NPA problem is not simply a recapitalisation exercise. It is not just taking out the bad debts and replacing it with more capital effectively. It is also about skill sets. It is about governance within the banks. It is about efficiency, it is about overlapping banking networks that need to actually consolidate, reduce costs generally, and not just NPA costs but also costs within the banking system. This is particularly important because over the next 5-10 years, we are going to see massive digitisation impacting the banking system. The banking system is going to have to get much more efficient.

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