Mar 15, 2016 06:53 PM IST | Source: CNBC-TV18

Crisis-hit banking sector: Who is to be blamed?

Pratip Chaudhuri, former CMD of State Bank of India, says banks are circumspect because once you call up a loan, there is no chance of it ever coming back to health, and obviously valuations of stalled businesses are very low

The Vijay Mallya mess has thrown up deeper questions about the health of the banking sector and concerns on whether and why banks aren't going after defaulting borrowers with more aggression? Simultaneously, there is also a fear on the back of public anger with respect to bad loans, whether bankers will become extremely risk averse?

Charan Singh, executive director of UCO Bank, says most of these borrowers don't have any cashflow and selling assets is not easy either.

He also cites the example of the steel sector which is under severe distress. According to him, the situation is such that both buyers and investors are not there in the market. Hence, the only other option is to continue with existing managements, and sell non-core and personal assets, he told CNBC-TV18. He says for SDR to be a success, a lot of different measures will have to be taken.

Meanwhile, Pratip Chaudhuri, former CMD of State Bank of India, refused to get into a discussion on Kingfisher, claiming the matter to be subjudice. However, he explains that banks are circumspect because once you call up a loan, there is no chance of it ever coming back to health, and obviously valuations of stalled businesses are very low.

Former financial services secretary DK Mittal too gave his views on the crisis facing the banking sector. He says there has never been any pressure on banks to fund discoms.

Below is the transcript of Pratip Chaudhuri, DK Mittal and Charan Singh’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Latha: We understand that bankers at the moment, led by State Bank of India (SBI), are grilling several borrowers to ask them to pay quickly whatever dues there are to sell off non-core assets. Can you give us some update on what this meeting is all about?

Singh: Of course, this move is going on, but I do not know how far it will be successful, because these borrowers, they do not have any cash flow and selling of assets are also not a very easy job. So, we are working on that. SBI is taking a lead in that direction and many consortium meetings are held for deciding on what to do with these borrowers. Let us hope that some results will come. We should be able to sell some of the properties which are not in use or some of the assets which can be sold off.

Latha: We understand that most of the companies who were being met, whose promoters the bankers were meeting are steel companies. We had that list of Bhushan, Essar, as well as the smaller steel companies, Visa and companies like that. There are not so many buyers for steel today, since there is such a downturn, so is the intention to sell non-core assets, to sell buildings, office space, other assets?

Singh: In fact, that is true that this steel company, because they are in problem, the sector itself is in a problem, so the buyers are not there. Even the investors are not there. So, we have gone for earlier also, in few cases, but that is also, not materialising because of not getting the investors or the buyers. So, only alternative is that we have to continue either with the existing management and of course sell some of their non-core assets or some of their non-core activities or some of their personal assets and bring some liquidity in the company. So, that is the only alternative left.

I do not know whether how far it will be okay, but now, because the investors in this scenario will not come forward to invest in such companies, so in these cases, I think for implementation of strategic debt restructuring (SDR), we have to look for some market for developing some market for the professionals who can run these companies, the bankers can invest and then we can create some mechanism or some infrastructure who can scout for the management who can run these companies and the bankers, of course, can put in their money behind it.

Reema: Then there is the question of whether the collateral as well as the assets are going to be even sufficient to cover the kind of loan. Today we feel a lot of angst that why did the banks not act on the Kingfisher Airlines loan recovery a lot earlier. The loan was restructured back in 2010 and it is five and six years counting and we have still not managed to get the money back. So, two part question. A] There is so many stressed companies today. Has the system now improved? Are we now a lot more alert to prevent another Kingfisher from happening to the current indebted companies? And secondly, do you see another Kingfisher Airlines coming because there are so many companies like which are saddled with very high debt – Jaiprakash Associates has a debt of Rs 75,000 crore., GMR Infrastructure, Adani, all of them have debt in excess of Rs 40,000-50,000 crore?

Chaudhuri: On Kingfisher, it is not right for me to speak on television because the matter is subjudice. But basically, look at this, when you call up a loan, you are putting an end to the activity. So, therefore, whatever chances are there of it coming back to health will not happen. It is like mercy killing. So it cannot come back. So, that is why banks are a little circumspect before applying that extreme medicine. And secondly, under the lender’s liability, you cannot call up a loan till the borrower is serving the interest and the principle. So, you can only call up a loan and call up the facility when the account becomes non-performing. They may be making losses. That today, so many respected companies are making losses, but that is not an adequate ground to call up the loan.

So companies try to fight this problem by taking trade credit or other liquidity measures and only when the situation is irretrievably, it is like a patient being taken for operation. Till there is some hope that the patient can be cured with medicine, many people do not go in for the operation. Operation is the last resort, or I would say late resort. So, that is how it works, because if you colour the loan, the whole thing collapses and for a stalled business, you get much lower valuation.

Latha: I take your point that you do not want to kill a business unless you are absolutely sure it cannot be revived.

Chaudhuri: Not that. Absolutely, that means when there is because you have to look at the worse of the two options. If you allow the unit or if you force the unit to close, what you can possibly recover and what you can possibly recover by giving some doses of oxygen. So, this is a choice between the two and that is a real time choice.

Latha: I agree, but my point is the entire list is now in the public domain. I mean, there are several additions of Credit Suisse giving you the house of debt data from 2012 onwards. For instance Jaiprakash, as Reema alluded to – Rs 63,000 crore gross debt in FY13, Rs 73,000 crore gross debt in FY15 and Rs 75,000 crore gross debt in FY15. I mean, systematically, that is one. I can go on: Adani Power, Rs 41,000 crore became Rs 44,000 crore. My question is in a zillion cases, banks have given more so that the companies do not go under. How much do you ensure that the promoters bring money? It appears that banks are doing much more to save than promoters are doing to save it.

Chaudhuri: No, promoters, since they are in a position, they bring. But if the promoters are not in a position to bring money, what do you do? You ask the unit to close down in which case the option could be worse. It is like a hospital, if the patient does not have money to pay huge bill, what do you do?

Latha: There are innumerable instances of promoters living in style, but companies going sick. It is very obvious from their visual living style, whether it is the Ruia brothers or whether it is Mallya. Their actual style is not showing any reduction. It definitely gives the feeling that promoters have money.

Chaudhuri: That should be a law that if a promoter is under corporate debt restructuring (CDR), he cannot have an expensive car, he cannot have an expensive house. Under which law, do I go and attack the house, under which act?


Latha: Is this the case that banks don’t have the wherewithal, the legal means to attack a promoter and they have to keep on giving loans simply to save an old loan?

Mittal: I think there are very fundamental issues with the way lending has been made in India and these are known to everybody. One of the fundamental issues is the leverage which you very rightly raised. If equity is not there and I keep on borrowing, where is my skin in the game? So, this is a very fundamental issue. The names you gave, in all these cases they had almost no skin in the game and secondly, siphoning out the money.

Now, this is something very much prevalent in India and it is happening for quite some time; not that banks are now aware of it. The problem with the banks is after they lent X amount of money and they declare it NPA, they have to take a hit on the balance sheet and the tenures of the chairman’s are limited and nobody wants to take a hit during his or her tenure. So, everybody wants to shift the blame to next one. This doesn’t happen in case of HDFC when the CEO is there for 20 years, this doesn’t happen easily in ICICI Bank where the CEO is also is there for that long period. So, that is a problem with the management side of the public sector banks.

In terms of the power being exercised by them, I think the powers are quite good enough but the processes which are there with the Debts Recovery Tribunal (DRT) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) and the courts, they are quite cumbersome and it is not easy to get all approvals from these authorities at a point of time to execute the process.

Latha: How can the situation be different then? Is it that banks should not allow themselves to be levered so much at all that you all have a bigger stake in saving the asset than the promoter has. Having given the money, you become the more dependent.

Chaudhuri: For example, the sectors which are in difficulty, power plants. Now, power has been supplied to the discoms and discoms don’t pay. So, what do you do, you refuse to pay their wage bills, you refuse to pay their other bills and the unit comes to a hault. We have seen that when the company stops production, you fetch a much worse value than if you allow it to somehow survive and go along hoping that it would turnaround.

If you look at the last down cycle of steel which happened in the previous century 1999-2000, how did they come out of that difficulty? Because of better operations, better price realisation letter and all the companies including the very successful ones these days and I would single out Steel Authority of India (SAIL) which is public sector and which possibly has no such management issues as you speak so that share price went down to Rs 4 and the same plants came back to life because when the cycle turned better.

However, today the situation is different. We have much more open trade. So, if the Russian currency depreciates from 57 to 76 in one month, you can expect a lot of steel coming and flooding the Indian markets. The biggest problem industries are steel and power and I think for power the blame can be laid at the door of the discoms alone. So, if you for example take near Mumbai, the Dabhol power plant which they say that is being run by a rogue company, the rogue company was removed and it is run by two very blue-chip public sector companies NTPC and Gas Authority of India (GAIL).

However, yet the state electricity board (SEB) refuses to honour the power purchase agreement (PPA), refuses to pay the fixed charges. Now, if the bank was to shut down the unit, I think the loss would be much more. However, we are hoping that things should improve and the electricity board may change its stance. So, much of this has happened because of this.

Latha: I completely take your point that there is a global slowdown and there are huge amount of problems with the way we run power sector, my point is, why are banks getting more attached to the asset than the promoter is? Can this situation be changed? One can understand in a situation like power which is so completely ridden with governmental inconsistencies, but say for instance, a situation like Kingfisher or a whole host of other industries, even for that matter steel. Let us take the case of steel which Mr Chaudhuri is referring to, Essar Steel in the previous downturn was a NPL and had to be restructured. Essar Steel, in the current downturn is also asking for more money and is an NPL, and numbers indicate that every year banks are giving more money just perhaps, that the previous money gets returned and the loan is not an NPL. Why can banks not pull the plug earlier? Why should they lend at all to someone who has already got a restructure and who has defaulted on OFCDs on debentures, on floating rate notes, it was a very clear indication that several parties had been defaulted in the previous downcycle. Could at least some of these loans have been stopped, if not all of them?

Mittal: Let me just give you preface what Mr Chaudhuri has said. I would disagree that the banks were at freedom to lend to Discoms to meet their losses. They lent about Rs three lakh crore. No country would have permitted that to happen. It is primarily because against the government guarantee my provisioning requirement is due. That does not happen. First we funded the Discom losses, then we funded the power projects which is supplying power to these Discoms, knowing fully well that these Discoms will not be able to pay and now when they are becoming NPLs, we cannot blame the Discoms. It is the total failure of the banking sector, whether the banks or the regulator together, they are responsible for this.

Latha: This is going a little far. Do you think any of the banks can refuse to fund any of the Discoms? Will your political masters keep quiet? You mean, today Mr Charan Singh can stop funding all the Discoms that he has, because in almost all cases, the expenditure is more than the income. Can he stop? Politically is that possible? Are not the politicians coming in the way? Are they not to blame more?

Mittal: This is a total lie; let me use very strong words. There is no political pressure of this kind that you fund a discom. Discoms have been funded by banks merrily because there was no credit expansion happening and when the problem came, same way they funded everybody. You keep on funding loss making public sector enterprises and at the end of the day you come to the government that we have funded government; who asked you to fund? Nobody refused it.

Coming back to your main question, I fully agree that at some stage these assets which are today bad assets were in a position to be retrieved by the banking sector and to be handed over to a promoter who could have run them well. However, each asset passes through its stage, maybe many of these assets have passed a stage when this is not feasible at all because everything virtually will have to be written-off and that is a big challenge.

(Interview transcribed by Stanford Masters and Priyanka Deshpande)

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