Feb 14, 2018 06:59 PM IST | Source: CNBC-TV18

New NPA Rules: RBI's mega resolution overhaul

February the 13 may well be as significant for bankers and borrowers as the 26th of January when a new constitution was drawn up for the republic. In a near midnight swoop, the Reserve Bank of India (RBI) unveiled a new charter of rules for recognising default loans and how to resolve them. RBI has ordained what is financial weakness and failure to recognise them will invoke special penalties on banks. Also special rules for loans over Rs 500 crore and over Rs 2,000 crore.

CNBC TV18 @moneycontrolcom

February the 13 may well be as significant for bankers and borrowers as the 26th of January when a new constitution was drawn up for the republic. In a near midnight swoop, the Reserve Bank of India (RBI) unveiled a new charter of rules for recognising default loans and how to resolve them. RBI has ordained what is financial weakness and failure to recognise them will invoke special penalties on banks. Also special rules for loans over Rs 500 crore and over Rs 2,000 crore.

In an interview with CNBC-TV18, Sunil Srivastava, Deputy MD-Corp Accounts Group, State Bank of India (SBI), Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services, Abizer Diwanji of EY, VG Kannan, CEO of IBA, Sanjiv Bhasin, EVP-Markets and Corporate Affairs, IIFL, G Padmanabhan, Non-Executive Chairman at Bank of India, Siby Antony, MD and CEO, Edelweis ARC, Krishnan ASV, Lead Analyst - BFSI, SBICAP Securities, Pawan Kumar Bajaj, MD and CEO of United Bank, Rajkiran Rai, MD of Union Bank and Krishnan Sitaraman of CRISIL Ratings shared their views and readings on the same.

Below is the verbatim transcript of the interview.

Ritu: Since you are one of the biggest insiders into the workings of corporate India, surely the idea behind introducing these new rules is to clean up the banking system and not really incapacitate banks. How do you read these new rules that have come in with strict timelines whether it comes to disclosures in notes to accounts, whether it comes to sending these cases into NCLT if they do not adhere to that timeline, how do you view these set of rules, they remind us of what Deepak Parekh once said about too much anesthesia sending patients into comatose.

Srivastava: It could not have been more propitious because on the auspicious day of Shivratri we have a change of an old order and a new order has been notified. On a serious note, I think it is a very comprehensive notification and it would encourage early recognition, justification, restructuring, resolution, or recovery as the case may be. This absolutely was required and the earlier dispensation had failed because of various reasons, the S4A, CDR, SDR, or whatever alphabets you would like to use, but frankly there are issues which will also need to be attended beyond these regulations.

Latha: First I wanted to ask you, from February 23 to April 1, you have to report on a weekly basis. Are all banks sufficiently connected with core banking and other software that every branch and every regional office that finds such a default will be able to report it to the head office?

Srivastava: Even now the classification of SMA 0, 1, and 2 is being reported, not to RBI, but internally to the controllers on a regular basis. We get it on a daily basis actually.

Latha: So you do not see a problem in that.

Srivastava: I do not see a problem in reporting.

Latha: Even for smaller banks, SBI is a different class, but other banks could have a problem.

Srivastava: I am sure this is a very minor tool, all the banks would be capable of adhering to it.

Latha: Do you think that even if one bank finds the loan a bad account, all banks will have to classify it as an NPA and that is immediate because on a monthly basis you are reporting. Do you think there can be an immediate swelling of NPAs, rise in NPAs?

Parekh: There will be, I am sure, because what may now happen is with stricter reporting and I am glad that this stricter reporting regime is now being out in place, it will get reported. However, we have to somewhere connect this with the recapitalisation of public sector banking. I suppose somewhere along I am reading a message which says that if the banks are now adequately capitalised, let them first clean up their books, let them report all the NPAs, let them not do ever graining, so there are ever graining related norms as well, and there are strict reporting norms. So I suppose I am connecting the two together actually.

Latha: A blank cheque of a question, how is it different?

Srivastava: In the sense that now there are prescriptive timelines which define the end game, so this is a recognition, this is early recognition for every participant and every stakeholder. From the point of view of the promoters, they will have to wake up much earlier. It defines the end game, but that is why I said, there are a few more steps that will ---- be required going along the way and I am sure they would be coming either by government or RBI. This will definitely come in because the business has a lot of uncertainty and now the ability to manage risk on the part of the promoters themselves who now have to recognise the problems much in advance, because they are the first ones who would actually know the problem. They could perhaps know the problem even at the SMA – standard at which they are not in SMA 0 as well because policy changes, technology changes, market changes, so this is really going to be a test for the promoters.

Ritu: As far as the immediate impact is concerned, will there be a spike in NPAs? We saw SBI results come out recently, a big chunk of NPA loans was identified, but for the system do you think these guidelines mean an immediate rise in NPAs?

Srivastava: I don’t think, every bank is now conscious of the divergence and every bank will try and recognise the problem much in advance, not giving the regulator the chance to point out divergences going forward in the future. However, definitely there are a few cases which have been implemented in the S4A, CDR, SDR cases which will need - whatever corrections need to be implemented now will have to be done in a hurry, in the 180 day period that has been given now. So definitely there are a few cases which have not been implemented fully and the key there is not that the plans have not been developed on firm footing, the fact is that the implementation, and the time that it takes for various banks to give their sanctions, which actually delays the in process of implementation.

Latha: Let me understand this, does this mean that take for instance say Renuka Sugar, or take say Reliance Communications, now you get six months because I think both these are already known cases which are under SDR or some other scheme.

Srivastava: I would prefer not to discuss individuals.

Latha: No, you do not discuss names, but do we have to understand, I am trying to understand for an investor audience who will be watching the show, should we understand that these which are already in a scheme, will get six months, and if in six months it is not implemented, it goes to NCLT, right?

Srivastava: Whichever cases are seriously under CDR, SDR, or S4A, they will have to be rated and those two ratings will have to be taken by two -- depending on if it is Rs 500 crore and above, we will have to take it from two rating agencies. If they point out that okay that based on the restructuring they are BBB minus and above, they are cautious.

Latha: But for that Rs 500 crore and above you do not have the six months issue, for over Rs 2,000 crore only within six months you have this deadline, right?

Srivastava: Yes, so, all those guesses would be above Rs 2,000 crore in CDR, SDR, and S4A. Definitely there will be a greater adjacency on the part of all participating banks to implement the plans in totality.

Latha: What is your sense, with this requirement as Sunil says that you have to even get them rated, whatever the Renuka’s, the steel companies, the construction companies and even the telecom companies, they have to also get rated, are you getting a sense that there will be an immediate spurt in NPAs?

Kannan: That could be possible but it is also possible that the resolution plan will be properly worked out. Overall I feel that this particular circular is actually a very simplified version, empowers all the banks to do whatever they want in any form, it does not give any restriction saying that it has to be sustainable, non-sustainable etc., how much has to be converted. You can give any structure you want and give full freedom. At the same time, as Sunil was mentioning, is also incumbent on the borrower to ensure that his account is standard.

Ritu: You have seen the new overhaul guidelines on resolution of stressed assets, what does this mean immediately in terms of your reporting of non-performing assets? Do you see a spike coming in the next coming few quarters because of these guidelines and how prepared are the banks to take these?

Rai: I do not think reporting is an issue because as of now also we have this dashboard and every day we get data on defaults. So that we will be comfortable reporting part. I do not see a spike coming. Actually like the problems are mostly are identified, they are in our restructured book and major portion of that is already identified, but one thing we should understand is like regulator is going to be more strict on these accounts, the way we restructure, the rating coming in, even though it is part of IBC now, but at the same time what is our learning from this cycle is very important. Last four to five years, this bunching of NPAs and the bunching of provisions have happened because we had a lot of restructuring plans which did not yield the right results. So, hopefully the regulator is looking at mechanism so that in future we do not have this kind of issues. The problems are resolved in first stage itself instead of postponing.

Latha: That is point is taken but to get to that point, we have to pass through a huge period, that is what is worrying. As a person outside the banking system and yet very close to it, what are your thoughts? Our first desire is to know immediately whether there could be a spike in NPAs, your sense.

Diwanji: Of course there will be a spike in the NPAs, I think that is the intent of the RBI also. Why I say so is because I think one of the loopholes that they wanted to plug is people declaring SDRs and effectively getting an 18 month moratorium; that has kind of gone away now because they are saying that any provision has to be recognised now. So I think failed SDRs will be a big source of provisioning that will happen to the banking system I think in the next quarter for sure. Having said that, I agree with VG Kannan, these are very simplistic rules, and great that they are very simplistic rules because it allows a lot of flexibility. Also I think it will increase the supervisory burden on the RBI because as plans become more flexible, they become more subjective and hence the provisioning on them becomes that much more difficult. So I think we will see this divergence widening over quarters as we go along as the banking system gets used to more subjective norms.

Latha: I thought they are reducing the areas of subjectivity because now the RBI is giving you a non-exhaustive but indicative list of what is the meaning of financial weakness or financial difficulty and that is some exhaustive list. Inability to maintain required margins, drawing more than sanctioned limit, delay in payment of liabilities under letters of credit, excessive leverage, and excessive leverage, look at that, inability to meet financial loan governance, failure to pay statutory liabilities -- if you did not pay your EPFO or GST or something, undue delay in submission of accounts to the stock exchange or incorrect submission, delay in publication of financial statements, and steep decline in production figures – if there is a production downturn or a global commodity downturn or something, steep decline in production figures, downwards trends in sales and profits, elongation of working capital cycle.

Ritu: Excessive inventory buildup which impacts the real estate companies that are sitting on so much inventory, they immediately fall into this list then.

Latha: If you do not recognize any of these weakness then you are to be faced with monetary penalties. Just your reaction to this – identification of weakness?

Srivastava: These are as much a responsibility on the bankers as much as they are for the borrowers. So eventually a correction will have to take place much before the default occurs which means that otherwise they go to the NCLT and in the NCLT obviously these guys will be debarred from if they prolong the period too much. So I would expect that the recognition would come in much earlier and the resolution which would actually be devised by the borrower himself as to what is the corrective situation which confirms to the requirement would come to the fore much earlier than it is coming today.

Latha: That is what I am asking you. As you say it will come into your ken much earlier because the borrower also has his responsibilities. In that case – to repeat Ritu’s question – immediately do you think that for the next 12 months there could be accelerated NPA recognition or classification?

Srivastava: Wherever we are facing problem on resolution, and these guys have failed SDR policies as Abizer mention, definitely these would be reported as NPAs or if we are looking at the Special Mention Accounts (SMA) 0, 1 and 2, now the efforts to clean up or to take corrective action would be initiated at SMA 0 stage itself. Now caps have been removed so the onus now lies on the bankers and also the borrowers come up with resolution plan much before it shifts into a default situation.

Latha: Until now it was the reportage quarterly because if it is in a month, suppose the loan was due on 10th and the borrower doesn’t pay but he pays on the next month 10th or something like that. He doesn’t pay on the 31st day but pays on the 51st day. Will there be a problem that you cannot have even within the month upgrading and therefore more people have to be reported?

Padmanabhan: It is right. I think the challenge that the guidelines throws up is we need to do a real time monitoring recognition on reporting and the first time the slippage happens then you will be able to classify this as a performing asset only after the entire arrears get paid. So within a week, if you are reporting every week and within a week if this is happening is a different matter, but once you have recognized this as NPA -- so far we were doing this on quarterly basis; if you are going to do this on real time basis, I suspect there could be some additions which could happen as far as the NPA numbers are concerned.

Ritu: Do you concur with Mr. Padmanabhan?

Srivastava: Right now the slippage happens only after 90 days. So it is SMA 0, 1 and 2 which means the notification that some action has to be initiated, is going to come on real time basis and that resolution has to happen as soon as you come to know that he has slipped, not paid the interest for a particular bank.

Latha: So you are agreeing that there could be an accelerated recognition?

Srivastava: Absolutely. Sebi was also coming with a circular of downgrading of ratings based on the slippage, on inability to service on a particular day. I think that was a timely thing. Now we have the realign the downgrading of the rating to the SMA 0, 1 and 2 stages which will force banks to come with a resolution plan and also the borrowers come with a resolution plan much before the default happens.

Latha: As Mr. Padmanabhan is saying now we have real time recognition requirement?

Kannan: I would say early recognition of stressed assets, not necessary NPAs because the moment you recognize the stressed asset -- today what happens, only when it becomes SMA 2 you start taking action. Now what has probably happen is, once it becomes SMA 0 you start having the meeting, have the discussions.

As Sunil rightly mentioned, in many advance countries suppose a particular payment is due on February 25th and he knows in advance that he is not going to meet it, he will come and inform the bank and say I need this and I will be in a position to resolve it. You have a meeting, you discuss it and say okay. Within ten days it will be resolved. You have to say I will postpone this. All those things can be done.

What the circular actually says is please take advance action on any probable stress in the system and incase the stress is already taking place by way of default SMA 0 or 1 please have a proper resolution plan in place. A resolution plan - they have given wide spectrum of resolution probabilities. I think everything can be taken. It can be understood what they, start the action from day one of the default.

Latha: All banks have this bandwidth. SBI may have and maybe even Union will have but will all banks be capable of this real time reporting and second, the bandwidth to deal with it?

Rai: I think with core banking all banks have this capability even though there may be some erroneous reporting in the beginning. I am very sure these things will be corrected.

Adding to your NPA spike issue, I do not think RBI has tinkered with 90 days norms. What they say is 30 days you start looking at the account and restructuring and another conclusion we need to draw is if a company has got temporary issue it can be resolved very easily by restructuring but companies having major problems in their cash flows and other issues like right now we have so many mechanisms to postpone that. That long-term issues have to be tackled differently. I think that is a purpose of this guideline. So we need to differentiate between temporary issues and long-term issues which the company has faced and act accordingly.

Latha: Your guess about the banking system. We have got huge amount of capital, it doesn’t look all that huge now or will the money be only enough for slippages and nothing left for growth?

Srivastava: I would assume that with the recent capitalization and the bank being allowed to also raise capital maybe the government is also diluting its shareholding a bit. There would be opportunities for the banks to raise further capital from the market. I do not know whether each individual banks will have enough capital to grow or to meet its NPAs but at SBI we are comfortable.

I would expect in this policy because we are trying to encourage borrowers to identify the problem and come with a resolution much before the event. There is one clause which acts as disincentive and therefore, if a borrower is a standard asset and services his interest in time but recognizes a problem; a problem can happen on account of variety of reasons, you don’t have certainty in business and initiate the action – while as a standard asset and as a non SMA 0, he will be penalized for a period if restructuring is going on. So that needs to change so it will encourage people to come with a resolution and identification of problem much before.

Latha: We have been listening to all the bankers and there is this rule that disclosures have to be made in the notes to accounts. How will market react on February 14th?

Bhasin: It is a welcome step. It tells you that the government is now after the huge recapitalization, having thought on how they are going to put good money after bad and the RBI being prudent, it wants all NPA recognition to be at the forefront and also it tells us that you cannot kick the can down the road because of time, commodity cycle and upgradation of technology redundancy of assets is across the board, so the faster you resolve it, the better it is.

We have some banks which have come out with results where gross NPAs have crossed 20 percent on quarter basis and in two quarters they will out of their entire capitalization. So it is telling us that dire ire circumstances are there. Market fails to believe the book value of most of the public sector undertaking (PSU) banks and that why they trade at a discount. So market will wait how fast this can gather stream and we get faster realization of bad assets. So in a bigger macro it is a welcome step but in a shorter run it is going to see an escalation of NPAs in a next two quarters in a big way.

Latha: I am asking you because on Monday we actually saw the rally being led by public sector banks and corporate banks as well. Generally it was the bank index which was ahead of the Nifty itself. Do you think with these rules in place, on Wednesday it will be selling time for corporate facing banks, private and public?

Bhasin: Bank of Baroda came out with better than expected numbers on their cleansing and the road forward whereas SBI came with a kitchen and sink quarter. In the garb of the merger, they came out with all their NPAs which was quite a shocker with a loss. So, it is telling you that the market is discerning, like I said the rising tide raises all boats, I would say it is time to sell because definitely cash infusion, the longevity of this period is going to be painful for at least the retail investors who own stocks.

Latha: You are going to sell them all down to less than one-time book, will you redraw the book itself. So until what point will you sell the corporate facing banks. We saw huge rally for instance in IDBI Bank as well with all kinds of rumours of restructuring. Indian Overseas Bank (IOB) rose by 4.3 percent, Andhra Bank rose by 3 percent, PNB 3 percent, Yes Bank 3 percent. All these banks are corporate facing banks. So, what happens on Wednesday and thereafter for the rest of the week as the market internalises these new rules?

Bhasin: I think markets will be in sync. We are in 8 percent correction and a 10 percent correction globally where a lot of the froth is now getting unwound. Also, bond yields are now the big headwind which you are combatting. Like I said, it has been on a quarter basis, certain banks have come out with better numbers and they have indicated that they have cleansed out large part of their slippages, but I think that with this new constitution, there will be a lot of NPA recognition which will accelerate faster. In the longer term it would be positive, but in the shorter term it will mean pain on the numbers if we are looking for absolute numbers. So, I think the PSU banks will definitely be under pressure tomorrow and for the rest of the week.

Ritu: Exactly how much is that pain, a lot of the guests on the panel have been saying yes there will be an acceleration and recognition of NPAs, but how much pain there really be? When RBI has withdrawn all the existing guidelines in the current restructuring schemes, it says that accounts where these schemes are invoked but not implemented, only those particular accounts will be governed by the new framework. The quantum of such restructured assets under these various schemes where the scheme has been invoked buy not yet completely implemented and therefore they will be impacted by these new norms.

Padmanabhan: I know there are a few but it would be difficult to off and tell you the numbers. However, there are some accounts which are in the process which is yet to be completed.

Ritu: If you could tell us what would be the proportion of these restructured assets where the schemes have been invoked but not implemented and therefore they will be impacted by these new norms?

Diwanji: My estimate is that roughly around Rs 35,000-40,000 crore are currently SDRs invoked; roughly the number Rs 35,000-40,000 crore would be the number. However, one has to understand a few things in this and I wanted to say this earlier, when we say default versus NPA, what happens when schemes are in SDR? They are not NPAs, but they are in default. So I think under the current guidelines, those will attract provisioning almost immediately but what we tend to underestimate is when we say you are in SDR, you are exempted from the provisioning mechanism – you were rather, I will speak in the past tense now. However, in the present tense, you are a defaulter and hence attract a provisioning almost immediately. So I think SDRs which had a moratorium on provisioning will take a back-ended provisioning again in this quarter.

Ritu: Isn't this in-line with IND-AS will bring anyway in terms of accelerated provisioning, perhaps this is preparing banks for that new regime as well?

Diwanji: IND-AS basically talks about expected loss. Leave the expected loss provisioning out. Expected loss will obviously cover the gap in terms of provisioning going forward, but if we talk about specific SDR cases, the question that you were talking about, in that we were not providing for and frankly everybody took companies to SDR just to avoid the provisioning or turning it NPA. Now all those things will attract provisioning right from retroactively again because the default is there. There are cases again in those Rs 35,000-40,000 crore worth of SDR where there has not been a default post SDR.

Latha: How many such cases may be there where accelerated provisioning will kick in you think those under SDR, S4A?

Srivastava: Recall the statement given by my chairman where he has given a guidance for 2019. After all it has been done after carefully reviewing the all arounds, including the SDR cases. So what Abizer Diwanji is saying I do not disagree with him, but as far as SBI is concerned, we have reviewed each and every case and based on which the chairman has given a guidance and we will stick to it.

Latha: Ritu’s question was not with respect to SBI at all, we are not at the moment discussing specific banks. Her point is how many cases of SDR and S4A are there out there, what is the amount – are we talking about Rs 1 lakh crore, are we talking about Rs 70,000 crore which immediately will attract provisioning as Abizer is saying?

Srivastava: Yes, Abizer may be correct, he is collating all the figures for all the banks, but surely these would have been factored in by all the banks. So as has been mentioned earlier that we are not seeing the absolute end of the cycle. We will perhaps have to live with this pain for the next couple of quarters, but definitely the guidance that has been given for 2019, especially by my bank, I think that is reasonably achievable.

Latha: One of my colleagues has calculated this for a few banks and he says for SBI though I think this may be as of September 30, the standard restructuring as a book percentage of total advances is 3.17 percent for SBI. He has counted 5 by 25, SDR, S4A, and the restructured book, and the total he says is Rs 57,000 crore, 3 percent of the book. Would that be right?

Srivastava: I do not think we should confuse 5 by 25. 5 by 25 is linking it to the economic life of the asset. There were hotels and there were power projects which were financed for 10-12 years, where the economic life is 25 years, they are not in stress.

Latha: That rule goes now, at the moment it is in the appendix, the list of rules which now stands canceled, annulled.

Srivastava: Yes for future but if they are not in the SMA 0, 1, and 2 stage why should they be considered as stressed.

Ritu: The other point I wanted to get to is while they have said they disbanded the joint lender forum (JLF) completely, how are these resolution plans to be arrived at, there is no guidelines clearly specifying whether 60-75 percent of bankers have to approve a plan for it to be implemented, how will we go about this especially now that the revised guidelines we are talking about sending empowered bankers to the JLF meetings to take quick decisions. Now with the JLF being disbanded, do you think getting that resolution process kick-started and done in that 180 day timeline, will that be a challenge?

Srivastava: Definitely that would be a challenge because one of the greatest impediments of implementing a corrective action plan in the JLF has been the interest of various banks based on the exposure that they have had. So that would be definitely be a challenge and that is why some structural intermittent would be required, maybe devised by the participating banks.

Latha: What are your thoughts on this?

Padmanabhan: First of all let me give you a number which you asked for, is that what is under implementation under the various schemes as far as my bank is concerned. There are about 23 accounts and roughly about Rs 4,500 crore. As per the size of the bank, I do not think it is such a large number.

Latha: I just wanted your thoughts, a more open question, where do you see the pain points coming where perhaps rules needs to be tweaked?

Padmanabhan: The pain points come in, I am yet to see a resolution really happening under the NCLT so we are pushing now all these cases to the NCLT. If there is going to be a clogging there, then what is going to happen is that this is going to take much longer time than we actually wish for as far as the resolution is concerned.

There is a second aspect in respect of those annexures which you talked about where if there is for instance an excess leverage is there, you start recognising, I think these annexures in my view will have to be looked at from two point of views. One clearly where in terms of what is stated there, you will have to recognise the problem, the second is you need to ensure that if a problem is starting as VG Kannan said from day one if there is a problem, all these are the tell-tale signs which have to take on board to make sure that you are monitoring this closely. So what RBI is pushing the banks towards in my view is to make sure that you make this monitoring process much closer and the recognition process much quicker than it is happening today. So unless the ecosystem is able to support this in terms of resolution, I would think that banks could face a lot of challenge.

Ritu: In that case I would like to ask you is now for the large accounts it is NCLT if you cannot resolve these accounts in 180 days. Do you think IBC is the preferred route for bankers given the large haircuts we have been seeing and if that was the case, why have we seen so many banks list out all of those IBC accounts when they are trying to sell assets to ARCs and other financial institutions. Why selloff these accounts when you think NCLT is a better resolution mechanism?

Padmanabhan: Because NCLT mechanism, we are yet to see success; this is something which is yet to stabilize fully. So since there is a pressure on the banks to make sure that these accounts are resolved as quickly as possible, banks like us at least are thinking of various means to make sure that the recovery happens.

Latha: What you fear is that the NCLT could get clogged?

Padmanabhan: I am not suggesting that it should get clogged. I am saying that we are yet to declare victory because that is a process which is – it’s a new process which is getting stabilized and if the stabilization unless it happens and we see the resolution happening which will make all the banks comfortable about the entire process end-to-end then initially if we are going to push more accounts into that, we fear that whether that ecosystem will be able to support. I mean maybe it could but today it is uncertain.

Latha: Do you think there will be a shortfall of capital?

Rai: It depends on reporting what will happen after March 1. If the numbers are huge then yes. Actually we need to get a feel of the numbers which will come then only we will be able to draw a conclusion because we feel that at this point of time, if you take SDR and S4A, the numbers are being discussed. Actually a lot of SDRs and S4As have already slipped and the remaining are likely to slip in Q4. So I do not foresee that there will be huge spike because of SDR, S4A because more than 80 percent has already slipped and the remaining will slip now. We need to see the numbers as to how much are under SMA 0 and SMA 1 because industry doesn’t have a fair picture of SMA 0, 1 at this point of time unless we have that number, it will be difficult to take a guess. Once we have that number then definitely we will start looking at it and try to assess the revised capital requirements.

Latha: But your suspicion is that there could be a capital shortfall?

Rai: Maybe if the numbers are bigger and if the accounts are coming from outside of the watch list than what we have because we have estimated based on the data, on the accounts which we are watching but if some accounts come from outside of this list then there will be some revision in working.

Latha: Two question – one, because of the new rules will there be more slippages than you anticipated and will you fall short of capital?

Bajaj : As per the new circular definitely we have to analyze the position and whatever position -- I am seeing, my bank position and the industry, I think once this new rule which is going to be implemented and scrapping of SDR, S4A, definitely I feel there will be spurt in NPA position and more so this is done just to resolve the issue in a much quicker manner. However, earlier thing was that in many cases some banks have classified the accounts and some have not. Now it will be even one bank, if there is, then everyone has to do and reporting is to be done on monthly basis, definitely it will be much quicker resolution to the NPA.

Latha: Therefore, will you worry that capital maybe inadequate?

Bajaj: We have to calculate that. Whatever standard restructuring position as to our bank is concerned, the amount involved is only Rs 2,300 but with this any new thing comes up then we have to analyze that and if more accounts will come definitely because whatever earlier estimation we gave for this capitalization that will change totally.

Latha: Give us your sense. One, will slippages increase. Two, will capital be adequate?

Kannan: Abizer mentioned about Rs 45,000 crore could be the amount which is under SDR and S4A. I also agree with Mr. Rai saying that some of them may have slipped. The actual quantum will be decided. There could be some additional slippages but what I am seeing as positive thing is that once we have the NCLT process through in couple of months and that will give a clear signal to the entire market as to what is going to be the process and the bankers and the borrowers will sit together and resolve the case immediately and then if at all they fail they know they are going to lose the company because if it goes to the NCLT then they end up losing the company. Therefore, there will be a lot of keenness on the part of borrower to ensure that they are in a position to come back to the bank well in advance. In case they are having SMA, they will come and resolve. Therefore, it is very positive.

As regards the capital requirements. Yes, there could be some marginal additional requirement but what I am also getting worried is on the bond yields also going up which could add more fuel to the fire. So it is a difficult position to be in today.

Latha: Your answer to the same question. A word on whether you will worry about capital short-fall accelerated slippages?

Parekh: I am worried about three things now. One, I am certainly worried about the cost of compliance because the evidence gathering will have to be really at the grassroots level and it has to be made available for supervisors to examine. The second thing is out of Rs 215,000 crore of the additional capital that the public sector banking is likely to get or will be getting in the next two years; this year and the next one. I am certainly seeing that a good portion of that will really be used up in cleaning up the balance sheets of the banking system. So the amount of money that will be left for growth – to my mind it’s a question mark and the third directional question that I am seeing somewhere coming out from the regulator’s office is that the capitalization and if that is not going to be adequate for public sector banking then should the government be holding on to 51 percent. Should it do something about capitalization. I mean this no cash kind of a recap bond arrangement can work only for a while but the size of the problem is too large then there will be some directional issues that may come up for the government, for the policymakers. The regulator has clearly said that let’s use the money first to clean up the system.

Latha: The rule say that as of March 1 the announcement will have to come on monthly basis. The first set of accounts where you will know how much is resolved, under implementation and all those details. You all will get to know when the earning season starts for the April quarter. Until then how will you look at all the corporate facing banks and I meant corporate facing banks. I am including ICICI Bank, Axis Bank and Yes Bank in this as large corporate facing banks.

Bhasin: First to the point that Mr. Parekh made, I agree wholly with him that all the money which is going to be used be pumped in or recapitalization. A large part, I think 80-90 percent will just go in controlling the damage and there will be hardly any money spent on growth which the government’s actual idea was. Second, you have already tried to privatize the banks by putting IDBI on the block but there are no willful buyers and third, on market perspective you may see some pullback but this will be a big negative in the short run because where are you going to get growth. All you are doing is you are cleansing balance sheet which only adds and escalate the NPA provisioning. So for us March will be very difficult period with bond yields, cost of money and rupee, all under pressure.

For entire discussion, watch accompanying videos.

tags #Economy

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