Is the worst over for banks in terms of bad debts?

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Is the worst over for banks in terms of bad debts?

N Seshadri of Bank of India believes that the pressure on liquidity still remains and there is definitely a lag effect in terms of lesser capacity getting utilized and a possible slowdown in capital expenditure.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about Bank of India See previous management interviews See what other Experts & Brokerages are saying about Bank of India

In the past two months, there has been a distinct increase in the amount of political attention and action to key sectors that have plagued the banking system with bad debt. The power sector is being looked into both coal import and mined quantum of coal is likely to increase; the government has decided to guarantee the Air India bonds and there are no fresh scams.

More importantly, interest rates may have peaked. N Seshadri, executive director of Bank of India and Pawan Agrawal of CRISIL ratings share their views on the sector and its problems.

N Seshadri of Bank of India believes that the pressure on liquidity still remains and there is definitely a lag effect in terms of lesser capacity getting utilized and a possible slowdown in capital expenditure. Furthermore, while Seshadri doesn't see the NPLs to rise substantially, he expects more of restructuring in the system.

According to Pawan Agrawal of CRISIL ratings, NPAs will rise from March 2012 and this is a trend that that will change after several years of NPAs remaining at about 2.5% in the entire system.

He added that since higher interest rates have remained in the system, the pace of increase was frequent and also the fact that foreign exchange volatility has been high, we are likely to see pressure on the debt servicing capabilities in some of the sectors. He said, "If I look at what we are noticing on our rating actions, we are seeing that last quarter we had more number of downgrades than upgrades which is again a trend that changed after a period of several quarters."

Below is the edited transcript of the interview with CNBC-TV18. Also watch the accompanying videos.

Q: We understand that Rs 7400 crore of government guaranteed bonds are likely to become a part of the Air India restructuring. Can you give us the highlights as you know them?

Seshadri: As of now, the final details are yet to come but on the basis of what the discussions we had in 2-3 rounds, three issues clearly emerged. One is on the duration of the loan, second is on the sacrifice or the provision that the bank had to make on the net present value between the contracted rate and the future interest will be charged and third is how those cash flows, which would affect the Air India business, would in turn be available to meet the commitments towards the bank interest and repayment of principal.

Clearly, there was agreement on the duration that all the funds will be used for long term. There is clearly a need to move from the short term loan to long term and there is a broad agreement and banks have given a clearance on the 15 years repayment of the debt. We are quite happy that the government of India has agreed to guarantee us the interest payment, which is very critical.

One of the reasons why the CRPS was not really finding favour with the banks was CRPS as an instrument needed to be serviced with the current year income and the business model of any airline for that matter, even Air India in particular, doesn't see it to create servicing capabilities. That is exactly why banks have been asking the Government of India to guarantee the principal rate as well as interest so that they remain a performing asset.

Q: How does it benefit you? You have asked the government to guarantee the principal and repayment. Is it to only that Rs 7,400 crore which is now being changed from cumulative preference shares to government bonds or is the government giving a bigger guarantee in terms of the Rs 11,000 crore - the bigger part of the bonds of long-term loans?

Seshadri: My understanding is these bonds will be outside the portfolio of banks. Probably, these bonds would be guaranteed by the government and will be taken by insurance companies and other players. So from the Rs 20,000 crore odd, the total outstanding to the banks will come down by a similar amount and the government will independently guarantee these bonds.

This Rs 11,000 crore needs to be serviced by way of periodical provision and capital infusion by the government. We expect the interest servicing and the principal to be guaranteed by the government because otherwise Air India, on its own, may not be able to really service this interest. Therefore, I said we need to work out the final details.

Q: Has the government agreed on the second part and how will it make a difference to your provisions?

Seshadri: If the principal amount is guaranteed, there is no requirement in terms of the security. Otherwise, an unsecured loan, if it is not guaranteed or serviced, there is always a threat of that becoming an NPA. More importantly, Air India may not be able to service this debt of Rs 11,000 crore in the near future and there must be an infusion of capital from the government by way of periodical provision from the budget so that the interest gets serviced with the banks.