Additional provisioning of CDR a temporary phase: SBI

Diwakar Gupta, MD & CFO, State Bank of India, Ashvin Parekh, Ernst & Young, Vaibhav Agrawal, Angel Broking and SS Mundra, ED, Union Bank discuss the implications of Mahupatra Committee recommendations, which said that its time now for India to do away with the concept of restructured assets.

The RBI report recommends that right now, restructuring cannot be done away with or banned, but may be in next two years that may be considered. At present RBI is recommending higher provisioning norm of 5%, if a corporate debt is restructured. Below is the edited transcript of the interview on CNBC-TV18. Q: For your bank or for the banking sector what will happen if immediately provisioning becomes 3.5% which is what in the first year and 5% in the second year, additionally 5% on all new restructuring cases? What kind of a burden it might impose in terms of provisioning? Gupta: We have a restructured standard book of Rs 30,000-32,000 crore. So by a straight back of the palm calculations and other 1.5% on that is Rs 450 crore. Last year we restructured Rs 8,000 crore. So if we restructure Rs 5,000 crore this year then additional 3% on Rs 5,000 crore is additional Rs 150 crore. So, our initial estimate is Rs 600 crore, if the norms were to apply at 5% for new restructurings and 3.5% for the existing book. Q: Would this 5% deter you from restructuring, and the fear that eventually all of them will be NPLs? Gupta: No, I think there is no deterrence. The other option is to let it flow into a non performing category. Discussion on restructuring is more a qualitative one on whether restructuring is deserved. Eventually, restructuring needs to be done only where we expect the asset to come back, so additional provisioning is only a temporary phase. I don’t think that worries us too much. Q: How much do you think this would actually affect profitability? Most brokerages on the street are assuming that SBI would be the least affected or on of the few banks which would be the least affected from the PSU space? Gupta: In the PSU space our restructured book is the least percentage of advances. We have barely below or around 3% which is lower than most other public sector banks. To that extent in the public sector space we are the least affected. But around Rs 600 crore could be the effect on the bottom-line. Q: Would you be really happy if restructuring was never allowed? Gupta: Restructuring is a reality of life. If a company does not get environmental clearances, nothing is in its control. So, if that does not jeopardize the viability of the project or promoters are willing to bring in the additional burden then there is no reason why it should not be restructured. Q: Broadly is it good to be in step with global best practices? You don't pay in 90 days you are NPL. What’s your stance? Parekh: From bankers point of you, these guidelines, the report and once the comments are offered and they become the final guidelines would offer far more clarity to the banking system. You are doing away with the subjective element in terms of whether borrower will come back and become a regular payer, If a regular re-payer or he will really once again much later come back for a restructuring. To that extent it takes away that element. Second, the report is comprehensive. It takes away a lot of issues like investigation and pointing figures. There is clarity. When the monitoring of CDR comes there is clarity. It's a comprehensive report and covers all aspects, but it should be a big blessing to the bankers. _PAGEBREAK_ Q: Second clause which has been a recommendation that post initial period of two years the group recommends that the distinction between standard and impaired or loan should become one. What is your analysis and possible impact on the P&L? Gupta: I think as far as the upgradation of the restructured book is concerned, also there is a recommendation there which says that for one year servicing of the loan with the longest moratorium and I think we would fully agree with that. Q: How would you react if restructuring or regulatory forbearance is totally banned? There is a first year NPL hit. How would you react if you are not being disallowed to restructure but no regulatory forbearance? Gupta: I would go along with that. But there is a qualitative aspect that, if an account becomes an NPA somehow in the perception of lenders and the public the company could suffer. So that is the only aspect that we need to take care of.  As long as the company is standard it continues to borrow and do businesses. Q: You want the rules to change in a way that if a company which you or bankers believe is sound but has not paid interest within 90 days there should be a category which allows it lower provisioning or allows it to use to borrow further. Do you want the grey area to remain? Gupta: The company should not suffer. If a company is being restructured we shouldn't do anything that will make it harder for it to bid to business that is the cornerstone of deciding not to call it an NPA. If we send in regulation to quality non performing asset then there has to be some clarity on this company not therefore being at a disadvantage because of that classification which is regulatory. Q: Other clause that rollover of short term corporate loans over and over again should not be permitted, that is a maximum of two to three times. Is this an occupational hazard, would it be required because of the cash credit limits and the manner in which Indian banking operates? Gupta: No, I agree with the principle that a rollover shouldn't happen but a timeframe should be prescribed. If somebody gives a three month loan and it gets rolled over as against somebody who gives a six month loan which gets rolled over, so there is a time element which probably should be enunciated. Other than that the principle is absolutely fine. _PAGEBREAK_ Q: There were also the guidelines on the priority sector lending which came out. What would your view be on that? Gupta: The priority sector guidelines are not very different from the Nair Committee Report excepting for the foreign banks. They are being given time to come up to the norms and that should be by and large fine. At the end of the day, everybody has to go along with national priorities and national goals. Q: According to you, what should be the way forward? Is it necessary that banks should evolve either conventions or rules which don’t sound the death knell on NPAs? Parekh: This is where exactly the grey area begins. Who is going to do that analysis? It’s not difficult for a banker really to judge because there are indications. If a loan becomes bad on account of let’s say either policy areas, particularly in the area of infrastructure, there could be some category in between and that’s something the bankers and the RBI could really work on to say they took it with a certain acceptance. For example textiles or telecoms; these are sectors where some amount of relaxation or more articulation maybe required. But by and large I would say this was completely needed because the restructuring, when it happens, has to be within a framework and that framework has been created. Let’s look at the larger part of what this report has achieved, which is that it has really created that framework I am sure the Indian Bankers’ Association and the banking companies will work together in putting out their comments to the RBI and they will certainly look at those. But this is a very good attempt I would say to create that framework basically. Q: In terms of past history, which are the sectors you think which would be most susceptible once these norms do come into play? Parekh: To begin with, the report has come perhaps at the most appropriate time when a lot of policy related bad loans have started coming up into the system. So you take complete infrastructure; a large part of infrastructure is now waiting for policy clearance. In the absence of that, the banking system suffers the most. For example, as soon as policy clarification is arrived at, a borrower becomes a good borrower because he certainly is in a position to. So the entire issue of telecom pricing for example of 2G is one such large issue; till clarity is obtained the bankers cannot decide whether the borrowers are good borrowers or otherwise. Q: Just give us a sense in terms of what you think the impact on your P/L would be once this come into play? Mundra: As far as the immediate P/L impact is concerned, that is not a major issue. If I look that the 3% incremental provisioning to be done over a period of two years, and if I look at my stock of restructured assets as on March’12, it will be something like Rs 140 crore for the current financial year and similar amount for the next financial year plus whatever incremental comes during the year. So that is the kind of impact which it will have. _PAGEBREAK_ Q: Are you in agreement with the other rules that have been put forward, for instance corporate loans cannot be rolled over beyond 2-3 times? Do you see that creating problems of borrowers getting a little more stressed than now? Mundra: Before coming to that, let us first look at the whole framework of restructuring. I would say as a whole these are good measures which move towards the international best practices. But I would like to say that as of today, when we try to reach to the best practices, I think there are two or three things which are work in progress. One is moving towards the Basel III norms, that too in a little advance manner than what is being prescribed in the Basel III committee itself. Second I would like to mention the dynamic provisioning for which draft paper is already out. Thirdly about the International Financial Reporting Standard to where we will be ultimately converging. At the same time, when we look at the international best practices, I think there are a couple of things which are unique to India. When I say that, I mean priority sector lending and second is the maintenance of SLR. So while all these measures are good, I would believe that the time has come that all these emerging trends should be put together and their impact in medium to long term should be assessed. As far as restructuring of short term loan, not more than 2-3 times I would say is a very welcome measure. As far as we are concerned, as a matter of our internal rule we have not being such rollover till the previous short term loan is really repaid. It is a good measure to bring discipline. Q: It looks like the Reserve Bank is pretty determined to go through with a higher provisioning, even if they don’t rule out all restructuring in two years. If it happens in FY13, what is the order of banks in which it would be impacted? Agrawal: Clearly PSU banks on an average will see the largest impact; on an average about 5% of PBT impact on FY13 numbers. The ones which would be on the higher end are some of the smaller PSU banks such as Central Bank, Indian Overseas Bank, OBC and Vijaya Bank. These would see impact anywhere between 6-10%, even 12% in case of Central Bank. At the lower end would be the larger ones such as State Bank of India, Bank of Baroda etc. where the impact is about 3% on the profit before taxes (PBT). In case of private banks the impact is pretty negligible, less than 1% for almost all of them and for banks like HDFC and Yes Bank it’s hardly about 0.1%. Q: Considering that these norms have come in to play, give us a sense of how stringent your future credit deployment would be. Which sectors would you be most apprehensive of in order to basically protect yourself in terms of possible restructuring, NPL conversion, etc? Mundra: I would say two things; number one is that it was not so that there was no framework at all. There was a framework, there was a CDR mechanism, only the rules are probably becoming more defined and more stringent. So I don’t think that the pronouncement of these recommendations is substantially going to change the direction which we had already decided for ourselves. But I would ask you to recollect that for last almost one year, within infrastructure there were certain sectors, notably power, where we had already not taken any substantial exposure. We had already started growing our book under retail side as well as on the micro, small and medium enterprises (MSME) side. Our loan distribution within the industry is fairly well dispersed, so I think we would continue with the philosophy which we were pursuing for almost last three to four quarters. Q: Do you think doing away with restructured assets will be practically unbearable for PSU banks two years from now in terms of capital, in terms of profit retention? Mundra: As I mentioned in the beginning, these are still recommendations. I think these are open for deliberations and I am quite optimistic that industry viewpoints will be taken on board. But like in infrastructure, if it is mentioned that the present rule regarding COD and other things would continue in the present circumstances, the point I would like to make is even within that there are varying regions. I mean to say there are regions which can be attributed to the promoters, but there are regions which are related to the policy or the overall environment. In that context, the more stringent rule for the upgradation - that is the interest payment or the repayment of the longest moratorium facility - that is something which will certainly have a deeper impact. So I am sure when these points came for discussion we would have better clarity. I look at the present guidelines which are given, I am sure that the clarification will come like for some thing. For example, one thing mentioned that the infra financing done in India would only qualify. I am not sure whether it is about the infra project in India or financing done in India. So there are few areas where there would be discussion and I am sure much greater clarity will come. But coming to your point, if finally all these rules emerge, then naturally it would require all the banks to have a business realignment in a very strategic manner. _PAGEBREAK_ Q: How would you view Kotak Mahindra Bank, where their restructured book was only around Rs 12 crore in the quarter gone by? What would your pecking order be within the private banking space in light of these recommendations? Agrawal: Private banks are the least impacted by these restructuring norms. It’s not just the restructuring, even their asset quality has been better. Even if you look at the priority sector norms that have come out, as compared to the Nair Committee recommendations which have been very stringent for private banks, those have not been accepted by the RBI. So that is also another sign of relief for the private banks. So all in all definitely these developments are positive for private banks. Within that space, also taking into account the growth prospects and valuations, Yes Bank is the stock which is our top pick. Q: Certainly there will be medium-term pain, more for PSU banks than private banks, if all these rules came together. Nevertheless, would you say that if these were gone through, you would get a definite rerating of banking sector altogether because it would be on a much sounder footing? Parekh: It would be. Certainly by and large what would then happen that anybody who is looking at our banking sector will at least take a complete comprehensive look and say that it is a system which is actually recognizing not only the account but also has a clear restructuring kind of plan. However, we seem to be getting a very conservative approach regards everything; we touched upon an important point of SLR, that is the cost that banking system is paying for the stability. Liquidity risk is one of the risks which gets addressed by way of SLR. These things come in some form or the other and we have taken a different approach, it’s not international approach. We are already paying a huge tax in the system for that stability, to keep on burdening the system with more stability to do away with the systemic risk. So the point was the larger aspect needs to be examined, a collective approach to not just the Basel III recommendations and all the guidelines which have been issued but also restructuring in the context of that. Q: If these rules were to come, it’s a bigger burden monetarily on the banking system. But will they get some brownie points because it’s a better run system? Agrawal: Definitely, none of these guidelines are irrational. Looking at the past experience of what actual losses banks have faced on restructuring norms, this kind of requirement coming in was quite rational. So it will make the numbers more realistic and it will make the balance sheet stronger for banks as well. Overall it’s in the right direction.