Banks can perform only if economy improves: PNB's Kamath

KR Kamath, CMD, Punjab National Bank (PNB) and chairman, Indian Banks' Association (IBA) discusses the challenges in store for the banking sector with  CNBC-TV18's Gopika Gopakumar, at the sidelines of Bancon 2012- an annual event that showcases the best and the brightest minds in the banking industry.

Also read: Banks well positioned in terms of liquidity & deposit: SBI Below is an edited transcript of the discussion on CNBC-TV18. Q: Do you think the situation will improve for the banking sector in Bancon 2013? A: Let's begin from 2011 for a proper perspective on 2013. Banks are the aggregators of the economy. Between 2011 and 2012, the Indian economy slowed down and the obvious impact of the slowdown on the banking industry has caused the stress on the assets. On Tuesday, the finance minister clarified that it is difficult to expect banks to perform when the economy is slowing down. So the status of the banking sector in 2013 will depend on how the economy behaves over the next one year. Q: From a three-year perspective of joining Punjab National Bank in 2009, do you think the lack of adequate credit appraisals could have caused the deterioration in asset quality? A: I don't agree with the view that the credit appraisal was not correct. In 2007-06, the growth was good, there was widespread and the talk in the market was heady with 'India Shining'. But when the slowdown began all those who took pride in the economy passed on the blame to the banker. When the going was good, nobody gave credit to the banker. I fully agree with the view that if there was an indication of what was to follow, the banking sector would have taken action to prevent the economic damage. But if the banks had not acted at that point in time, the economy would not have witnessed a growth of 8 percent. Q: Do you think there is a need for a sort of one-time dispensation for restructuring like in 2008? A: Between then and now, a lot of things have changed. There was a crisis and at a particular point in time, it was said that if banks had a restructured a standard asset in its books, it could be continued to be classified as a standard asset. But today, banks have to provision 2.75 percent on a restructured standard asset and to that extent the banks are bearing the brunt of the pressure of the slowdown. So, what is the purpose of the one-time dispensation? The Reserve Bank of India (RBI) has said after studying international practices that restructured assets are like impaired assets and has called for the adoption of international standards. So, increased provisioning for assets that are close to sub-standard lowers the benefits of a special dispensation. A substandard asset requires provisioning of 15 percent while the provisioning for standard restructure, with all sacrifices, is around 12 percent. So I do not think that there is a need for any special dispensation. The situation needs to be handled. Q: Is there a need for consolidation and is the time right? A: The finance minister clearly pointed out, in his inaugural speech, that there was a need for an economy of our size to have two-to-three global banks. At the same time, he did not rule out the scope of smaller banks. Regional rural banks (RRBs) and local area banks have an equally important role to play. So India wants to be among the top three or five global economies, there needs to be a financial system supported by a banking sector. To this extent, what he said is absolutely correct. But the finance minister clarified the government did not have a roadmap for consolidation and added that the process had to be driven by the management-boards of banks. So, consolidation is not on the top of my mind as of today. Though I cannot comment on this as the chairman of the Indian Banks' Association (IBA), but as chairman of PNB, it not a priority. But if there is an enabling environment and availability of opportunity, I will not hesitate to encash that opportunity. _PAGEBREAK_ Q: As IBA chairman would you be a tough negotiator in the tenth bipartite bank-wage negotiations that have commenced or would you be lenient to the unions' demands this time? A: I think I would like to be a reasonable negotiator than tough or lenient. One needs to look at the reality of the economic situation around us and try to achieve a compromise. Q: Do you think there is a need to look at performance linked payments and salaries, do you think under your chairmanship you would probably move something like that? A: In the last wage negotiation we had this topic with them saying that we need to look at a structure where we have a broad contour which is common to the bank, banking industry, public sector and there can be something little different. It already exists in some other way in the industry today because there are so many other areas where the banks depending on their profitability. Try to look at some of the perquisites or additional facilities being given to them. There is also a performance linked incentive which is provided by the government. A good section of this goes to the employees whose wages were negotiated. I think that appreciation is there in the unions. Definitely, we will try to see the issue forward from where we left last time. I did mention this to the unions when they came to give the chart of demand saying that let us set the starting point to where we ended last time. Q: Do you think that this is the time to ban cash reserve ratio (CRR) or get more interest on cash which has been kept away? A: On the interest front, there has been only one voice saying that you can’t allow your money to be left without earning anything. What doesn't earn anything to the bank is called nonperforming asset. One can not have money collected from a depositor and not effort to earn anything on that. Of course the Reserve Bank has argument on that, saying, they can give interest on that but, I will increase my CRR. There has been a continuous demand from the banking industry for an interest on CRR. It was available earlier which has been withdrawn. In terms of whether the CRR should be there or not, I don’t think there has been any debate which happened at the industry level to come with a unanimous view. It is a question of opinion of each person. There is a case to reduce it, now should it come to zero or should it come to three, is a question of time.