Bad loans: RBI's priority is resolution not liquidation, says Deputy Governor Mundra

A: First of all, let me make a couple of quick comments on your opening statement. The Reserve Bank of India (RBI) is very judicious in distributing the leaning. So I would say that all the colleagues, Deputy Governors have equally shared the burden. It is not an individual.

Q: I meant only for commercial insights.

A: I must, in all fairness say that I do not know whether RBI would miss me or not, but I would certainly be missing the RBI. It has been a very interesting and satisfying period.

The supervision department, I must say it had been a period of intensive activities, but more importantly some of the activities which will have a very long-term impact, so while asset quality review (AQR) and what happened around is the most talked about subject in supervision. We have spoken on that many times, so I will park it for the time being. But during this period, the entire approach of supervision, migrating from a traditional transaction testing to the risk based supervision had been the most satisfactory thing which would have happened.

I must say that the team in supervision really did splendid work. And this, I am not telling anything for the sake of it, because incidentally, what they managed to achieve and improve over a period of time had been exposed to some of the very credible, even the international outfits and without exception, I have found all of them to be very appreciative of this work which is largely home-grown. So that is one very great satisfaction.

Second, which is relatively new work which we started, but that is around the entire IT security and cyber security. This again, it started in a very small fashion with three units, expanded to 30. Now, this year we are covering each and every banking outlet separately, from the viewpoint of IT and cyber security. It is a very emerging concern so I think very timely action.

Q: The biggest activity when you were Deputy Governor in your three year innings has been the AQR. Can you give us an idea? Was that an idea that the Governor of that day discussed with you? Do you feel that you fathered that idea or introduced it to the Governor in any fashion?

A: Again, I do not know whether you have got some inside information. This is a very interesting question because I did share with some other colleagues or in some other forum.

Q: So you hinted to the Governor?

A: That is the interesting part of it. Actually, if you recollect, the previous Governor, Dr Rajan, when he took over, he started holding some meetings with either individual or small groups, very early in his tenure and I remember, probably I was one of the very early invitees to a lunch and meeting as a commercial banker, as the CMD of Bank of Baroda. I think it was within first week of his taking over his office and he invited for a lunch meeting. And having worked in banking industry for so long, I also knew very well that cannot be any free lunches with the central bank.

So I had also done considerable homework with some of the ideas and there, I did mention that while we are looking at the individual banks and the individual exposures and their interaction, but really what is missing is the large picture; one entity and the entire banking system. So, why not we should have some kind of credit information system; of course, I did not have the idea this getting housed in RBI. What I had suggested, maybe Indian Banks' Association (IBA) can have this kind of platform with the access right reserved and all those. So it was one idea which we did discuss. I do not say that it was fully my idea. I am sure that maybe other people might have spoken or he might have in his mind. But it was very satisfying to see that before I moved to RBI, this is something which has already become a work in progress.

And since then, platform is continuously fine-tuned. Again, the team in supervision has worked very well on this and it has emerged as a very robust platform.

Q: But the Central Repository of Information on Large Credits (CRILC) was in place by perhaps, mid-2014. The initial press release came out in February, 2014 and maybe by the time, you could collect all the data -- but you do the AQR only in end 2015. Why did it take so long? Whom did you have to convince?

A: No, you are not required to convince but understand that there is a supervisory cycle in RBI which runs at a certain given schedule. So when you are talking about - by the time you put the CRILC data, you have some sense of that of data point cleaning, the current year supervisory cycle may be already mid-way or more than that.

So, typically, April-May is when the new supervisory cycle starts and if you look at it, actually it started just with that. So I think it was a perfectly used and it was very well timed.

Q: Let me come to what the nation is faced with. 12 companies have been asked to go to the Insolvency and Bankruptcy Code (IBC). Are you getting a sense that they will show the way why at all the RBI picked 12 cases in the first place? Why not give everyone six months' time?

A: Two parts of it. One, as far as giving the time is concerned, if you look at the history of past 2-3 years, post AQR various mechanism, no one should have that grudge or grievance that we were not given either enough time or enough opportunity or enough mechanism. So that is not relevant. Comes the question that why you pick up 'x' number, whatever number you pick, there would always be this viewpoint, why not this, but you have to make a beginning. Plus, I think RBI was quite open in communicating that what was the criteria, why these cases were picked up. So from that sense, I think it has been a right and well-thought approach.

As far as all other cases are concerned, it is not that all others were just forgotten or excluded. For them also, there is a roadmap, the whole point is you have to pick up 12 large cases, there is a certain way forward, it really creates a framework for a large number of other cases. So we have to see in that context.

Q: Was there a thought that already there was some resolution being discussed in these cases? So, probably they will go through the National Company Law Tribunal (NCLT) with a resolution and not liquidation. Did that thought cross the mind?

A: Actually I do not why there should be at all this kind of a huge confusion around the cases going to NCLT because even sometimes, I find it surprising that even in some of the knowledgeable sectors, somehow this belief is ingrained that reference to NCLT means liquidation. Actually, the very first step of NCLT is resolution only and you rightly mentioned, many of these cases were already under various tools of resolution.

Same can very well be utilised in NCLT. I have always said, only big difference between whatever was being given earlier and under this is, in all earlier instances, the tool is applied. If that tool has not worked then what next? That what next was not so abundantly clear and it would have given again some reason and the dilly dallying at the operation level. Here, all those things are relevant, but with one addition that if they do not work then what next, that next is very clear. So we have to see in that perspective.

Q: The market has given a big thumbs up to the entire process. Nifty at 10,000 and ably supported by public sector banks – they are at the vanguard of the rally in the last few weeks and in the current phase, as well some of the stressed assets like the Jaypee Group, GVK Group, all those are also in the forefront of the rally. Are you getting a sense that we are hitting resolution? Some big investors seem to think so. They have all picked up.

A: One thing, I think the behaviour of the market and authoritative comment on market, I think the Bandra-Kurla Complex is more qualified than Mint Street to talk about that. But having said that, being a general part of the financial system, one, I would say when we only talk about Sensex and Nifty and then if we say that it is representing the whole trend of the nation, while they are a representative bunch, but a broad-based rally and a limited rally has huge differences. How liquidity plays a part, then when the international investor ¬– as I said, I am not very proficient in understanding the market, but some of the things which I feel, sometimes the international investment is guided by a theory of composite return and composite return include the market return as well as the return on the exchange front and all that.

So, I will not completely read too much into this, but yes, as you people have always maintained that market was much more efficient in sensing the difficulties before the players started sensing it. Similarly, I would be very happy if market is showing the same acumen in showing the improvement which is coming before even the players can sense it. And if that is what we are reading in market then actually if we, in RBI would derive satisfaction that a plethora of measures which we have put, they seem to be heading to a logical conclusion.

Q: Before I come to whether the market is reading the stressed asset resolution properly, which it seems to be, what is your view on the market rally itself? Is it telling you that growth is around the corner?

A: No, whatever I have said in reply to the first question, I know that is a very broad-based rally then yes, I would endorse all which you are telling. But for others, too early to become completely optimistic like that.

Q: 37 years as commercial banker in a public sector bank, there are lots of solutions being suggested to improve the public sector banks. Let me take one by one, do you think merger is a good idea?

A: I have spoken on this several times, on a broad conceptual level to have a very large number of players, largely under a common ownership, the majority percentage may differ, trying to do the same kind of  thing, some of them doing well, some are really imitating it poorly, really does not make much of sense.

So, on a broad conceptual level, probably they can do more efficiently if they are lesser in number. So, maybe some duplication of resources and those kind of things can be saved, that is on a broad level.

Now comes the question of what kind of merger and that is where I think it is very important that why, the entities are there, it is a historical reality. They came into existence, that is a historical reality. Now the key question is if they have to come together what should be the motive and in what fashion they should come. It should achieve one of the 2-3 purposes, either coming together they should reach to a better geographical spread or they should have a better product range or they should have different kind of HR acumen which is complementary to each other. Having said that, it is not necessary that each of them or each small entity necessarily should lose the identity. Some of the can be very well very regional banks, they can be very niche banks. So, that is what is important.

Q: What according to you went wrong? It is true that even private sector banks which have lend to corporates went through a lot of pain. However none of the private sector banks have 20-22 percent NPAs. According to you what needs to be treated in the public sector banks?

A: One observation which you have made is very right observation. It is not that the business segment which was picked up was wrong. It all depends that which kind of business model you chose to pick up at that point of time and again this is a long discourse because some of this business was easy to drive from a centralised location. So, in the hay days it was good and easier model for achieving a good growth. At that point of time it was not looking a risky model. Now trying to achieve a high growth in a shorter period also has to do with a shorter tenure. So, that is a related aspect.

So, if you have a given time which is short and you have to still leave your mark, you will adopt the method which is easier. So, there are several those such factors. However the key point is, while the underwriting had been similar in many banks whether they are private or public, the key point comes how soon you detect that there is a risk? That is where I come back, that risk management has to be much more proactive rather than compliant and having identified the risk how much is your capability to exit faster even if it means taking a hit. That is where the major difference comes. Ability to enter is similar for everyone, ability to exit is not the same and for that there are several reasons.

Q: What is the regret as you leave, anything unfinished?

A: In growing concerns there would always be certain things where the canvas is still not fully painted. I won't say regret because even if I say had I got some more time I would have finished them, but I am sure by then there will be few things which were still.

If I look in supervision, as I said Risk Based Supervision (RBS) has seen now 3 years, it has become quite robust, lot of work has been done. I would be really keen to know that what emerges out of RBS and when it is shared with the industry, how ultimately it is resulting into changing the basic behaviour and the risk perception of industry. Asset quality review (AQR) aftermath is of course unfolding and moreover it is now a much larger ownership issue rather than sitting with supervision. So, I would give up that ownership at this point of time, it is now in much larger and capable hands.

More on developmental side which I happened to look, I think there are three areas which are fairly good work in progress but I would really be very happy to see - one is the whole empowerment and more work which we can do for MSME sector because I strongly believe from the view point of employment, from the view point of contribution, it is a very important sector. I have no hesitation to say that this sector is yet to receive a fair treatment. Second, lot of supply side work has been done in financial inclusion. So, everyone is there, government, RBI, various schools and all that. However if we don't work on demand side then this is a oversupply kind of situation. Third related area when I talk about demand, demand will come when there is financial literacy. A lot of work has been done. Again a strategic paper has been prepared, that is National Strategy on Financial Education, a lot of work has been done.

Q: But I thought one of the unfinished tasks would be NPA resolution. Are you getting a sense that all the recognition is over and it is the last leg of resolution?

A: If I put very simply, my sense is over-delayed recognition is already over. There were things which were over-delayed and AQR and all that, you know that journey. So over-delayed recognition is over. But having said that does not mean that new development would not come and they would not result into some new asset quality issues coming and rightfully, because power sector, as you said.

Power sector there is still a large number of entities and capacities which is already under creation or implementation and some of them are still not in the category, they may be stressed, but they are not NPA. Until and unless this whole demand and pricing equation and whole reform in power sector is concluded as it is envisaged, this sector may emerge as a potential stress.

Q: What are your thoughts on your own successor? Do you think it is time that a private sector financial expert should also be there as Deputy Governor?

A: You are always known to put a fair question and you have put me an unfair question this time. But, since you have asked, let me tell you one thing. I do not want to go into the matter of whether a public sector banker or a private sector banker, but what I would like to emphasise that this one office of Deputy Governor in RBI and as you mentioned in the beginning, has relevance from the fact that it is a RBI's direct connection to the ground level reality.

You can design very fine policies, but if those policies are not implementable then those policies have no meaning. I mean to say if I can use that in the old Bollywood song, 'jungle mein mor nacha, kisne dekha'. So a policy should not become like that. So this office connects. Second important thing is market players are the affected players from the sector also sometimes feel more comfortable in speaking. So you provide a shoulder to cry, if nothing else at least that is available.

So whosoever is coming and the fact remains that 70 percent of your banking sector is still represented by public sector, so putting all that together, my point is that whosoever occupies this office, and I am sure it will happen like this that the tradition of remaining connected to the ground, providing a very frank and honest feedback to the other sections when they are working in some policy area, provided there is a receptivity and inclination - it has to be a two-way traffic - and keeping the communication channel open, whosoever, these are the prerequisite of this office.

Q: Now a time has come. Until now, public sector banks were 70-75 percent of the market. But now, if you look at the incremental loan growth, private sector has increased its share. So is it time?

A: First thing, as we always say from RBI that our regulation is ownership neutral, so my inclination is also ownership neutral.