BoB holds loan recovery target, sees more consolidation in Q4

Bank of Baroda maintains its loan recovery target of Rs 10,000 crore in FY17, says PS Jayakumar, CEO and Managing Director, of the bank.He believes consolidation theme could play in the PSU banking sector in the fourth quarter or thereafter. While consolidation discussion for now is focused on State Bank of India and its subsidiaries, Bank of Baroda will be ready to participate in it as and when any further announcements happen.With the objective to emerge as a better bank, preference of consolidation will be for banks which can give a complimentary edge in geographical presence, he told CNBC-TV18.So far, cash flows for the bank have improved in some of the stressed sectors, particularly iron and steel, Jayakumar added. Below is the verbatim transcript of PS Jayakumar’s interview with CNBC-TV18\\'s Latha Venkatesh and Sonia Shenoy.Latha: After this consolidation of the State Bank of India (SBI) babies the expectation is that there will be more. You as the next strongest bank in the public sector undertaking (PSU) space is on every investors\\' radar. Has any conversation happened with the bank board bureau (BBB) on the consolidation space?A: The consolidation discussion at this point of time are obviously focussed around SBI and the subsidiaries and at Bank of Baroda (BoB) we are focussed on strengthening our processes and if as and when the consolidation opportunities emerge we should be ready to be able to play a role in that. That is where it is. There is nothing more I have other than what you know as far as specific to BoB or consolidation outside of SBI group.Latha: Were there any themes of consolidation that was ever discussed in the BBB meetings in terms of whether it would be regional, whether you as strong banks will be asked to take over any of the regionally complimentary, geographically complimentary banks?A: I don\\'t want to get into specifics of what discussions took place in BBB with us or otherwise but speaking from our point of view and though the consolidation exercise are a little bit of time away the preference would be obviously for companies that compliment us in geographical area but more close to where we are strong which should be the western and southern region and to some extent the north. The objective of all of this consolidation even for BoB should be that we emerge as a better bank than what we were prior to the consolidation and we should not be looking at this as an opportunity to absorb banks that might have a poorer quality portfolio and I don\\'t think that is the intention of the government either. The net effect of this must be positive to both the institutions, the one that is getting merged and one that is an acquiring entity.Latha: You started your sentence by saying it is a distance away. So we should assume that it is not this financial year that we should worry about at this point?A: No, I don\\'t again want to specifically comment because some of these things are outside by remit. But logically looking at it and seeing how prepared we are it is probably at best in the last quarter of this year is what I would think is the best case. It could be later than that as well.Sonia: What is the sense that you are getting on asset quality going ahead because in the quarter gone by the non-performing asset (NPA) woes for the banking system continue because of the higher delinquencies due to Reserve Bank of India\\'s (RBI) own asset quality review (AQR). What do you see as the way forward?A: Here is broadly what we are saying. Just look at some of the larger exposures banking systems have with respect to iron and steel for example. Obviously the minimum support price (MSP) has helped them. Their cash flows have improved, their earnings before interest, taxes, depreciation and amortisation (EBITDA) has increased I mean positive EBITDA but as yet the repayments are not flowing to the banking system. Rather they have been used by those institutions to consolidate their working capital requirement.Insofar as the companies that we have better access to which are smaller exposures in the region of Rs 500-2,000 crore where what we see here is in some ways continuing stress on the portfolio but clearly an effort on the part of this institution and also of us to figure out to come up with some solution that will help both the lending institution and us. So, I see a far greater level of engagement in conversation, discussion and in trying to find some solutions even if these were not to play out in these quarters I do think that over the course of the next two quarters we should see some detailed progress that will help our portfolio as well as the lending institutions to start standing on their feet.Now, in the context of the new RBI circular with respect to sustainable debt and debts that is not sustainable, the sense that we are getting looking at our portfolio is there are a large number of companies with debts owed to them from the government, matters under litigation some of them having some non-core assets. So, there is a much higher probability of being able to work with these companies within the scheme, the scheme might itself require some tweaking and then move the sustainable debt in one category and those part of the working capital or term loan that got stuck because of onwards payments that are due, all those kinds of asset we put those aside and we move on.So, that is the discussion we are having recognising that some of these around is the fact that they have not been paid, whether they are government payments, whether they are a private payments, segregate them, deal with them separately and then insulate the rest of the company from the challenges that have come from those delayed payments. Delayed payment is just one such example, there are similar examples of projects not completed, various other things. So, within the group of companies which are for us in the Rs 2,000 crore exposure and less in certain specific sectors like power we think ether is an opportunity to work around particularly using the new set of regulations with respect to sustainable restructuring.Latha: You said that there will be a slippage of Rs 15,000 crore but a recovery of Rs 10,000 crore. That is a lot. I have never seen such a record recovery done by any bank in any year. How will you manage that?A: I will tell you. Last quarter also we did pretty decently. We had some Rs 3,200 crore or thereabout of recovery. So, it is just as I explained last time it is based on the run rate and we still hold to those numbers. There is no change over there. And as I said last time to you also that there may be a bit of hockey stick which is that the deterioration may happen in this quarter or next and then the improvements will happen in the later quarter for the reasons that we have discussed that there are variety of programs that have been done to deal with the NPA problems would start taking effect and more consensus will be there among consortium banks to get those remedial measures in place. But we should be quite there.The other thing we must recognise is that delinquencies come from this 60 SMA 2 which is really close to 90 DPD. These customers sometimes tend to move from one bucket to the other. They may slip to NPA and then they quickly come back because they catch up on the earlier repayment. So, in a reporting sense they become slippages and then they become recovery but really they are where they are. So, that is really what it is. So, there is nothing to change those numbers at this point in time with whatever incremental data we have.Latha: When will the first sustainable restructuring be done. Should we hear from you bankers in this quarter?A: I am not aware anything is happening this quarter. The institutional framework also has got to get set up. And while progress has been there but really for it to effectively take shape it would take some time and it is not like an automatic thing. There has to be a fair amount of work in establishing viability, there would be a level of supervision and review of the data by the review board. So, I would think given the reality probably the next quarter is the best when we can expect some action. At least we would like to make an effort to get one or two transactions in the next quarter.Sonia: You did mention that cash flows have improved in some of the stressed sectors. Can you give us a little more granular details on where you are seeing some relief. Iron and steel, power, construction, we understand a lot of these sector continue to reel under pressure but where are you seeing some amount of relief?A: What I said was that the clients are seeing some improvement in the cash flow but the banks are not seeing the improvement in the cash flow with this sector because the money at this point of time is probably going down to improve the working capital situation. But once those starts stabilising we should start seeing some flows into our repayment.As far as our client group itself is concerned apart from the large companies where incidentally we have trivial shares and therefore really we are not the real reference point on what is happening or not happening there with respect to our existing customers I see a lot of effort by them to get themselves liquid either by focusing more on the election doing some short term transactions that will get some yield, looking at selling down their non-core assets as they now classify them I see a lot of efforts.The efforts will not materialise, not all of it or substantial portion of it does not materialise in this quarter but going into the next two quarters I see that happening. So, I see a great intent with the companies we are dealing and I also see a greater commitment from us to support them in the scheme of things.Latha: The red ink on the net profit is over. Do we start with black now, FY17?A: Well, the financial results are very close by. It is going to be third week of July, not too far away from today.Latha: Even the quarter has not ended, you are not in any silent period.A: I am not. Still, I have to keep into account that the month is nearly coming to an end but I would think we will work hard to stay within whatever guidance we have given before which is that we expect to be in the realm of profit in this quarter.Latha: Finally also wanted to know if you are talking to any stressed fund. Every other day we hear that banks are putting together a stressed fund, the latest name is Brookefields, sometime back it was KKR. Are you individually talking to anybody to sell off any of the promoters who are not able to pay you back?A: No, actually not in that manner because as I told you our share in all the larger exposures are fairly small. We are not going to be the driving force behind those decisions but with respect to the smaller companies, yes in a few of them we are seeing investments coming in and not so much with the stressed funds, as much from the private equity funds which believe the managements have been strong. There have been reasons why they have got into trouble and they are now in a dialogue to see whether they can enter them with the right price level.So, maybe a stressed level or pricing in the equity but not really a stressed fund investing. That is what we are seeing and that is exactly the kind of funds that we are talking to as well to get those kind of investors into some of the companies which are stressed, which we know are very good and get the right kind of capital and move on with that, that is what we are saying. But as far as we are concerned we are not talking to any of the ARCs for the reasons we have discussed before that there must be an incremental value coming for that exercise in terms of them being able to manage in the current arrangement of paying some 10-15 percent all of that stuff doesn\\'t seem at least to work for us.