Buyers for stressed assets hard to find: ICICI Bank

ICICI Bank's fourth quarter profits took a hammering -- its 76 percent fall over the year-ago quarter was largely due to the contingent reserve of Rs 3,000 crore the bank set aside. In a freewheeling interview with CNBC-TV18's Latha Venkatesh, the bank's Managing Director and Chief Executive Officer Chanda Kochhar, admitted that the provisioning dragged the profit numbers. The provisions were made on account of weaknesses in five 'stressed' sectors -- iron and steel, mining, rigs, power and cement. But Kochhar assured that the bank has an action plan; it is actively working on resolutions, she said. However, she cautions, low commodity prices will make it hard to find buyers for some of bank's stressed assets. "There should be buyers and sellers at the right price."

Strategic debt restructuring is a useful tool, said Kochhar, adding, the bank has successfully managed to find a buyer for one of the companies it had invoked the restructure for.Below is the verbatim transcript of Chanda Kochhar’s interview with CNBC-TV18's Latha Venkatesh.Q: You all did give a very detailed presentation after your results. But there are always after thoughts and after questions. So, let me start with what everyone wants to hear about the asset quality. You told us that your worry list or your stressed sector exposure list is Rs 44,000 crore. What is your best guess as to how much might slip into default?A: So first since you spoke about the results let me just for good order sake reiterate some of the parts of the result. As you look at the quarter's results and yearly results you would have seen that we have actually on a prudent basis made an additional reserve of Rs 3,600 crore, that is towards the future. In fact if you look at our profits taking into account the provisions that were required for the year for the non-performing assets (NPA) and restructured assets we had a profit of almost similar that was the previous quarters profits. The second is even after taking into account that additional reserve the bank still has on a consolidated basis a profit of more than Rs 10,000 crore in the year. So, a consolidated profit of more than Rs 10,000 crore, created a reserve of Rs 3600 crore and of course having a substantial capital adequacy and the value in its subsidiaries. From there on coming to the list that you spoke about. What we have disclosed is really a further drilled down disclosure on our assets. What we have said is that there are five sectors today that have been clearly impacted by the global commodity prices and by other economic conditions and all the portfolio that is below investment grade internally classified. So, we have just given more details about those. And that is really the list of the portfolio.We have added the fund and non-fund based exposure, it is across our domestic book as well as international branches and it covers all the below investment grids. There is also a fact that we have an action plan around each of those companies. We are working on resolutions with the promoters for them to either sell their core assets or their non-core assets to reduce their leverage because of which some of these exposures for us will go down. Some of them would move to better rated entities and so on. Beyond this it is not possible really to say what out of this will flow into non-performing assets (NPAs) and what out of this will not flow into NPAs.Q: Not what, it is only a ballpark. Axis Bank said 60 percent would be the outer limit, they don't believe it is going to be 60. So if you can guide on those lines?A: Actually as I said resolutions are on for many of these exposures. Some of these are actually large exposures for which you would have read reports about deals being done, sales being finalised and so on and so forth. So, we are actually very hopeful that some of those resolutions would work out but at the same time as I said in today's day and age even after you find a buyer - first of all when the promoter agrees to sell with the low commodity prices you have less buyers today than sellers.Secondly, even after the buyer is found you need to go through the court approvals, the Competition Commission approvals and so on. So, that could take different points of time and then during that period the regulator has the approach of early and conservative recognition. So, that is why I am saying it is difficult to say what part of it and it is better actually not to say what part of it but we do expect resolutions around many of these cases to happen actually.Q: These are only your five stressed sector sub-investment investments. Can you tell me what is your exposure to the non-stressed sectors, the other non-five recognised sectors and your exposure to sub-investment companies in those sectors in the balance sectors?A: Since we have so far never given all that break up we thought that it was prudent to start with these five sectors and to this we have added also the promoter entities that are linked to these five sectors. So, we believe that bulk of the NPA formations will happen out of this. That does not mean that there would be not other sub-investment companies that would not become NPAs. There would be some NPA formation from the other sectors as well. But since it is in these sectors that it is more concentrated we have disclosed these sectors.Q: Not even a ball park figure, a percent on what is the exposure in the non-five identified sectors that you can share?A: Since we have not shared it with the investors, analysts I should not be doing part disclosure.Q: This goes out publically to all your investors and viewers, so it is not selective at all. They will know it as soon as you tell me. What is your investment book and what is your advances book? Your total loans are about Rs 4.5 lakh crore. In that your corporate would be half of that, Rs 2.3 lakh crore?A: Yes, almost. A little less than half._PAGEBREAK_Q: So, how much would be investment and how much would be advances?A: Most of it are advances and investment book actually for us is very small. It is just about in the region of about Rs 6,000 crore. So, it does not move the needle here or there and they are mostly high rated investments because the philosophy that we have been following is that we don't take credit risk in the investment book. It is all there in loan portfolio in any case.Q: You spoke about resolution of many of these assets. Now is strategic debt restructuring (SDR) succeeding?A: Yes, SDR is moving. In fact we have had one good success in SDR. One of the construction companies where we actually exercised SDR and after it is not just about exercising SDR but after the exercise of SDR we have been able to break the company into three parts, three different businesses. Found a buyer already for one of the business and transferred part of the loans to that business. Finding the buyer for next part of the business is in progress. That should happen soon. Then the company will be left with just a residual loan and residual portfolio. So, that is one of the first successes, if you would say, in the industry that we have been able to achieve from the SDR. So, SDR is a very important and a very useful tool. It is just that as I said somehow the availability of SDR has also coincided with this very low commodity cycles and investment cycles. So, it just takes time to find buyers and if you don't have a ready buyer or a prospective buyer then it is not worth doing an SDR and just transferring the shareholding.Q: That is exactly what bankers were complaining. They are saddled with, they have become the owners of the company if they exercise the conversion from loan to equity. Then if the promoter has not paid provident fund or sales tax, it falls on them. That is why I was asking you if it is succeeding at all but you are saying it has succeeded in one case?A: It has succeeded in one case. The way to measure the success would be that we should not just jump into exercising SDR without having a plan of action. Where we have a plan of action, where we think we have prospective buyers we should do SDR otherwise if we jump into it we will be saddled with those responsibilities. Q: Would you say that may be at the end of FY17 there will be more asset sales because like you, others are also providing and because by FY17 you all may have provided as a industry 30-40 percent of the stressed loan, you will be willing to take write downs. So, should we expect more resolutions by the end of this year?A: I will not put it as one year or the other but I would say that actually there would be improvement and asset sales as the economy improves and as the commodity cycles improve. So, in any case we have to hope for that improvement to take place. That is what will really then bring more buyers on the table.Q: There were some instances like for instance JP Group, they were willing to give you land in lieu of interest, has that been cleared by the regulator? A: I should not talk about company specific thing and at the same time I should not talk about specific stance taken by the regulator.Q: I believe you all were going to the regulator?A: Yes but discussion between a regulator and a regulated entity should be kept on the discussion table. However I would say that when we look at physical assets, we look at the value underlying the physical assets, we look at what is the possibility of us having a long term action plan around that physical assets and if it is a once or twice kind of thing of collecting or rather reducing the debt, collecting the debt in some way or the other then I think that is the plan to take. However you should finally have an ultimate action plan for the company which is outside of physical assets. Q: What do you do with say for instance a loan like Essar? It is a big loan and it is difficult to find a buyer for that. Will you all be able to take a write down because you have provided for it. Therefore do we see such a big loan getting sold off or resolved in some fashion, strategic investor, finding a investor, is this loan resolvable in any fashion?A: Let me not comment company specific or group specific. I would only say that even for large exposures there are interested buyers and there are ways of working along with the existing management to bring about change in management to resolve these cases. In fact some of the larger cases the banks are working towards resolving them.Q: I will once again tell you why I am pressing on specific big cases. The number is worrisome, if you take this Rs 26000 crore odd GNPA that you have already declared and add to it this Rs 8000 crore and add to it this Rs 4000 crore 5/25 cases. Then even 50 percent of your Rs 44000 crore, we are actually talking about a Rs 60000 crore. That is over 10 percent. That is why I am asking you if any of this will be resolved?A: As I said resolutions are underway. I am quite hopeful that some of these resolutions will happen. Just as you say that some of the exposures are lumpy, actually when resolutions also happen they would be lumpy resolutions. So, that is one thing that you should keep in mind.The second is while you are adding all this up you should not assume that all of it is a problem. The third is that when you look at the loans and advances, actually you should look at the exposure. You are talking of a bank where the exposure plus non-fund base overall - it is a Rs 9 lakh crore book. So, we are talking of this viz-a-viz Rs 9 lakh crore. We are talking of a bank that has a networth of Rs 94000 crore. We are talking of a bank that over and above the networth has the ability if at all to raise other forms of capital like tier II and so on because our capital adequacy already is 16.6. However within that tier I is more than 13. So, you have enough tier I capital and enough ability to increase any other forms.You are talking of a bank where we have even just on the basis of the two deals done in insurance companies, the value of our two insurance companies is more than Rs 33000 crore. Then you are talking of a bank where you have other subsidiaries which have other values.So, you are talking of a whole lot of strength on the other side in terms of balance sheet. Now let me come to  the running business strength. We are talking of the fact that we have technology and digital leadership across the businesses that we run. A very strong retail franchise where even our savings deposits were growing at more than 17 percent, CASA ratio of more than 45 percent, retail assets growing more than 23-24 percent, very strong iMobile application and various other forms of digital businesses. So, we are talking of a very large franchise.Q: Will there be any need to raise capital therefore in a hurry?A: As I said we don't need to raise equity capital for the moment at all because we have so much of ability to release capital from these subsidiaries, partly from the overseas banking subsidiaries, from the insurance subsidiaries, we have ability to raise tier II capital if we want and anyway with all this we have a tier I even today of 13 percent._PAGEBREAK_Q: Disconnect comes because both you and Shikha Sharma and people who have announced numbers with corporate exposures are worried about FY17 and some of the very big accounts. However, when you look at the economy you are told very different things. About five of the core sector industries, cement, fertiliser all of them are rising in double digits. The picture over there appears to be like green shoots are there and things are improving. Whereas when you look at bankers they are still worried about a lot of exposures. Isn’t it a disconnect?A: As a banker as well I see the green shoots. First of all, we have to remember that India is a great story in the long run. Even as we speak currently, you look at our macroeconomic environment; look at our ability to take some of the decisions, look at yesterday the decision on Mines and Mineral Development and Regulation (MMDR), that is also been taken. These are all very positive.You again look at the ground economy level. Commercial vehicle production has gone up 20 percent in the last quarter. Two-wheeler sales have gone up more than 8.50 percent in the last quarter. All these sectors as you are saying steel into positive rate of growth in the month of March and the electricity generation has gone up substantially; cement production has gone up in double digits, fertiliser production has gone up in double digits and I think these are clearly the green shoots.Even for the bankers, in terms of even opportunities not just these, then you see that all the government contracts been given out on highways. The orders been given out on railways and the next round on defence, I think these create opportunities not just at top level but also the ripple-down effect on the small and medium-sized enterprises (SME). This is where we are seeing the rest the growth coming from. I am very positive about these green shoots and our ability to participate in these growth opportunities as well. However, at the same time there is also a fact that some of the past large projects are having some issue for some reason or the other or the group leverage issues.We will be irresponsible as bankers if we do not recognise the fact that those also have to be resolved. The picture is true on both the sides. It is very important for bankers to recognise both the sides and that is at least what we are doing. That is we recognise the green shoots which are many; we participate in these opportunities as they arise with the green shoots. At the same time recognise what are the resolutions to be done, what are those cases to be resolved and in fact not just that we have been prudent and said we are also keeping certain reserve aside for that. So, that is the way to proceed.Q: You referred to double digit growth in cement and in electricity and both those are in your five stressed sectors. That is exactly why I am asking. Will you see these two sectors move out of your stress sector list in a year or so?A: That is why, we have disclosed those companies which have now moved to below investment grade. That is because of certain reasons, because of either delays in project implementation or if a project implementation gets delayed the interest during construction itself adds to leverage levels.Q: You know your book, you know the kind of people who have got into the sub investment in power and in cement. Are you seeing that list shorter by FY18?A: The increase to that list should not happen.Q: The increase won’t happen I agree but will any of these sub investment guys get either sold off or move into the green, do you see that?A: Absolutely.Q: So, Rs 44,000 crore need not be cast in stone, it could be 40,000 crore?A: We have said that every quarter we will disclose how this list is moving that is which of these are getting resolved or upgraded. It is important to do that because we have a very focused action plan and we should see we should track that action plan.Q: You have an exposure to this Punjab thing which has suddenly come up?A: Some exposure we have because it is in line with our overall credit share.Q: This Punjab thing is not getting resolved?A: We have been told that it will get resolved so we should hope that it should get resolved.Q: What is the growth in net interest income (NII) that you see in FY17? Will it be like FY16? Will it be like FY15, what kind of growth?A: First of all NII first comes from the assets side, so we are saying our assets should still grow 17-18 percent. This is our loans and advances, within which retail will grow more than 23 percent or so. The corporate book will grow little slower than that. The rural book is growing at more than 20 percent. The small business group is growing at more than 15 percent. So, these are where the growths are coming from.Even on the corporate side, the ripple effect or the trickledown effect of the railways, the defence and the highways would give us opportunities. The growth in the higher rated corporate both on the private sector side and the central public sector side all those would be growth. So, that will lead to a growth in loans and advances.The NII growth will also depend on how the net interest margins (NIMs) move. We think that there would of course be some pressure on NIMs because some of the non performing assets (NPAs), you have to de-recognise the income on some of them. Clearly, as more and more competition increases in just that good rated assets you will always see the atmosphere being competitive._PAGEBREAK_Q: What is the likelihood of a rate cut, we have seen some good inflation numbers and interbank liquidity is genuinely much better. You have been cutting your bulk deposit rates as well, so should we expect base rate cut sometime soon?A: Yes, you are right, the macroeconomic factors have been good and in fact I have to complement the RBI for taking this approach on liquidity as they have taken in the last monetary policy. That is a very helpful and a very good approach. So clearly, interest rates will soften further from here as well.Q: So you expect that announcements can come from the banking system sometime soon?A: Yes, interest rates will come down -- you always say which day, which quarter, how much?Q: No, I am not asking.A: Yes, they will come down.Q: This thing has been troubling me. None of the banks, the large public sector banks and the large private sector banks did not give us any indication of the amount of stress, why does it require the RBI to speak about asset quality review (AQR) before you all declared?A: The recognition of NPA has been so far the record of payment. So it has been a technical definition 90-day plus and that is what the banks have been following.That does not mean that internally they have not been monitoring the list, that does not mean that internally they have not been monitoring the various cuts of where the credit quality is moving. We have all been monitoring that, we have all been working on that and therefore if you see, some of the action plans on resolutions have started.Some credit you should give to the bankers here as well, have started much earlier. You saw some of the groups starting to sell some of their businesses even two years ago.One year ago, you saw large sales taken place whether it is of hydropower projects or so on, this was all because the bankers recognized the leverage levels and have been working with these groups to deleverage.Q: I give credit for the resolutions that definitely bankers were planning but I am quoting the regulator. One of the regulators said that if we didn’t call for the AQR, what banks were doing was that they were almost ever-greening several of these loans because it will hit the book. Once you called it then everybody is declaring more than the AQR in terms of stress, why didn’t bankers do it before the regulator blew the whistle?A: I think you should put in perspective everything. That is every steel company also looks very different when the steel price was USD 450 vis-a-vis when it is USD 250 vis-a-vis when it is 350. So in this volatile environment where things have also moved so sharply, you should keep all that in perspective.Q: Let me come to your retail book as well. How do you look at life two years down the line when probably the Unified Payment Interface (UPI) and the payment banks will be very common?A: We should not wait for two years down the line. In this today's day and age, which is digital, mobile and social, every two days things keep changing and for a bank or for any entity to be up the curve, you have to look at things on a daily basis.I would say that I look at all these things as technological development. Technological developments we all have to do whether some entities are niche entities who play a part in this whole eco-system like the payment banks and so on but I think banks per se are anyway present across the payments chain.We as bank believe that we have to be technologically ahead across the entire level of payments chain. Therefore if you look at our own mobile app, you can do more than 140 services just on that app. We have our own digital Wallet, Pockets, which is one of the top four Wallets as per time spent, the only bank Wallet amongst the top four Wallets.Then you look at the customers wanting to make payments through anything, whether it is the e-commerce sites, whether it is buying on internet, whether it is doing bookings through IRCTC or whatever -- you can use ICICI Bank or its products in some way or the other to make the payment.Q: People will find it easier to pay out of the payment bank. Do you see therefore a threat to your CASA?A: Clearly, there will be more players and more competitors but I think as you rightly said, the first way to look at it is that all these advancements technology expand your business, expand your reach. The more and more people who were not a part of the formal payment system become a part of the formal payment system. So for banks to start with, it is an increasing opportunity then it depends on every bank, how fast they are on their own feet in terms of both technological innovation and going out there and getting the customers on the basis of technological innovation. So, generally as the pie is growing, for growing people like us, it will only mean growth.