Digitisation in banking an enabler & a disruption: Morparia

As for the lack of enough special funds to take over distressed assets, she said such funds will come into India. Morparia was referring to the Scheme for Sustainable Structuring of Stressed Assets which was introduced only recently. “These things will take time. I would urge you to be a bit more patient on it.”

She stressed on the importance of having more debt investors.

Although there will be buyers only for high-grade assets, she said, in cases where there are revenue generating assets, there is an enormous demand.

She sees digitisation as both an enabler and a disruptive force in banking.Below is the transcript of Kalpana Morparia’s interview to Latha Venkatesh on CNBC-TV18.Q: Let me first start with the bankruptcy code. Do you think that finally we are getting this piece right on banks being able to claim defaulter assets?A: India has done a phenomenal journey in terms of increasing the overall ecosystem to aid faster possession of collateral and whether it were the Debt Recovery Tribunals (DRT) when they were set up, because that created a separate judicial infrastructure, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and now, the new bankruptcy code. And therefore, the banks will have a repertoire within their armoury as it were, to deal with recalcitrant borrowers. So, I am indeed optimistic that that will work.In a lot of these cases, it is not just going and possessing the collateral because these are commercial assets, industrial assets, you want to put them to the swiftest possible use. And therefore, how quickly we can get restructuring done is also extremely key and all the efforts currently made by senior banking management in terms of driving that process faster would be really very good. So, I am hopeful. Last point I want to make on this is if you remember, a lot of the stuck projects and the impaired assets really happen in the infrastructure. There has been a significant de-bottlenecking in the power sector and probably the greatest success story, probably not as much appreciated by us, is what has really been done in the road construction sector. We earlier had Mr Gadkari with us and he talked to us, he took us through several remarkable steps that his ministry has really taken to de-bottleneck this entire thing. And something as simple as saying if the award is in favour of the company, let us just go ahead and release 75 percent and not haggle about this, create an independent body to really assess because National Highways Authority of India (NHAI) itself being a party to the dispute could not really be the judge and an affected party. So, all of this is going to free up a lot of liquidity in this segment and will once again propel this segment forward.Q: Now to come to the rehabilitation of assets. Yes, the Reserve Bank has gone with this Scheme for Sustainable Structuring of Stressed Assets (S4A) stressed asset reconstruction as well as strategic debt reconstruction, looking at changing of a promoter. Not much success, neither of them have seen much success. One complaint or one lacuna which we see is not enough special funds or special situation funds to buy distressed assets like a Wilbur Ross or even operation and maintenance (O&M) companies like Alvarez and Marsal to take over a company that has gone through a bad management. JP Morgan is well placed to see whether these funds to come into India?A: I think they will definitely come into India and we are a little too quick to judge that we have not seen success. As you know, this was 3-4 months ago. These projects take time. I have been in the heart of restructuring some celebrated cases and sometimes it can take you as long as a year. We all need to collapse a time frame. The difficult negotiations, there are multiple stakeholders involved with this. Foreign funds are absolutely interested in ensuring that they participate in this overall restructuring of corporate balance sheets and you have seen some joint ventures that have been entered into by them because they feel the expertise of a local banking partner actually makes it that much more attractive. I would urge you to just be a little more patient on this. Q: You feel that in a year or two, we are going to see a lot of these stressed assets rehabilitated?A: Absolutely, and I am not saying it as wishful thinking. We have seen it happen in the past and I see no reason why we should not see it again.Q: That is why you are here with us. You have been there, done that, so you are better placed to judge this process. It is action replay, as it were, for you. The other point, a very big change that the Reserve Bank is trying to bring about and you were to first person to identify that this is the reform in the banking space, is that exposures to large indebted companies shall not be more than 20 percent of Tier-I or to the whole group, 25 percent of Tier-I, as well not more than Rs 26,000 crore, incremental debt will be expensive. Will this work because it goes down to Rs 10,000 crore as the limit by 2019?A: Yes, and as you know, it applies at a company level, not at a group level. So, I think this is a great way for India to really appropriate risks across the spectrum. And if you look at Europe today, there is much more balance sheet that is given out by the banks there whereas the US is just the opposite. So this is indeed a seminal move on the part of the banking regulator. We will definitely need much more debt investors, because the supply is going to be great. You are already seeing the benefits of this accrue largely to very well rated corporates, they are talking about new benchmarks being created every time on the low cost accessing the domestic capital markets. We are also seeing this phenomenon in the dollar bond market as well and I will talk a little bit more about that. So, I think it is a great start, the greatest beneficiaries immediately are going to be the high grade issuers.And the Reserve Bank of India also simultaneously did something else. They allowed banks to credit enhance up to 50 percent of these exposures. So, then you have a really very good mix where you get the benefit of credit enhancement of the banking sector, which understands its risks much better and you get the liquidity of the debt investors who primarily go by the rating of the instrument that they are going into. So, this will be another great move. As more pension money comes into the sector, life insurance, general insurance, all of them particularly, life insurance is really looking at longer-term assets. Q: But, they do not buy below a certain grade, so do you still think the demand piece is addressed?A: As I said, the high grades are the greatest beneficiaries, but through some structures, you will be able to ratchet up the rating of the underlying instrument. The other interesting phenomenon that is happening now is, earlier a bank would have given debt to a company which had set up a project and then. When the revenue generation starts, they would still hold on to that because there was very little secondary activity. Now, what we are seeing is that where you have revenue generating assets, there is an enormous market, both locally and internationally which will take that out and therefore free up the banks in terms of taking exposure in terms of the new development phase that they are getting into. We have not yet seen the first real estate investment trusts (REIT) in India, I hope in the very near future, we will see one. Some of the infrastructure companies are already talking about investment trusts and that, as you know, creates a perpetual vehicle where you put all completed assets into them.Q: Coming to the other piece that was unclogged, putting licences on tap and giving differentiated banking licences. This comes along with the digital momentum where it is not just Jan Dhan, it is the unified payment interface also which is going to put all our payment activity on our credit profile. Do you think finally, the financial sector will finance economic growth much better than the last 3-4 decades or am I still being too idealist?A: No, I genuinely believe so. The biggest change which is going to be a transformational change for India is going to be digitisation. Yesterday, we had a very interesting panel. Overseas, it would been called a financial technology (FinTech) panel. We said digitisation, is it an enabler or disruption? It is both actually. It is going to disrupt a lot of traditional models, but it is a huge enabler and you and I like to talk a lot about the impact of that really to the overall banking system, how does that impact. But if you hear some of the digital players there, they are really talking about the dramatic transformation that it is going to have on the small business and today, the whole set of 350 million people who do not have access to this basic service. So, the cost of transferring money, the ease with which small savings takes place is going to be truly revolutionary. And it was a complete eye opener to me, because I always thought banks have this huge muscle and they can do it best, but the disruption that some of these small players are bringing in through their wallets and their ease of payments, you are actually going to see multiple models, not just working together, but evolving even as they are coming into play.