On the sidelines of the second edition of a two-day conference, Gyan Sangam, CNBC-TV18 brings SL Bansal, Ashvin Parekh and Hemindra Hazari to talk about the non-performing loans (NPL) menace banks have been facing with in its special series 'Gyan for Banks'.
Speaking to CNBC-TV18, Bansal says the Reserve Bank of India (RBI) has taken the lead and identified most of the non-performing assets (NPA). "Whatever is remaining, will be out in the March results [fourth quarter]," he adds.
Bansal further says Gyan Sangam should deliberate on the subject of how to dispose off these assets.
Highlighting the importance of Bank Board Bureau (BBB), Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services says the body will address banking governance. In an extension to Section 9 of the Bank Nationalisation Act, BBB may be empowered on behalf of the central government.
Meanwhile, Hemindra Hazari, Banking Analyst, believes the government should inject equity and form an expert panel which includes seasoned bankers and lawyers.
Below is the transcript of SL Bansal, Ashvin Parekh and Hemindra Hazari’s interview with Latha Venkatesh on CNBC-TV18.
Q: Was this a good idea to first open the Central Vigilance Commission (CVC) so that as and when the loans are sold down, the difference is understood between a business cycle that has gone sour or cronyism and just fraudulent decisions?
Bansal: This is a wonderful idea. I think the presence of CVC there gives a lot of confidence to the bankers and to my mind, the bankers should be encouraged to take decisions. And there is nothing wrong. If something has gone wrong because of business cycle or for other reasons, then naturally, we have to take a hit. As it is, 50-55 percent provision is available with the banks. Fortunately, the RBI has taken the lead and most of the non-performing assets (NPA) are on the table. Whatever is remaining will be there when the March results will be out.
Now the banks, they need to clean this balance sheet. Cleaning the balance sheet does not mean that you put all these assets on the table and then sit idle. Unless the banks dispose of these assets and the CEO of the company banks are encouraged to take decisions, let them take hit. 25-30 percent and in some cases even 50 percent is not going to affect the balance sheet of the bank, because as it is, there are sufficient provision available in the system. Naturally, it will cleanse the system and the banks will be having a clean balance sheet and they will be naturally, make some good money out of it and the future will be bright.
Q: This is provided the decisions were taken in an exuberant period between 2004 and 2008 and maybe even 2010 when we thought 8-10 percent gross domestic product (GDP) is a birth right and probably over priced a lot of assets. But, clearly, some of it is cronyism, some of it is fraud. So, how do you sift the good from the bad? How is it that you ensure that the decisions taken are not miss-spending public money or depositors money? What suggestions do you have to make the process clean?
Bansal: Let us not discuss fraud. I think there are other agencies to take out these cases, but let us be very careful when we identify which are the fraud cases and where the money has gone instead of asking the bankers why you have taken these decisions. If there are mollified, then naturally, that person needs to be punished, but otherwise the system should take its own care.
Now see this last 10 years, you need to break into four parts. Now, from 2004 to 2008, there was an era when liquidity was in abundance in the system and the interest rates were as low as 4-5 percent. Banks were rather running after these promoters and these promoters were also having.. (interrupted)
Q: What I am asking is that we have heard a lot of angry statements coming from the courts, coming from parliamentary standing committees, coming from the CBI, is there a way in which the process can be made transparent or above board? Do you have any suggestions for that because while transformation of public sector banks is a much larger agenda, immediately it is trying to make money from bad loans that is going to be discussed or I understand from my colleague is being discussed. So, is there any suggestion that you have?
Bansal: Let us not forget two things, let us understand the problem. In 2008 when the problem was not so severe for India we allowed one-time restructuring. So, what happened, all those assets which were falling into NPA category were also restructured and the repayment was deferred by three years. In that process interest is also added and all these accounts started slipping to NPA category 2012 onwards.
Secondly now the economy is in downturn. We are seeing what is happening after 2012. Having said this the process is very simple. There are full proof mechanisms available but still unfortunately there is one serious problem in the industry which is not recognised till date. In 2004-05 I think this problem people started saying with softer voice and it was said in 2009-10 that the banking industry is going to face huge HR challenges five years down the line.
Now the major challenge is if you see the banks what type of talents are available at middle level, I think we need to do lot of training, lot of grooming needs to be done before these people come and occupy the highest chairs. I think this is a serious issue. We are discussing only one problem.
Q: Any other idea that you think that the Gyan Sangam should get gyan on?
Bansal: Gyan Sangam should deliberate on the subject how to dispose off these assets. This is very quick, banks need to do it in the next 18-24 months before we lose out any further time.
Q: NPA management obviously will be the most important thing discussed. What would you think the government should do, a stressed asset group or do you think there should be more attention paid to how future NPAs are avoided?
Hazari: The first thing is to identify what is the extent of the loss. For that you have to do a forensic audit of all these corporate accounts or other accounts to find out what is the loss because what is the value of the assets that sits in the bank's books. It has got eroded on two counts, one is the demand slowdown, second there has been massive siphoning of funds also. So, even if the economy recovers some of these assets have been highly inflated. So, the banks and the government being the primary owner should know what is the extent of the hole. Once that is identified and that report can be kept confidential.
We must know what is the hole, today we don't know.
Q: Won't forensic take a lot of time? If one had to wait for forensic audits of probably 3000 accounts that would take a very long time, isn’t it? We have to probably do something more quick?
Parekh: We must. To my mind what will come out of a forensic audit or a review is who between the borrower and banker went wrong. I suppose what is to be emphasised now at this point in time is the measures to recover or reconstruct the assets so that the economic value can be restored. I suppose whether it is our vigilance, that is whether it is CVC on one side or whether it is our investigation agencies or the bankers themselves, I suppose if you start creating a lot of evidence in terms of finding out where things went wrong or who went wrong then once again we may take very long to resolve the assets.
The need for the hour is the methods of resolving and that is where I thought some emphasis is in the Budget. A larger emphasis is now being placed on asset reconstruction.
The direction seems to be quite good, the methods associated with asset reconstruction, for example at the end of SDR if we recognise that a certain asset is to be sold, a new management has to take over, we must start preparing and indentifying those effective managements which are capable and particularly on larger exposures. On minor and small exposures we can do other measures but in larger we must.
Q: What do you think the meeting can do to give the Bank Boards Bureau (BBB) a checklist of things to do? What should be the areas of discussion?
Parekh: Once again, in the new arrangement, BBB is going to play a significant role. There are three things in the construct of BBB itself, these were originally envisaged and I suppose going forward, they will have to be done. One is the whole concept of creating some kind of a holding company (holdco) on top of the public sector banks. Once again, to make sure and if I were to go by Shyamala Gopinath Committee’s working group recommendation, the idea was to create another layer from where capital can be raised because the holdco and the banks themselves, can both the entities can be listed at the market. So, that was one.
The governance and the entire order of governance at banking is something that the BBB will have to address. And now, the Budget gives out a third agenda and an important one is whether consolidation of public sector banking can be really looked at by BBB more closely. So, it is an extension of section 9 of the nationalisation act of banking companies, or public sector banking companies where BBB will be empowered of behalf of the central government to look at that.
Q: You were saying that the holding company which will own all the public sector shares should be created. Can that be created without amending the banking regulation act or whatever, the takeover banking undertakings act?
Parekh: No, the birth, the nationalisation of banking act, the acquisition and transfer of undertakings act, as well as the banking regulation act will have to be amended to do that. But, I suppose, if we were to follow some of the models that they other economies or jurisdictions have followed – China is of course, case in point, Korea is case in point – then I suppose, even if the parliamentary approval is obtained and if we can get there, then the burden that the government is facing today in capitalising public sector banking companies, can be reduced to a certain extent. And I suppose, such a bureau can play a much larger role as the shareholder of those companies.
Q: What would be your checklist of things for the government to do, BBB or however?
Hazari: One is government should inject equity. This kind of Budgetary allocation that they are doing is too small to make any significant, material impact. Second is, I think the government should form an expert panel which includes seasoned bankers, which includes lawyers.
Q: But that is the bureau, is it not?
Hazari: Yes, but includes lawyers, auditors and people specialised in asset recovery, especially on corporate asset recovery which can enable these banks to recover these kind of dud loans which they are sitting with, because once you form a crack team and they get to work, then the probability of getting some asset recovery is much higher than what it is.
I would also like to add, the problem that you are seeing today is not endemic only to government banks. Afterall, Standard Chartered bank which pays market salaries at a very attractive market salaries to its senior management ended up with a loss of Rs 6,700 crore on its India operations. And new private sector banks corporate portfolio will be very similar to Standard Chartered Bank’s India portfolio. So, this problem is not endemic to government banks. It is not just a problem of poor quality management. The type of management is there in public sector is obviously also there in Standard Chartered Bank because that is the kind of loss that you have seen there.
Q: I largely take your point and actually this coming from a banking expert who has no stakes in the public sector banks is most welcome, because that is an objective view. But it is also true that public sector banks have almost doubled the amount of bad loans that the private sector, the private sectors after the asset quality review showed much more bad loans, but still the problem is a little more acute with the public sector banks. But, what is your best guess? Do you think the problem, the worst is over for public sector banks and FY17 will be a slightly better year both in terms of governance and financials?
Hazari: I wish I could share your optimistic view, but my view remains consistent for the last one to two years that the worst is still to come. And the reason why is say that is that there are still a lot of troubled business groups which have an exposure to the banking industry for a minimum Rs 50,000-60,000 crore for each group. Now, these assets have yet to be identified as bad assets. Then only, can we know the extent of the problem. As I have been saying for some time, even the shock that you have got in Q3 is just the tip of the iceberg unfortunately.