NPA menace: Banks must take haircut, says KV Kamath

Below is the edited transcript of KV Kamath's interview with CNBC-TV18

Q: There is a new man in Mint Street - his first 100 days are over. Your initial assessment, do you think that the first steps are encouraging?

A: It is not for me to assess the Governor's performance. Having said that, he has come to grips with what are the challenges we are facing at this point in time. There are several challenges that we as a nation are facing. There are things in the monetary policy and banking side which require attention. He has sequenced it right, upfront by taking the monetary policy issues which were very fragile when he came in and trying to get order into it, atleast meeting the current account situation, trying to show how it could be covered, not get into the sort of situation that the doomsday sayers were saying we are heading to. It was a big first step.

The second is he also tackled what I call gaming the exchange rate system. I won't say manipulation - probably heading toward manipulation that was happening. He requires entire credit for correcting the rupee from 68 or 69 to the 61-62 range that it is today trading at. More importantly, it is going to be a very brave person who will now try to game the system. At the helm today, we have somebody who understands that we are being gamed and will search for the tools that need to be found to arrest this sort of gaming. He has handled those things that needed to be handled urgently as top priority in the first 100 days.

 Q: can you also share your views on the other piece that he has attempted - the early detection of NPLs. Do you think incentiveisation process that he has recommended will work? It is actually not so much incentives as much as penalty for non recognition for early NPLs?

A: Having lived through the India growth story now for 40 plus years, 17 years in a very active role and looking back I have reached may be a conclusion or a hypothesis as it were, in a developing country as long as it is a productive asset, it has value. In a mature economy whether it is a productive asset or not because if the economy is going to grow at 1 percent or 2 percent , f the company runs foul or asset goes bad, you cannot put it back to productive use. So, you sell it under distress. However in a developing country scenario, as long as there are assets and they are productive, they are not complete junk then you have value. As we go along, this is going to be the challenge in India to find out what are the productive assets and what is its fair value and get lenders to provide for the unproductive part of it and get on with life.

 I take you back 10-12 years when we did the first major bout of restructuring where we said wherever it was a productive asset and it was looked at very hard, the restructuring would be for a very long period. There would be a conversion of part of the loan into equity. The rest of the loan at current market rate of interest would need to be serviced. In all this if there was a loss - loss in interest terms, loss in terms of conversion to equity or whatever then the bank would have to take it upfront. It stood as well during that period.

What has happened over the last 10-12 years is we now also have unproductive assets which are in that pie. By that I mean assets which have no value or to take an extreme case loans which are not backed by assets at all. This could be of two types, it could be several services sector companies or it could be working capital type assets which either have lost value or did not have value to start with.

This will require identification and redressal upfront and I would think a separate bucket of productive assets would be the second category. I am sure this will be the feedback that regulators will get as we go along that this is probably the best way to do it. But whatever it is the banks will have to be prepared to shoulder the burden of the write-offs that would be required to put the assets which are productive back on track and write-off those assets which are not going to be on track and all that means a cost.

Q: Do you think a haircut will be called for say in power or some of the road infrastructure companies now?

A: We will have to look at it on a case to case basis. If it is a power project or particularly infrastructure project where the useful life could be 15-20 years, if you are looking at over that period of time I would think the haircut would be minimal but if you are looking at projects with seven-eight years life then the haircut would be larger.

In cases where even the productive life is going to be long, if based on whatever is currently visible the serviceability is not visible at all, you will need to take a haircut. It is difficult to precisely put a number whether it is 10-15-20 percent haircut, but I would believe a haircut would be required in every case.

Q: You think the system as a whole has the capital to write-off what you said is really shell companies as well take the upfront write-off on productive assets?

A: Unfortunately I don't think so. I would think barring a few banks most of the banks today it will not have the capital to take this shock in terms of a write-off which will mean that we will need to look at recapitalizing for a whole bunch of banks as well.

There are two problems here, banks will need recapitalizing, let me not go into which banks. A set of banks are also going to face problem of retirements so they will have people problem. It is not only financial capital, they have human capital problem also that is emerging and I could take it on to skills required to run the bank in a competitive manner and face these challenges. So I think the problem is not going to be slight, it is going to be fairly rigorous and it is better that we recognize it upfront so that we can then aim at solutions, solutions being how do we get the capital in and how do we get our people equation right in terms of skill sets, skill mix and people mix.

Q: Do you think time bound restructuring will work, the RBI has prescribed a penalty if you postpone it but still will that penalties be strict enough to ensure, I think they have given about 45 days to 90 days as the limit now?

A: There is no other alternative, but time bound resolution. Go back 12 years; the problem was lack of time bound resolutions. We would have what is called inter institutional meeting and you will be surprised that when I left in 1998 the last institutional meeting that I attended there was a particular proposal, I come back in 2006 and I attended the first institutional meeting as CEO of ICICI Ltd and the same proposal appears. So eight years we could not actually come to a head and thereafter for the next year or so this kept on going, finally I said I am not going to attend any more institutional meetings. A big issue was made about it.

We have not come to that situation today but there is need for urgency, we need to get resolutions done on a priority basis. I am fully behind this move to impose penalties if necessary, to get time bound recognition of problem and resolution of problem.

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Q: The other proposal that has been put forward by the RBI, actually its implementation is underway is central repository of loans. It is a pity that we didn’t have it all these days, you think that is going to speed up or at least slacken the pace of fresh NPL creation?

A: It will not slacken the pace of fresh NPL creation but what will happen is that it will put better control on people who have been trying to blame the system in a variety of ways both borrowers and lenders. So I think that will put a break on that and it is welcome.

Q: How seriously do you think the fiscal deficit should be tackled? Do you think it is a many sided cobra which we have not been able to bring under control?

A: The fiscal deficit is at the root of whole lot of challenges that we are facing. That it has be brought under control is a given. The challenge regarding the bond market or the challenges regarding the bond market are several. Unless we are willing to look at all those challenges we will not have an optimal solution. Today to complicate matters the bond market also is – the interest rate is paid on by the exchange rate. On the exchange rate I mentioned about the problems that we are facing and what impact it would have on the interest rates or the need to get higher interest rates because of the exchange rate problem. So, you have now a whole lot of challenges that are happening first is high fiscal deficit as a consequence finding the resources for that, as a consequence SLR on the banking front has cracked. Secondly, lack of development of corporate bond market, interest rate transparencies and free movement of interest rates on a market basis, yield curve not getting right as a result.

Now to top it you have got the foreign exchange, suddenly you find that you are vulnerable to that too. So, far you were vulnerable but if the rupee moved in two rupee band to the dollar you could manage. However when the rupee moves Rs 10-12 in a year then you have challenges. Having said all this, the Governor who is at the helm of monetary policy today, somebody who has a total grip on what is happening in this space. I would expect him to address this issue. He has completely grasp on what his happening is a given. It is now how he decides, in what sequence or whether it is simultaneously that he would attack all these challenges is to be seen.

I would think you will have to give him another 100 days for this to be done. It is a task which has been left unfinished for several years. So, even if he were to do it in a year’s time, 100 days would be very uncharitable, I would think it would be a great achievement.

Q: For long you have been an India bull. Two years in a row we have seen growth falling rather sharply, in fact three years. We have come down very sharply from 8 percent to 6.5 percent thereabouts to 5 percent to now 4.5 percent. Do you think that we have to linger in this bracket for a bit more before we start improving?

 A: We have caused this slowdown ourselves. It is not economics playing out or anything. We have taken two guns and shot ourselves in both the feet and we are paying for that. As I see it the 5 percent growth that you are seeing is the growth excluding the infrastructure sector. Whoever is going to rule the country for the next five years has to make sure that top of the agenda is going to be to get infrastructure growth going and to get the right policies there, the right environment in terms of land policies, environmental policies and so on in the quickest possible time if you want to get back to 7-8 percent growth. There is no other magic wand.

As far as inflation is concerned, get your distribution policies right. As far as the revenue side is concerned, get your policies on GST and other things right. These are the three things that any government that comes in will have to do clearly as a 100 day target. If that is done, I am hopeful that a year from now if we are having this chat we will see a hope in the country. If not, we will struggle at 5 percent growth because there is nothing driving growth beyond that at this point in time.

Q: What is your sense in terms of what might happen or what might happen after the elections? What if it is a no part majority, if it is say a third front?

A: Whoever is observing the economic situation has understood what damage can happen for reasons that I mentioned earlier. What gives me hope is that we had a more fractured situation in 1996-1997-1998. We saw that whatever was that fractured situation growth was allowed to happen. I am sure whichever government comes back to govern for the next five years is going to understand what has happened in the last few years and take steps to correct it. I don’t think there is rocket science in this. There is simple economics. If you get that right we should be back. I am not too worried at this point in time about who is going to govern us for the next five years.

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Q: Post the assembly elections there has been a bit of euphoria which is there even in the way the stock markets have reacted that hopefully it will be an NDA government or a BJP led government, do you think that will be a panacea?

A: Any government which clearly understands the economic policies and the challenges is going to be good.

Q: What do you think has been the single biggest failure of the current government?

A: Taking its eye off the infrastructure story. We have allowed it to happen while everybody watched.

Q: In terms of numbers 4.4 percent Q1 GDP growth has become 4.8 percent but do you really think we have troughed out?

A: We have troughed out here. This much of momentum is there in the economy to keep growth going at this. Luckily for us we have had other engines which are firing. Rural engine is still firing. I completed one of my drives into rural India last week and I find the rural engine is still firing. That gives us a hope that we will do well.

Q: Governor has been speaking of multiple licenses probably specialized licenses, niche banks, banks only for inclusion or banks only for cash management like some of the foreign banks wants. Do you think that is the way to go forward?

A: We will have to see as we go along. In any case a new entrant is going to find a challenge because entry is at a point in time when the economy has slowed down. You will have to do the spend that you have to do to get momentum going. It is a competitive field out there. There are entrenched public sector players; there are the newer private sector players who have loaded technology. It is a challenging situation for a new entrant.

Within that, whether it is narrow banking in one terminology or the other we will have to see what the best route is. It is good to have an open mind right from whether the American type of credit cooperatives is right or credit unions is the right approach. Having said that, you also have to look at the challenges with the cooperative banking sector. To answer your question it is not going to be easy for a new entrant in the first few years given the economic environment and given what they will need to do.

Q: How many licenses do you think will be given?

A: I don’t know. I know as much as the media tells me. I guess it is going to be half dozen or so. However as has been made out by the Governor why should we have a number in mind at all? We could well be adding to that as we go along.

Q: On tap licenses is okay for you?

A: I am not at all worried. The person getting the licence honestly at this point in time has to worry because it is not going to be easy. We have seen how difficult it was 12 years back to try to scale up from where we were. It is not going to be easy. I wish everybody well. If we can all play our role in getting that bit of momentum in the economy we would have served our purpose. The Reserve Bank of India tightening up things is welcome. We hope that we have a government which governs well and gives the country economic momentum. That momentum is what we all seek.