Why BoI's Padmanabhan is not optimistic of stressed assets

Dinesh Kumar Khara, Managing Director & Group Executive (Associates & Subsidiaries) at State Bank of India also acknowledged that the RBI has taken measures to tackle the NPA issue. “These steps are in the right direction.” Professional decisions in handling stressed assets will be an enabler, he said.

Regarding capex into sectors, he said that the roads saw some unclogging.

Below is the verbatim transcript of G Padmanabhan and Dinesh Kumar Khara’s interview to Anuj Singhal, Sonia Shenoy & Latha Venkatesh.

Latha: There was the meeting that the Finance Minister had with bankers and one of the big things that came out in the press when the Finance Minister spoke is his hope that rate cuts would be transmitted. How does it look like pressure coming in from bond markets as well?

Padmanabhan: Today probably the banks are better placed to pass on the rate cuts although I wouldn't think that all has been sorted out asset but given that the treasury, the mark-to-market gains we are sitting on and a reasonable amount of cleaning up that has happened, we should be in a better position to pass on the rate cuts.

Latha: The expectation is that October 4 could yield a rate cut from the Reserve Bank of India (RBI) itself because of the inflation number coming in close to 5 percent and looks headed to 4 percent. Will that push give a bigger push?

Padmanabhan: Yes, we are all presuming that the rate cut would happen, so first of all if the rate cut does happen, to what extent it happens. So, all that I am trying to say is that today probably the banks are in a better position to pass on the rate cuts if and when that happens. Let's hope that that happens and happens in a significant way.Sonia: You recently spoke at one of the India corporate forums that one of the analysts had held and over there you indicated that you are optimistic on the resolution and recovery mechanism. Want to understand from you on the asset quality front - are there any new specific or generalised risks that you see that could perhaps be a hindrance to your slippage guidance?

Khara: As regard the resolution of the impaired assets or the stressed assets are concerned, there are lot many steps which have been taken in the recent past at the structural level and also many of the initiatives which have been taken by RBI though many of them as of now appears to be work in progress but these are the steps in the right direction. So, maybe if you look in terms of Asset Reconstruction Companies (ARCs) and the recent relaxation of norms which happened in terms of who can own the ARCs. So, it will probably bring in some new breath of life for the ARCs.

Apart from that the Strategic Debt Restructuring (SDR) mechanism, the Scheme for Sustainable Structuring of Stressed Assets (S4A) mechanism, they are all work in progress but the critical piece which is possibly missing as of now is the resolution on the ground and that too the ecosystem which can help the resolution of such assets. It has started emerging in some kind of small measures on the ground but going forward once that comes into full play maybe the Rs 600,000 crore worth of impaired assets which are available for resolution it will probably move to the faster resolution pace. So, that is something where the efforts are in from the RBI, from the Government of India and even from the banking sector also. They are also very keenly looking at people who can actually help in resolution of assets on the ground. So, there is a concerted effort on the part of all concerned and hopefully it will result into a definite action on the ground also.

Latha: We also picked up from both SEBI and RBI sources that they are looking at allowing or waving the open offer even when private promoters are buying stressed assets. As it is banks don't have to do an open offer. Will that make a very big difference?

Padmanabhan: On this stressed asset I have a take which is not as optimistic as what many people feel. The first issue that we need to understand is the speed with which we will be able to resolve these problems. Now, we are living in a scenario where even the normal credit pick up is not happening. The existing promoters are not prepared to spend on capital expenditure (capex).

So, who are these people we are thinking about who will be able to pick up the stressed assets? If you are thinking of only the specialised agencies that come and pick up these stressed assets then the kind of haircut that they are demanding on this is quite substantial. So, I would like to put it this way. Today what has happened is through various measures that RBI has taken sometimes it becomes little bit difficult to keep pace with these measures because by the time you finalise on one the next measure has come in, but what has happened is they have facilitated the classical horse to be taken to the river to drink. However, many of these banks have not been able to make this horse drink then there is somebody else who is prepared to offer that. But then what you bring back to the river may not be the full horse. So, are you prepared to take that and that is what is the system will have to decide. But once we decide on that because there is going to be the pound of flesh demanded, if the cleaning up is happening and this is something which has to be done and taken forward.

If you want to revisit these things in retrospect that is what normally happens in a public sector scenario then it becomes quite difficult to manage. This is where many of the banks are hesitant to go ahead. Once this resolution happens then I would go along with the optimism that this could happen very quickly._PAGEBREAK_

Latha: Are we at least sure that we know what the problem asset size is or will we get more nasty shocks?

Padmanabhan: No, most of the banks - at least I can say that at least in respect of my bank - but most of the other banks I presume clearly know what the extent of the problem is. But then there could be certain issues, certain unexpected developments but at the same time I go back to an important point that deputy governor Vishwanathan made in his last speech is that just because we have understood the problem that doesn't mean that the balance sheets are going to get better because these will have to be accounted for in terms of aging, in terms of the non-fund based business also having to be provided for. So, these are the issues which need to be resolved. So, once it is resolved, yes. So, to your specific question yes, banks are aware of the problem, so there is not going to be anything which is huge and unexpected, but then resolution is going to take little more time.Latha: FY17 as both of you say will be difficult. One, promoters take a long time to buy a troubled asset and second, in FY18 you would have provided for a larger part, so a haircut of 50-60 percent would be something which banks can take in their stride. Should we expect say this is in FY18 rather than in FY17?

Khara: Yes, as the situation stands one, of course I do concur with what Mr Padmanabhan indicated that as far as stress is concerned as of now it has already been factored into and as the stock is concerned we as bankers have already factored in. Going forward as far as the flow part is concerned which is again a function of the economy, how the economy fares it will actually depend upon that. However, having said all that on the resolution piece it looks like yes, the comfort of haircut, one, it will come from the kind of the provision which is already available and the second of course is some kind of an ecosystem relief in terms of looking into the decisions, reviewing the decisions and creating a sort of atmosphere through which the professional decisions are allowed to be reckoned and accepted well by all the authorities which are involved in the task of reviewing such decisions. So, that will be very much enabler which will be created and which will probably facilitate the banks in taking the kind of haircut which possibly is inevitable in certain cases.

Sonia: I wanted you to come in on the point that Mr Padmanabhan was making about there being no spend at all in terms of capex. What are you noticing on the ground, is there any pickup either in private or public capex either in roads, ports, railways, anything that you are noticing?

Khara: The roads of course we did see the unclogging some time back and also the recent relaxation in terms of the construction sector - 75 percent of the arbitral amount will be released for the contractors on furnishing of a bank guarantee. This is of course as of now the outlay to the construction sector is not very big but when it comes to the sentiments as far as the industry is concerned it creates a very positive sentiment and to that extent the sentiments can take the whole sector a very long way. So, to that extent it is an enabler but if we are looking for the end result by itself may not be visible but of course it is a positive in many respects.

Latha: Bank of India posted very good improvement in current account, savings account (CASA). It went from 28-29 percent to nearly 35 percent in the last two quarters. Is there some consorted efforts and should we expect better?

Padmanabhan: Among the several strategies that we set out to turn around one of the strategy was to bring down first of all the high cost deposits and then move specifically towards accumulating more of CASA. This has worked quite well and we are well on our way to achieving something close to 37 percent.

Latha: Consequently perhaps, partly because of that your net interest margin (NIMs) had improved by about 16-17 bps. Should we expect that to continue?

Padmanabhan: Yes, we are trying to at least make sure that this NIM, we are able to retain. This again is a part of the conscious strategy which has succeeded.

Latha: You all are through with losses; the provisioning will not lead you to have any red ink anymore? You all were already through last quarter.

Padmanabhan: I am not concluding that we will straight away get into black from this quarter or the next quarter but the improvement is clearly visible and we don't expect any huge unexpected kind of accounts to blow up. So, probably the turnaround is starting to happen and unless there are some external shocks which are unexpected we hope to be moving in that direction.