'Banks have provided for more bad loans than RBI estimated'

There is no additional round of asset quality review that the RBI is planning, he said, adding that convergence of NPAs will continue to happen in the coming few quarters.Below is the verbatim transcript of SS Mundra’s interview with CNBC-TV18's Latha Venkatesh.Q: You know both sides of the pain, the pain of the regulator and with your long career in commercial banking the pain of the bankers as well. So, I am not going to start with pain. Let me start with hint that appeared to come from the governor in his latest speech, he suggested that recapitalisation bonds issued by the government could be one way of recapitalising banks, should we expect some time soon, is that an idea?A: This is one of the several options which could be on the table and of course if I recollect correctly it would not be a new instrument or it would not be an instrument which is used for the first time. In fact the very first transition from being a private bank to nationalised bank was through this route only as you must be very well knowing. What is essentially the suggestion that number one, if there is a fiscal room already available, so something is already prescribed in Budget and the Finance Minister made for some additional announcement. So, it suggests that there is some fiscal room that is available. So, that is the first choice.Governor did mention that Reserve Bank of India (RBI) had been doing its bit and would continue to do its bits in providing those kind of space to the government by way of as much as dividend as we can provide. And then if it is further needed then this could be one route which will be the case neutral for the government. The point is not immediately to pick up one instrument but the idea is to say that capitalisation is a need and it will have many positive impacts. So, it should not be postponed for any kind of constraint. So, if those constraint emerges we should be prepared to use the various instrument, that is the pitch.Q: Yes, that certainly was what you were saying that we should have enough fodder to fuel growth, so capital is needed. Therefore we should expect the capitalisation bonds in FY17?A: It will depend on the total as we progress in the quarter and what kind of capital need which would emerge for the bank. But as I mentioned you had a certain announcement in the Budget, you had an additional announcement and probably the fiscal room may continue to build up. So, I don't think it will be a very kind of black and white that there is a need or there would be a recapitalisation bond in this year.Q: There may not be also?A: If a direction contribution or the capital infusion is possible then it can always remain as one more opportunity which can be used.Q: In that case from what I am getting from you the arithmetic which the government and Reserve Bank of India (RBI) were working with that they will give 70,000 over three years, 25, 25, 10, that was what the government was working with. That may under current calculations be less, a little more than that is needed?A: This estimation was done at the time when we started on the asset quality review (AQR) journey and then it was supposed to be over two quarters. So, we have seen those quarters December and March. Typically if you look at those quarters that finally the recognition and provisioning which has come is certainly much more than what was suggested by us, identified by us. So, it is quite clearly that banks have done the proactive action. They got more convinced about the merit of doing this, probably which they were - to begin with they were a reluctant player in the game. But probably they had become quite a willing player. So, from that perspective requirement may be a little more. But then little more has already been indicated by way of 12,000 plus, then the 25,000 which was originally envisaged.Q: The 25,000 came after knowing AQR. Now after knowing the extra provisioning that banks have made over and above the AQR and the watch list surely you need more capital?A: Yes, but then after that RBI provided some room as you are aware by harmonising the rules and this 12,000 is coming. What I am trying to say that there were two components of the AQR exercise. One was which was to end with March 2016 and another which was to continue in the four quarters of 2017. The point which I am trying to make that what we look as the enhanced activity which has happened in December and March 2016 it is quite possible that it is some of the fast forward of 2017 which otherwise would have happened over the fourth quarter. If it has been pulled forward to that extent the requirement of 2017 may get compensated. Q: We were given to understand by sources that another AQR could happen in probably smaller assets, probably other banks but is there another review that is being planned, that is underway? A: As far as I am concerned, there is nothing like another round of AQR which is immediately planned or warranted. However, since you have mentioned that you have got the information from sources, so, if there is another agency which is now prepared and empowered to carry out the AQR, then okay. Q: You spoke about the stressed declared by the banks to be higher than what RBI anticipated. The governor made a similar observation. So, you think now most of the stress is known, that at least in some quarter, may be first or second quarter we could see the stress starting to decline, we would have bottomed out as it were?A: I think two things, one of course will be a repetition but I gave this same analogy in my interview the other day that as long as you are using the kitchen for doing the cooking, it would be very unrealistic to expect that there won’t be any wastage and the garbage can would always be empty. In a running business, there would be incremental delinquencies which will keep on coming. Q: I am not saying no incremental delinquency, I am asking accelerated pace.A: Only one thing which will continue to play in next few quarters because if you see the last exercise, since we are living under a rule based dispensation and I think you people have also been expressing surprise many times how it is possible that such and such account is NPA in one bank and not in another and I was at pen to explain why it happens and it happens for all the right reasons. So, that convergence will keep on happening. Convergence could be either the suffered one may become the healthy one or those who are -- so this will see some interplay in next three to four quarters. However, by and large, I think all the known dimensions have been identified and addressed.Q: This sustainable stressed asset structuring the scheme that RBI put out has its own set of moral hazards. You are actually telling the banks that the guys who have unsustainable debt should be helped, isn’t this a moral hazard?A: Yes, I accept that there would always be some moral hazard in this kind of situation, but let’s look from the view point number one why this situation has come; the situation might have come for the reasons which are completely beyond the control of this particular promoter and if you see the trajectory of various measures announced right from the Central Repository of Information on Large Credits (CRILC), Joint Lenders' Forum (JLF), CAP formation, Strategic Debt Restructuring (SDR), 5:25 and now scheme for sustainable structuring of stressed assets (S4A).S4A is particularly only intended towards the promoters, which have run into difficulties for not any wrong intention or malfeasance on their part, but only for the difficulties which were beyond their control. I take your analogy, but it is quite possible that one promoter had set up a plant in the part of country where it didn’t face the hassle, other one had put up the similar plant in another part of the country where he faced a lot of hurdles and there was a time overrun up 4 years, now you are right but at the same time what are the options. You have the option either you say that yes let us abandon the project, let the productivity, let the employment go, let the ecosystem which is around or the second option is that you try give it a fair chance, but yes there has to be a proper mechanism at least to deal with this two differences.Differences are only thing that in the first situation because plant is running efficiently whatever gain comes, this gain would be purely of the promoters. Whereas in this case there is a provision when gain comes, principle of proportionality should kick in and then the gain should be equally enjoyed by the lenders. In first case lenders would be entitled to their contractual rate of interest which they would run. In this case they can expect if things go well and everything is coming back, they can expect to get something much more than that, so I think that is trade off.Q: I heard from a fairly reliable sources that you are planning something to what he called read the riot act to habitual defaulters. So, something more is coming to warn promoters or punish them in some fashion, defaulting promoters.A: Every day, day in day out what we have been reading is that riots act only. All the provisions which have been put in are designed in that direction. If you look at the SDR, SDR is primarily mean to drive out the promoters who have not played fair, what is further important is that by our wishing alone not everything can accomplish. RBI is a regulator and RBI is considered to be having substantial powers, but we don’t have all the powers at our command. So it was very important that many other players in the act should have become equally sensitise about the possibility and they also come into this with the similar kind of commitment, which they have you must have seen gradually that many of them have come. So it will be collective endeavour.Q: You said that bankers will be avail of the upside, so far promoters have been or at least the one set of promoters have been able to cheat the bankers of all that upside. Personal guarantees, you are saying that for the sustainable portion personal guarantee should be demanded. By now all those guys would have transferred their assets. What will you get with that personal guarantee and diligent the governor made is so clear that even where you were irrationally exuberant in lending, even if you have taken good care of your collateral it would have been good. Is there any mechanism in place to ensure that the banking system after sale service, its diligent over it collateral is sharpened, it doesn’t seems to be existing and that was admitted.A: I think is a big question. I am struggling to say that how can I reply it, so that it doesn’t consume one of your entire programme. It can consume one of your entire programme if I go into all the dimension of this, but understand one thing one is you say someone okay, his personal guarantees is there, but the asset will be transferred. It will be very difficult, yes but then if it is possible you have seen the many cases for a variety of reason if someone is prepared to spend a disproportionately long time in Tihar and start enjoying the lifestyle in Tihar then it is one thing. If someone is prepared to called recluse from the country and prepare to remain confine to another country is another thing. So while system may grind slow, but then when it grinds, it grinds fine, so let not be so sceptical about the system that people can get away with any kind of thing.Q: I am wondering if anything is in place to ensure that bankers are putting better diligence?A: I am coming to that. Yes, that is very much. If you look at the whole S4A process then it is not something that few bankers will see it and decide something and implement and maybe at times whatever is designed is more to kick the can down the road rather than deal with the problem. So, all those mechanism would be there. There is a direct correlation with the cash flow, there is oversight committee, there is Techno-Economic Viability/Feasibility (TEV) valuation. TV valuation from a reputed company and not a big consultancy firm from some small place, not like that. So, those mechanism are there. Unlike the previous system where the upside is more on a negotiation, some clause of recompense which we will sit down, that is what all happened in the past. Here upside is because there is an instrument and an instrument maybe listed instrument, it is a traded instrument. So, it is not an upside which one has to negotiate or assume about it. It can be directly through the market mechanism. So, it is a much better mechanism and structure than what we have seen in the past.Q: You are a frequent visitor in the bank board bureau (BBB) meetings as well you have been a career commercial public sector banker yourself. Have you noticed any concrete steps to improve governance in bank boards. As I see it the BBB is making appointments. Then what is the point of having a good board inside the banks. Likewise the negotiations on whether this sustainable and unsustainable debt is good or not is going to happen by a committee appointed by IBA. Where have we improved the public sector banks?A: There are several steps. Of course I agree, I won't say we have reached the most ideal point but at the same time to say that nothing has been done would also be - I think truth lies somewhere. So, the formation of BBB itself is as a move forward that at least you have detached the process of identifying such people purely from the bureaucratic system and then there are three separate gurus which evaluate him independently and all that.Then the split of the post of chairman and managing director, this is another move forward. But yes, I would say a lot more would be needed to be done. I feel at times concerned that at times, forget about the right kind of quality on the bank board a number of bank boards are having vacancies. We talk about who will fill that vacancy and their quality is the second stage. First their vacancy themselves are there. So, that is a concern and all the time we have discussed enough about the top management in the bank continuously bringing, that is all fine. We need to find a time to look at the middle management.Q: Is BBB doing that?A: No, it is not. But it will be unfair also or unrealistic to expect BBB to take that entirely. It is not an individual bank management.Q: What is the next one or two steps we can expect by way of PSU bank reform?A: I think the one thing is, immediately after the top management, the rung which is typically consisting of GM and DGM, there is a strong need to strengthen that maybe it is by way of intense kind of training to them, exposures, if need be do some lateral recruitment for the time being till you can grow your in-house talent; that will be very important.The whole risk management, the risk management has to move from the compliance to really understanding the risk and even at the board level, the risk management committee I think needs to devote much more time. So, these are few areas that BBB is working on.Q: We should expect something in a quarter or two to be in place in terms of improving these metrics?A: These are the suggestions or these are the messages we are constantly giving. Since there is a constant focus so let us hope that they would get implemented.Q: We have been waiting for a quite a long time from the banks and the government for a stressed asset fund, we were told that there would be two stressed funds, one for working capital and one for expansion capital, last mile capita. Are we any closer, who is putting the money, is government putting National Investment and Infrastructure Fund (NIIF) money?A: I think if you ask me, as a regulator we can only say that a certain structure of fund was presented and more from our viewpoint that whether it will be acceptable or it is within regulatory framework. So, that is something which has already been indicated. As far as the funds coming into being itself, this is I think more for the government, bank and maybe even the other players to move in that direction.However, my sense is if it is a fund which is partly bank and partly government, then probably we are almost back to the old situation. So, whatever the shape of the fund maybe, it would be better that it has fairly independent private kind of character. To call these actually the stressed assets funds, I think we need to find out a new nomenclature for them because they are typically not meant to take over the stressed assets from the banking system but provide two kind of support, one where the equity support is needed and one where some last mile funding is needed.Q: We have ended the Rajan era and two of the legacies of the Rajan era or maybe I will only stick to banks, the legacy of the Rajan era has been very strict about NPAs. Probably in the second half of his tenure but that demand for provisioning and not withstanding nonsense about whether it is loan to a Punjab government for food credit or to discoms, to provide correctly as well to resist institutions like the bad bank which as you said may not be buying assets at the right market price. Will these get tweaked, diluted in a new situation?A: Number one, a factual correction, we have nowhere ended Rajan era. Rajan era is very much there and I think we are in that era for a couple of months. So, to just reply what you said we have still not hit the rewind button. We were on play mode, probably we will be moving towards the fast forward.