The health of the Indian banks deteriorated sharply in 2014. Gross bad loans rose from 4.1 percent of total loans in March to 4.5 percent in September and 4.7 percent by December. Likewise, stressed loans – those that are not paid back along with the restructured ones -- accounted for 10.1 percent in March and rose to 10.7 percent by September.
But the things may change now. The three key actors -- government, corporate India and RBI -- have made some seminal moves.
The government over the past 12 months has taken some solid steps to remove hurdles to infrastructure. Road projects are reportedly getting bid out with higher viability gap funding. Mining bans in several states have been lifted; coal output has improved even if the resource has become more expensive. Also, the central government is expected to begin spending on infra and smart cities when the new fiscal kicks in. Gas power plants, the worst-affected, may start to see a third of their capacities utilised. India Inc in the meantime is also cleaning its balance sheet. A couple of cement plants have exchanged hands , some beleaguered energy and shipyard companies have found investors and finally the RBI has made it easier to roll over infrastructure loans through the 5/25 mechanism – which is casting long-term loans into 25-year loans with banks initially financing only the first five years. Now banks may convert their loans into equity at lower prices and thus force out a bad owner still keeping their loans from becoming non-performing loans (NPLs). The RBI has also cut rates twice already.
Are all these stopping the faster pile-up of bad loans or are they making it easier to tackle legacy loans? Eminent bankers, Pradeep Kumar, MD, SBI, Srini Varadarajan, Executive Director, Axis Bank, and Ranjan Dhawan, MD and CEO of Bank of Baroda, discuss on the same.
Below is the transcript of the interview with CNBC-TV18’s Latha Venkatesh
Q: Are you getting a sense that pain in the system is reducing? If you had 10 small and medium-sized enterprises (SMEs ) defaulting last month, is it 9 SMEs this month or for that matter larger companies, is the pain reducing?
Varadarajan: We will have to look at it in two forms. The old stressed assets, the legacy stressed assets which have still to be worked through. This is something which will continue to for the next few quarters and we will see some more pain but incrementally are fresh loans being added to that list? I would think that that is slowing down and that is good news here. On top of all the actions being taken by various stakeholders, fresh incremental stress loans accretion to that is clearly slower.
Q: Are you getting a sense that fresh pain in the system is not getting generated?
Kumar: I would like to endorse what Srini said that the growth for credit is very muted for the last three four quarters and maybe it will continue to be so at least for the next quarter.
Yes, the government, the RBI and if you go by data of our bank especially for the last five quarters, we have seen the slippages coming down but they are still substantial. We are not in a comfort zone still but yes relatively maybe compared to last year the slippages have come down quarter on quarter (QoQ) which perhaps indicates the pain is slowly easing in the system but its still there. The amount of slippages we had in the last quarter show that we are not still in the comfort zone, we are not comfortable and as Srini says yes what has slipped lot of action has to be there to recover those loans. Those recoveries are also happening very slowly because of the legal tangles we are in. The steps that are being taken by RBI whether it is 5/25 or conversion of debt into equity, easing conversion of debt into equity, availability of gas for the power plants will all prevent perhaps more loans becoming non-performing assets (NPAs).
Q: Just to put some numbers to what you were saying, if you were generating about Rs 7,000 crore per quarter in terms of bad loans, do you at least have the confidence that it will fall to Rs 5,000 crore or something in the current and the next quarter?
Kumar: It will be difficult for me to give specific numbers.
Q: Not specific, I am only asking for ballpark and the direction.
A: The direction was coming down I hope because our numbers are still not out, we are still in the quarter so I do hope it will be down but I will not be able to say it with great confidence it will be lower but it is trending lower.
Q: In Bank of Baroda we distinctly saw that after a period of actual stability in bad loans, they jumped up. What is the sense you are getting of the current quarter and the coming quarter, are your branch officers and credit officers telling you that incremental pain is receding?
Dhawan: I believe so. In point of fact in December our figures were fairly bad and I believe that the pain would be there for one or two more quarters but the incremental pain should reduce this quarter. Going forward of course the new dispensation of the RBI comes in wherein all restructured loans are to be treated as non-performing assets (NPA) so we will have to wait and take a call for the first quarter of the next financial year but for this quarter we should be pleasantly surprised on the downward side.
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Q: What is the sense, before I come to the resolution of legacy loans, is this going to mean that in the April-June quarter itself we could see a spike but that will be a one quarter spike?
Varadarajan: What RBI has done is to make sure that when you restructure it no longer is called a restructured standard asset but it is called a restructured substandard asset but the way banks would look at resolving some of these assets is broadly going to be the same. If the recovery possibilities from a loan are better by rephrasing the payment schedules, you would still continue to do it only the tagging is going to change and probably the amounts that you are going to provide is going to change.
If a project or a corporate is going through a stress because of underlying economic conditions or things beyond its control and the chances of recovery is better through a restructuring rather than through a recovery process which again as Mr. Pradeep Kumar mentioned has lot of other legal implications and delays involved, you may as well restructure and try to recover your money as to the best extent possible than just initial recovery. So it is just a tagging issue and to some extent how much you provide for it and that is what is going to change but otherwise the fundamentally how you approach a loan in terms of resolution whether it is restructuring or recovery is something which the banks have to decide based on the underlying quality of asset.
Q: But is that the way bankers look at it? First of all the rules allow you to lend more even if it a NPL and secondly generally what is the mentality of bankers? Would they-for the first time you are going to be faced with the fact that even if you restructure it maybe a bad loan but are bankers approaching it with that positivity?
Varadarajan: We are still in the Q4 of this year, the new fresh guidelines have not yet kicked in. We will know as we go into the next quarter but broadly banks will do what makes commercial sense and in that context we will do what makes best sense for banks.
Q: What is your take, for the system will there be that one quarter spike?
Kumar: Normally in the first quarter not many restructurings takes place primarily because most year ends are March 31. Bankers wait for the year end numbers. It may not happen in Q1, maybe it will happen in Q2 or Q3 also. It may not necessarily happen in Q1.
Q: The other point I wanted to ask is although RBI is not going to allow a category called restructured loans, it is also providing for easier restructuring of some real huge legacy loans infrastructure loans. What has been the extent of use of this 5/25 rule so to speak? Have some of the potential bad loans been restructured by the system in the form of 25 year loans?
Dhawan: Our bank has at the moment three or four proposals in which earlier we had sanctioned let us say 10 year loans and the economic life of the project was much longer. We have three four proposals for extending the repayment period which is in fact afar more realistic period maybe 20 years, maybe 25 years and we are looking at these proposals. There is of course one technical problem at this and that is that the RBI guidelines say that if you are to enforce a 5/25 rule in effect make the repayment period much longer, you will have to protect the net present value (NPV). Now in protecting the NPV if we elongate the repayment period on the same terms and conditions, the NPV cannot be protected and therefore we will have to make provision on our books. So, this is a problem we are facing at the moment, we are trying to find a way around this.
Q: You’ll have succeeded in converting any loan into a 25-year loan?
Kumar: We have but fortunately for us what we have tried is two three accounts where we have gone by the earlier RBI policy which came out in August where if there is a 25 percent of the loan is taken by a new banker, the loan can be restructured for a longer period. We have used that guideline and we have restructured, two or three or four are in the pipeline so we did not have to provide that because there is no NPV guideline in that guidelines of RBI of the August 7, 2014. As Mr. Dhawan said, the other one yes, that is an NPV issue. So far we have not done anything in that category.
Q: What about the other big provision that the RBI hopes will lighten your problems? The ability to convert debt into equity and if that equity is passed on to a new owner then you do not have to mark that loan as an NPL. Obviously the minor rules have yet to come, do you think this is going to make for reasonable number or at least some number of management changes and therefore will rescue, will save banks from NPLs?
Varadarajan: It surely helps clearly your ability to bargain or negotiate with the current sponsor once you have such a clause and your ability to have a substantial holding in the company clearly strengthens your hand and that would go a long way in terms of trying to seek better resolution of the asset. But if you look at projects itself, typically in most of the project finance transactions, you have most of the shareholding of the special purpose vehicle (SPV)already with you. So, to that extent that is something which we can still do. The only thing in listed companies you need to be careful is that without the current sponsor cooperating, how easily you can change management control is something we need to test but this is clearly a step in the right direction, it strengthens the arms of the lenders and will go a long way in terms of making sure we find the bright resolution for some of these companies.
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Q: You see it reducing the number of NPLs, you see it helping you?
Kumar: This is a step in the right direction; it will be very difficult to quantify it because we still have to wait for the RBI guidelines. Yes it strengthens the hands of the banks and maybe change of management will become much more easier but I cannot give you a number to it how many I will be able to do it in the first quarter.
Q: I am not asking for a number in that sense but is it also something which will reduce the pressure of NPLs?
Kumar: Yes, the promoters especially the not so good ones will be very weary and when the banks have the leverage of converting their debt or interest into equity and the resolution becomes much easier, we can always look for to transfer the shares which we have to a new management but as Srinivasan said, yes there will be challenges in the Indian context but these are steps in the direction. This is what the banks have been demanding and securities and exchange board of India (SEBI) and RBI together should come out with the detailed guidelines to enable us to take steps in this direction.
Varadarajan: In terms of this in addition to helping resolution, converting loans into equity also gives equity upside in case the economy turns and these companies start doing much better than what they are doing. So, banks, one resolution in terms of change in management. Second is in terms of participating in the upside in case the companies’ fortunes change. That is also useful upside which if you look at the last cycle, the financial institutions benefitted quite a bit.
Q: Absolutely, steel companies, I remember that big restructuring of S R Jindal and Ispat and that would have made a lot of banks, IDBI in particular much richer but exactly on that point, economy turning, some mining bans have been removed as well you are seeing this proposal for gas projects. Let me come to mining bans itself. Is that clearly indicating some activity on the ground or reduction of pain in the mining space, in the metal space?
Dhawan: Most certainly. I had one of my major clients which I will not name but we all are familiar with, for the first time in many years I saw some relaxation on his face. He has got hold of a mine and I hope he shall soon be turning around. This is the one step which will certainly reduce pain in the system. I would also like to comment on the earlier portion that you were talking about, this is a huge step in the right direction, this pledge of equity shares because we have seen in the past that transfer of physical assets is very painful, very time consuming, there are many issues surrounding them. Perhaps if we could reduce some enabling some legislation could be passed that pledge of shares more than 30 percent, the banking system can do, it would enable us to change the management much more easily. As it is this new provision that has come of converting debt into equity shares is a major step in the right direction and I feel that it will really help the banking system.
Q: I wanted to just come back to the last set of steps which the government has announced in terms of gas-based power plants. Now that is a huge—some Rs 60,000 crore of loans that have been given to these companies most of which are idling. Your take, is that Rs 60,000 crore likely to be at least stopped from going bad, at least one-third will go into operation?
Varadarajan: It is a very welcome step, if it works out in terms of the spirit which they have put it out. Basically what they are saying is give up the returns on equity and make sure that you are in a position to service your debt and keep it going till a fresh solution is found. That goes a long way in protecting lenders interest and that is what we are hoping will happen.
Q: That helps you also I would assume. You must be having—you have GMR loans so you just think that prevents future NPls?
Dhawan: I would assume so, yes going forward that is a major help but of course much more need to be done in this place but it is good beginning.
Q: One last comment form you Mr Pradeep Kumar, since you have the largest number of loans in this gallery of bankers, a Rs 12 lakh crore book, are you getting a sense that things are turning around? Mining for instance which Mr. Dhavan spoke about and eventually I guess more coal mining, more steel production and more power output, are you getting a sense that deep pain is behind for the economy?
Kumar: As Mr. Dhavan said, I also had a discussion one of the large companies in India which has mining interests iron ore mines, they said they have started mining operations in Karnataka re-started. Although at a much lower level because the court has put a maximum amount of output. Similarly these coal auctions that have happened, this a step in a right direction. This gas pooling is also a step in the right direction, so all this small, small steps ultimately will improve the health of the economy. We will see more output so more cash accruals, more cash accruals means less pain for the banks. All these steps that the government has taken will help to reduce the pain of the banks. And I hope that next year will be much better because of all these steps.
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