The RBI and finance Ministry are discussing various formulations with respect to NPA resolution and think we should be able to shape some policy on that in the near future, is the word coming in from RBI's deputy governor SS Mundra.
The whole of Indian Inc, Indian investors, foreign investors and bankers are eagerly waiting for the NPA resolution from the Reserve Bank of India and the government.
In an exclusive conversation with CNBC-TV18’s Latha Venkatesh, Mundra shared some of the discussions that took place and his personal perceptions on various issues, which could give an indication of what is likely to come.
Below is the verbatim transcript of the interview.
Q: This is the first interview I was trying to postpone because always I expect that today evening, the RBI and the government are going to announce some big scheme or small tweaks. Is something coming soon to speed up resolution?
A: Let me tell you, there are various possibilities and various formulation which have been under active discussion within RBI as well as with the government of India. You people are aware of those things. Even some of the information I get from the flashes which you run about those activities.
Before I say something on this, let me first make it very clear that as I mentioned, there are several possibilities and formulations which are being discussed, but as of today, I cannot say that either it is a settled view between the RBI and the government of India or even an institutional view within RBI. So, what I am trying to tell you or going to tell you are some of the discussions which have taken place which give the possible indication of things to come and maybe some of my individual or personal perceptions on various issues. So, let us convey it very clearly and let us carry our conversation with that being very clear.
Having said that, yes, there are several issues right from the various schemes which have been introduced, whether there is a need to modify any of those schemes or even introduce another scheme whether the mechanism of corporate debt restructuring (CDR) has to be viewed in any modified way, the Institution of Oversight Committee or any legal empowerment is required in that respect, functioning of Joint Lenders' Forum (JLF).
So, this is a whole range of issues which have been discussed where the various viewpoints have emerged. Some of the viewpoints, there had been finally a commonality of view, some of the viewpoints are still at a distance from each other, but continue to be discussed. So, that is where we are.
Q: I will tell you what hinders resolution, the expectation that a better CDR mechanism is coming. That is preventing bankers from taking any decision because let us wait and see. So, is something coming soon?
A: It is quite a lengthy discourse, but if better CDR mechanism means a more relaxed or benign CDR mechanism, if that is what translates into the meaning then that is not the case.
Q: I am not sure that is the only point at the back of the bankers' mind. When you say relaxed, you mean more time for provisioning perhaps. But what they would like to know is under CDR only 10 percent of debt can be converted into equity. Will you allow more? Will some specific rules be relaxed?
A: Let me go into a little length on this because it is a very relevant question. At one extreme, the CDR mechanism. As you said, only 10 percent of debt can be converted. On the other side, there is Scheme for Sustainable Structuring of Stressed Assets (S4A) or strategic debt restructuring (SDR) which have a provision for the conversion to much higher.
Now, from what I understand and what I have been hearing from the banking industry and the representations have been coming that 50 percent is something which may not be really possible in all the cases and sustainable portion can be even less than 50 percent. Okay, good, acceptable point.
The point is to be understood, number one, the CDR mechanism apart from those restrictions, but the main attraction if you go by hindsight, at that point of time that it was providing a kind of forbearance as far as the classification is concerned. That is no more there and it is unlikely to come back. If we are talking about the reinvention of CDR with all those possibilities, those are clearly not on the table. So, that is one thing.
Coming to the sustainable part, there can be two possibilities. Again, the wish list which keeps on coming, one possibility is that sustainability is to be assessed on the basis of a much distant future rather than an immediate future. And if you say that it is a much distant future, the viability would emerge, let us say two years from now. It means cash flow would also get strengthened over a period of time. It means repayment should also calibrated to the cash flow and then this is the whole new structure which is to be put in place. You have tracked the banking system for long enough to understand what I am trying to tell. Again, that would not be a realistic thing to do, so that is one possibility.
Other possibility is that yes, you restrict the cash flow expectation to a reasonable period which originally was more constrained and on the demand of industry, we already provided a slightly longer horizon and decided the sustainable portion. The key point is if this sustainable portion is below 50 percent, then what to do?
Okay, I would believe it is alright if the cash flow projections are not unrealistic, they pass the test and sustainable portion is coming less than that then it is for the lenders to go ahead with that prescription. Only added expectation in that, that would that mean that remaining portion has to be provided for.
Now, if expectation is that remaining providing for is again spread over a very long period of time, then again, that is not a right expectation. So, I would say it is a justified case which can be put up, but you have to clean it up with all those additives and all those expectations which are really not meeting the requirement of a prudential regulation and then yes, everything can be discussed and worked out on the table.
Q: So, can we expect that you will tweak the S4A to allow more than 50 percent unsustainable debt?
A: As I said, this was something which was put up and I have already explained. And as I maintain, there is no institutional view right now at this point of time. But I have clearly spelt out that what is my perception around it and to my mind, yes, it is something which can certainly be looked into, in a realistic manner.
Q: But the longer it takes for a word to come from the regulator, the longer will the resolution of some cases get postponed.
A: I cannot disagree with you. It is a very valid point, but understand one thing. If this is to be done, finally in a cleaned up version as I am mentioning, one thing which it will entail and you will be clear about it that one thing which primarily would entail is the availability of capital. So it means the engagement has to go beyond the lender and regulator, but also the owner and that is where all the engagements were going on and as I mentioned, there had been quite meaningful and I would say also fruitful engagements. You must have heard the statement which have been coming from the Finance Minister as well as the other concerned authorities in government also. So, putting all that together, I would tend to think that yes, something we should be able to give a shape in the near-future.
Q: Any timeline at all?
A: It is difficult to put a timeline. Let me be very frank about it. But it could be anything. It could be very near, but my sense since there is so much of seriousness and engagement and so much discussions have already taken place, it should not be something that which would be indefinite or very prolonged.
Q: What about CDR tweaks? Do you see any chance of changing CDR rules?
A: The CDR mechanism, as it was in the beginning that you restructure, everything is flexible, there is a forbearance, once you take out all those things, what is left today is practically, not a very elaborate mechanism. So in the changed context, after that much has happened, so many other instruments have been issued, right from 5:25, JLF, SDR, S4A.
To my mind, today we should look at CDR more as a monitoring platform. You need not really try to go and try to tweak the CDR mechanism because if you take out 80 percent of the original CDR mechanism and say I am retaining 20 percent, only the shell, and putting new 80 percent components when you already have the other products already available.
So, the right thing would be to look at those things and maybe like we have discussed S4A is something, if it needs some sort of realignment that can be done. But important point and which I personally feel very strongly that under the JLF mechanism, if let us say hundreds of JLFs are functioning and each JLF has to be administered by the respective lead bank, there would also be a rightful expectation that each JLF participation should be at a very higher level of management. These are all very right expectations. But how far they are practical is a question, at least which I, having remained on the other side, can also probably feel more strongly.
So, my sense would be rather than so many JLFs sloshing around and all that, why it would be the right mechanism that JLF is the first institution, they bring an account fit together, work out a broad plan what is to be done. Once that has been signed and sealed within the given JLF mechanism, it should be handed over to the CDR Secretary Head for monitoring.
I think it will have many benefits. Number one, there would be economy of scale, there would be pooling of expertise and more importantly it will be completely arm's length monitoring so that the people who are creating the framework, they are not only monitoring. So, that may necessarily mean that you strengthen the CDR Secretary Head, maybe you bring some more enablers, those are the enablement’s which are required.
Q: Is that imminent is what I am asking?
A: Till it becomes an institutional view I can’t say that it is imminent. However I have not found any serious discomfort or dispute about this kind of platform.
Q: Now let me come to something on which everyone has a demand, Oversight Committee. Are you looking at giving it more legitimacy or legality and expanding its mandate?
A: The first relevant point is even the number of oversight committees. As you know, as of today, one oversight committee is functioning and what we are discussing, if everything is put together, it would need more than one oversight committee if this is to be handled. That is something which has been discussed.
Q: Is that coming?
A: Again, all of these you can take it as something which has been discussed which is work in progress, but institutional view or a common, combined view is yet to emerge.
The second point you talked about is legal empowerment. Of course, even within the existing banking regulation and RBI act, there are enough empowerment available for RBI to give this kind of structure. But a greater clarity can always be beneficial and why I am telling this because from the time these acts were enacted and subsequent to that and more particularly in the recent past, a number of acronyms which has been given in the financial sector where something which we are actually not known or not even understood.
So, you write an act in the context of the prevailing situation at the point of time. So, when so much has happened, it would be meaningful if even those provisions which are already existing are made a little bit more explicit, it is serves two purposes. One is of course, the clarity in the act, but also, it brings a lot of assurances on the side of everyone who will be involved in this entire process. So, that was something which we have been suggesting and government has also listened to us on that.
Q: So, we should expect that any increase of the oversight committee's number and empowerment will await legislative amendments of the acts?
A: That is something which probably, because these are some of the technical and legal niceties and I am not qualified to really make an authoritative comment whether what kind of process it needs to go. Only thing I know that if both the parties are convinced, then it will be for the government to find an appropriate way to give it a shape.
Q: But pending any legislative changes, RBI is not looking at doing anything about oversight committees?
A: If you look from practical way, it does not make sense. You take a view, we are starting this journey and we expect to reach the final solution and midway you say I will take a right turn and then come from that route again. So, you start going to Churchgate and say no, I will come via CST. It makes sense, if something is there, to stick to that.
Q: Again I have to ask you that for this legislative change, is there some timeline?
A: That timeline, obviously you will have to travel to Delhi.
Q: I agree, but you are into these discussions, so should we at least expect it? Legislative things, usually take time and that is precious time lost in resolution of assets. There is a time value for that money.
A: I know, but there have been several instances in the past when there is a complete agreement and acceptance at the government's side, this processes can also run pretty fast.
Q: Will the government or the RBI suggest something like a formula because that formula does the rounds in conversation.
A: I think you are experienced enough to know. Rather if I can ask you a counter question that let us exchange the chair and I ask you the same question: do you think any such formula is possible?
Q: I want you to bash up the idea. That is why I am asking you.
A: What I am trying to say is you can define a process and all the efforts had been to define a process. Number one, you are talking about a variety of sectors, you are talking about a variety of companies, variety of equity and debt structure, the variety of products, so let me be very clear, no such omnibus formula is really possible. But yes, processes can be well defined and you must have seen that all the efforts are directed in defining the process.
So, if there is a mechanism of JLF, if there is a requirement of majority, if there is a requirement of techno-economic feasibility to be done, then this is to be further weighted at the level of oversight committee. If need be, oversight committee can be assisted by the credit rating agency. If you are not comfortable with one credit rating agency, you can make it two credit rating agencies. So, all those processes can be defined and any proposal, once it goes through a regulatory broad structure, within that, a very well-defined process and finally, what emerges, I would tend to believe that it should be something quite realistic and sustainable.
Q: So, should we expect credit rating agencies also to be included in the process?
A: That is what the thought is and it should only strengthen the process. So, yes.
Q: At least that, when should we expect? I mean resolutions are being held back in anticipation that something may come.
A: It is like putting a vehicle on the road and then commence the journey. Now you are asking me when the steering wheel will start travelling and other parts will start moving, these are all interlinked components. Even on a serious note, it is really now, we are passed that stage where we should again try to look at the issue in bits and pieces and components. It is better to have a whole mechanism with proper interlinkage in place and then put it in place.
Q: The oversight committee repeatedly apparently tells the bankers that S4A at least, the process is very clear, so we can compare. If you swerve outside it, we cannot whet the process. So, how would you answer that? Therefore, is an omnibus process coming?
A: I meant to say what will happen, as we have discussed S4A, it is now even suppose finally it is agreed that there can be a slightly revised version or a modified version of S4A and all those other schemes which I was mentioning, to my mind, everything could be a input for oversight committee to look into. But that will again, enhance their universe substantially even with the present universe, which would again mean that there needs to be more hands and brains working on that.
Q: But in all this, retained profits will fall because you have to provide more. So, capital again becomes an issue. What are the discussions with the government on capital? Are they going to provide more or there a serious thought about recapitalisation bonds?
A: whichever way you look at it, ultimately, all it boils down to is the requirement of capital which is not negotiable and I think the government is quite clear. There have been a lot of discussions, a lot of data sharing on this and you must have seen the finance minister had also, not once but several times, he has mentioned that if there is a need, government would provide the capital.
But what we have to understand that only government providing the capital is not the only thing. Capital has to come, that is very clear, but capital can come from several sites. And to my mind, rather than always just focusing that government has to put a lot of money would not be the right thing to do. So, capital, on a very fundamental level, there are two ways. Either capital can be augmented or capital can be conserved. Now individual institutions first have to take that view that how much they can expect the augmentation capital and how much they can look into their business to conserve the capital.
Once that is done, yes, the augmentation, yes, the majority owner has to provide. Other owners can provide. You can dispose of your non-core assets, you can try to exit from some of the business lines. So, each bank will have to look at all the possibilities and then accordingly decide.
Q: But recapitalisation bonds are not discussed?
A: At least I am not aware of such discussion if they have taken place.
Q: Now the other way in which the government has, or even the RBI in the prompt and corrective action (PCA) says for the weakest of banks, you will recommend even amalgamation. But is there an amalgamator, someone who can accept an Indian Overseas Bank (IOB)?
A: If you look at the PCA framework, there are two parts of it. One is the mandatory action and others are the discussionary actions. Some of these are discussionary actions. If it is put there, it means not necessarily that this is the only thing which is to be done, but yes, it is something which is very much on the cards.
So these things will depend on very individual cases and how the circumstances do take place. There had been instances of amalgamation in Indian banking system in the past. It is not that it is for the first time. And even otherwise, on a more general and philosophical level, we are talking about the consolidation in the industry. So, within that broad framework, all the possibilities should be taken as being available and not discarded.
Q: But should we expect consolidation anytime soon, say in this year or something like that?
A: I think you demand a timeline for everything. Right now, one consolidation is going on and you have also witnessed that this consolidation coming into shape. It takes its own course of time and that too, where it was a case which was very different. It was a kind of half consolidated entries to be fully consolidated. So, we have to be realistic in that perspective. But what is important is to decide a broad framework, form up the mind. Once you do that, then other things are a matter of detail which can take care of themselves.
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