PSBs need to track credit better to check NPLs: Ex-SBI CFO

Concurring with Gupta’s view, Bansal added that NPA follow up or resolution is better in private sector banks. "There is no incentive for the management in PSU banks to settle an NPA account at a very attractive price," he told CNBC-TV18.

Gupta, however, added that there is no issue of stress not being recognised in mid corporate or large SMEs level. 

Bansal added that most accounts with exposure of Rs 100 crore have been recognized. The problem occurs with large accounts – Rs 1,000 crore and above, he said.

Below is the verbatim transcript of Diwakar Gupta & SL Bansal's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Why is it that the problem is so much more niggling and bad for the public sector (PSU) banks?

Gupta: As we have discussed for a long time, the first thing is that while some banks are doing a little better, some are catching up on their numbers the fact is that on the ground there is not really much changed as far as the experience of the public sector banks is concerned. Going forward now there are two or three major heads in which action is required. Some of them are not in the control of the banks but there is definitely an operational element about tightening our internal processes to track credit better.

That is what banks like State Bank of India (SBI) are doing and therefore their numbers are better. We need a lot more of that to be done. There has to be a meaningful assessment, meaningful post sanction follow-up and meaningful resolution. Those are the three things where the public sector space and the private sector space are vastly different today and that is getting increasingly reflected in the bottom-line numbers, though topline still continues to be 73-75 percent public sector.

Latha: Your thoughts, why is the problem so much more severe?

Bansal: The point is 1) most of the private sector banks were not in the infrastructure space except ICICI Bank. You have seen the numbers of the ICICI Bank during the last 3-4 quarters. Important issue is non-performing asset (NPA) resolution, as Diwakar Gupta has rightly pointed out NPA resolution in private sector bank and in public sector banks is vastly different because of various reasons. Now anybody settles an account in HDFC Bank, ICICI Bank nobody questions but in public sector banks because of the inherent problems in the system there is no incentive for the management to settle the NPA account at a very attractive price.

Now our systems and procedures are such, it is very difficult to settle an NPA account, the moment it slips to NPA category or even if the account is not slipping to NPA category maybe it may slip after six months if the account is say under special mention accounts' (SMA) category then nobody thought of settling these accounts, while the private sector banks immediately settle it. These are the major issues; we need to resolve these two issues quickly so that the problem can be sorted out.

Sonia: Is there a lot of unrecognised stress yet in spaces like steel or infrastructure and do you think that the percentage of impaired loans will now go up for many of these PSU banks that the worst is not over yet?

Gupta: At least in the mid corporate and the large SME sector I don’t think there is a problem of non-recognition today. Broadly whatever is in stress has been recognised as in stress. Now obviously bankers and borrowers on a pro-active basis try to keep their accounts standard. So there could be accounts which are marginal and we could debate either which away, whether they are sustainable, whether they should be classified non-performing.

My worry is that we are adding a lot of stock quarter-on-quarter (QoQ) rather than just recognising an old problem. That inflow is not getting stemmed that is the problem. As I was mentioning a little earlier, there are 2-3 major rubrics under which this resolution has to happen. The first is banks need to exercise better control and be connected to the borrowers in the real time basis. The second rubric is that there has to be something to de-stress the accounts which are already in stress for no fault of theirs. The third rubric here is that banks have to decide more quickly as SL Bansal was just mentioning one way or the other and this one is administrative that is to do more with the mind set of the decision makers. The problems are all well understood but we need quickly to get off the ground in moving in those directions.

Latha: What is your sense, I know both of you have not been with your respective banks after this Joint Lenders' Forum (JLF) and the processes were put in. It has been formed so that you can recognise stress earlier, what both the bankers referred to as SMA accounts –special mentioned accounts. You don’t pay the loan in the first month or the second month, you get into a special mentioned account and a joint lender forum of all the lenders is formed. Is that working? Has that recognised the stress earlier? What are your banker friends telling you now is that an indication therefore that all the stress is coming out now and may be the worst is in the public gaze already?

Bansal: Most of the account, where the exposure is up to Rs 100 crore has been recognised properly in the banking system. The problem lies with the bigger accounts where the exposure of the industry is say Rs 1,000 crore or more than that. The issue is, under JLF, normally what happens the banks are not in a position to recognise the NPA and take a hit straight away. So, sometimes decisions are not in the best interest of the economy or the bank itself and sometimes we give additional lifeline to the promoter.

Whenever these accounts will come for testing then these re-structured assets they will still slip into NPA category. The point is the NPA will continue to happen but the older account which is the stock whether it is technical written of a account or it is a NPA account in the books need to be resolved quickly so that we can recover the money quickly. 60 percent of the provisions are provided in the banks books if you take together both NPA account a technical written of account and if we can quickly recover even 50 percent of the NPA accounts then the banks balance sheet can be improved a lot.

Latha: This is a little scary what you are saying that the bigger accounts are the problem and where banks have given money or given a longer moratorium period. Look at the restructured assets numbers. Punjab National Bank (PNB) is almost Rs 8,000 crore fresh in just one quarter, the last quarter. Andhra Bank the restructured asset is Rs 3,300 crore for a small bank like that until last quarter they were only doing Rs 500-700 restructured assets per quarter. Do you think all this has been done in a haste and we are going to regret many of this even after two year of moratorium this will comeback like a bad coin?

Bansal: All of us understand what is happening. I don’t say that most of these accounts have been restructured in haste but few accounts, because the regulatory forbearances was applicable only up to March 31st. But for few accounts the banks were having no choice except to restructure them quickly and then wait for the right opportunity when the economy start showing upside and the cash flow improves, most of these accounts will turn to performing assets. However, few accounts will definitely slip into NPA category because there are inherent weaknesses in the few accounts and most of us understand which are these accounts and what are the problems in these accounts.

Sonia: By when do you think the entire PSU banking pack could see a revival? Do you think we would have to wait for a couple of quarters or perhaps this whole fiscal will pan out before we see any revival from PSU banks?

Gupta: This is a very tough question to answer because I have now been out of the bank for almost 2 years and this is exactly the question I was feeling in the last year and the half of my tenure as the CFO of State Bank of India. We are hoping for an economy to bottom out, we are hoping for a revival in manufacturing in infrastructure. There is a fair amount of restructuring or hand holding which has happened in the hope of that revival happening.

Now with the bottlenecking and fresh impetus to the economy and to the sectors hopefully there will be renewed activity. My limited point is that people who are in stress already they need a dispensation other than the over arching framework of becoming an enabler for business. They have specific problems and those problems need to be sorted out. Otherwise though we may wish that we are at the bottom fresh stock will continue to arrive and that has been happening quarter-after quarter. What we just discussed in this discussion we need forward movement on that. A JLF is fine where are the timelines for the JLF, where is the voice of the borrower.

We make a lot about borrowers being not very honest, or not very ethical about project cost being inflated. That is all in the past. What about those who are not, what about government dues to road projects, infrastructure projects. They are not even recognised because if you go to the government departments they will find a technical reason to say they don’t owe any money. However, we know that Rs 1,000 crore – 1,500 crore are owed to these people and that is continuing for the last two years. There is a holding cost which is very high that is making them un-sustainable, that is the crux of the problem.

Latha: It is very difficult to argue that there should be fewer controls on public sector banks because the numbers are so large. It is very difficult to make a case that PSU bankers should be given more freedoms. There is an argument that they are not taking decisions and Diwakar Gupta has made that effectively because there is always someone watching over, probably it gets into a Central Vigilance Commission (CVC). A private sector bank can sell off its asset for much lower than its book value and get on with life. However, that is difficult for a public sector banker because you have Comptroller and Auditor General (CAG), CVC so many eyes. Is there an argument therefore to take them away from these central agencies but ensure more tighter control and oversight by the boards that is what the PJ Nayak Committee is recommending but is that a solution?

Bansal: You have raised the question and you have answered yourself. The point is so long there is an oversight from CAG, CVC and Central Bureau of Investigation (CBI) then the bankers will not take decision. However, if the oversight is from the board then naturally the more accountability will be there but you need to professionlise the board. Till date we have been talking for the last one year but very few initiatives have been taken to professionlise the board.

There are still so many banks where the Managing Director (MD) and Chief Executive officer (CEO) posts are vacant and so many initiatives need to be taken. I believe large numbers of director post are yet to be filled up in the public sector banks. You need to take all these initiative quickly time is running out.

We are already on May 15th around, so after 45 days one more quarter will come and then how you will see. So these are issues which need to answered at every level whether it is government of India level, Reserve Bank of India level and the public sector bank. All of them need to sit together and then let us resolve them. I am hopeful that may be after 2 -3 quarter these numbers will stabilise and then we will show a healthy progress towards the asset quality of the public sector bank.