RBI inaction early on to blame for current NPA mess: Ex-SBI boss

The problem of non-performing assets in public sector banks has grown to an alarming level mainly because of the lack of pro-active measures from the RBI in the initial stages, ex-SBI Chairman Pratip Chaudhuri tells CNBC-TV18.He says the RBI should have introduced a uniform provisioning standard long back when it saw that some banks were treating a loan as NPA while some other banks were treating the same loan as a performing asset."RBI should have moved towards uniform provisioning across banks 2-3 years back," Chaudhuri says."Most of the accounts are in consortium; there are multiple lenders. So how can the same loan be standard in one place and sub-standard in the other," he says.Also watch - Budget 2016: Budget & bad loansSpeaking in the same discussion, Rajat Bahl, Director, Ratings, CRISIL says the RBI's move to force banks to recognise bad assets may look like a knee-jerk reaction. But the regulator may not have been left with a choice after other measures like strategic debt restructuring and 5:25 schemes did not yield the desired results. As a consequence of having to make provisions for bad loans, public sector banks are now starved for capital"Will capital alone solve the problem? To an extent, yes," says Bahl."But the bigger challenge for banks is the assets they have now recognised as NPAs," he says.According to Bahl, public sector banks are wary of lending to companies struggling to repay loans. In many cases, these companies are struggling because of lack of availability of capital, particularly working capital."At this point, if you pull the plug, things could get even worse," Bahl says.Madhukar Umarji, Partner, Alliance Corporate Lawyers says not all NPAs are caused by wilful defaults.He says that many projects are viable and with some additional capital, they can be turned around. But if the credit decisions are questioned, banks may withhold capital to even assets that can be saved.Below is the verbatim transcript of Pratip Chaudhari, MR Umarji and Rajat Bahl’s interview with Latha Venkatesh on CNBC-TV18.Q: Since you know where the shoe bites, is it as strong as this, is this clean-up which at the moment says that non-performing assets (NPAs) are about 7 percent of total assets may go up to 10 percent of total assets. Will it really incapacitate banks?Chaudhari: We should look at the situation more objectively. NPA definition is very clear, it is a globally accepted definition that if a company, person or an individual, whatever, cannot service the interest for 90 days that is non performing. Even if this can’t service the principle continuously for 90 days that is non performing. So, I think there is no running away from the definition and recognition.However, where this problem has happened as Deepak Parekh said that it happened all of a sudden. It is like a person ailing for some time, you neglect then last moment you take him to the hospital and the hospital says why didn’t you come earlier. So, I think Reserve Bank of India (RBI) has been extremely slow in recognising the problem. This problem would not have hit us in face like this if RBI had been more proactive. It is not just a hands-off, it had been more hands-on and trying to make sure that the banks make normal and appropriate provision.In State Bank of India (SBI) I found that we were making more aggressive provisioning and our shareholder and analysts would say this account is not a NPA in XYZ bank, why do you have to be this holier than thou and make provisioning. So, it was very difficult to answer to my shareholders and to the analysts.So, I think RBI should have moved much earlier, two or three years back, towards uniform provisioning across bank for accounts. Most of the accounts are in consortium, there are multiple lenders, now how can it be that it is standard in one place and standard, sub standard is one level of differentiation, even provisioning. Account is 15 percent provisioned somewhere, so, RBI should have moved.Q: The question I am trying to ask is first of all, is it going to be that debilitating if capital is given and if there is some reform like the bank boards bureau and the others contemplated, then do you think that this is such a serious problem, I am also asking this question because even for instance in Europe, the total amount of bad loans is 7.3 percent of the gross domestic product (GDP). In our case recognised NPLs are at the moment about 3.5 percent of GDP so we still have a distance to go? That is the question, is this a question of incapacity really if the capital is provided?Bahl: I think it is a question of whether capital will solve all the problems. As Pratip Chaudhari was mentioning that this problem has been growing for a while so while I don’t agree that whether this kind of a an action could have been done earlier, I think there were things that were tried, there were multiple tools that were provided by RBI to try and revive some of these corporate including restructuring or 5/25, strategic debt restructuring (SDR), multiple methods have been tried. At the end of which we have come to this stage where they have had to take this sort of an action which looks like a knee-jerk reaction but probably there was nothing better that was left but to now recognise that the stress is high.Capital, will it solve the problem? To a large extent yes but the bigger challenge that also exists alone with the capital that at least the public sector banks where they are falling short in capital is also the assets that they have now recognised as NPAs. What happens to these assets? These as Deepak Parekh also has been mentioning, they will have an impact because especially public sector banks are very further lending to any asset that is now being classified as NPA. So, that impact will be there on these assets and a lot of these companies are companies that are struggling because of availability of capital, working capital in particular.If you at this point pull the plug things could get even worse and we are not seeing too much improvement on the economy to help use that as a twig to pull them out of this mess.Q: Is it really the regulator? The banks seem to be very clearly ever-greening. Shouldn't banks be blamed for not cleaning up the mess early?Umarji: You have to see the cause for the problem faced by the companies also. One of the major causes is downturn in the economy and the other cause is that the infrastructure projects for which finance has been given, have been stuck up because environmental clearances and land acquisitions and some such other problems are there by which the projects are not going ahead further and there is an inability to service the loans which have been taken.When such a situation is arising, banks have no option but to keep the needs of the industry being met from time to time and it is this hype which is created about so much NPAs and sudden spurt of levels of NPA going up and all that is going to create a further problem for these industries because there will be a reluctance to lend to such accounts on the part of the public sector accounts on account of CBI second guessing the decisions of the lenders and starting investigations and inquiries into the credit decisions taken by the banks.So, this is not only going to particularly in regards to case which are viable and which can turnaround by giving further finance will be stuck up and if no finance is given there will be a problem faced by such industries and it will worsen the problem than what it is today._PAGEBREAK_Q: The fault of the promoter in the entire NPA mess clearly slowdown was one issue. Gas power plants being put up and gas not being available is not their fault but how much would you apportion blame to factors like gas or non availability of gas and how much to probably gold plating probably to promoters being incompetent or outright corrupt?Chaudhuri: It would be 90 and 10. For example you mentioned GVK Group. But please also if you go to Mumbai Airport and see the kind of facility they have created. All criticism should be based on an alternative and not on a rhetoric. Now supposing god forbid Mumbai Airport for a particular 3 or 6 months makes cash loss for whatever reason. Now, what do you expect the banks to do. If you were the chairman of the bank or leading the consortium will you shut up all payments, will you cut off the electricity, will you refuse electricity bill payment, will you refuse payment of salaries. Now, if you allow the outstanding goes on and comes your favourite rhetoric that they have been colluding with the promoters and increasing the outstanding.Look at the power projects, power projects they put up the plant, they sold the electricity to the discoms and they never got paid. Now, how long can this go on and banks what are the banks supposed to do, it should say okay, your bills have not been paid, so you shut down the plant and retrench all your workers and close down all the facility. No, I don't think the solutions are that simple. So, you have to keep the fire going and hoping that things should improve. It is like a patient being admitted to a hospital.Q: You said 90 percent default lies with slowdown and other governmental intransigence and not the promoters fault, I bought your point. But my counter question is there are some instances of probably something the tax payer and the depositor cannot forgive because they are bailing out in turns. One take for instance - I had to take names here, Essar Steel. You already got package in 2003. It is a 20-22 year old plant. You can't keep on - I didn't get the 2003 slowdown, I didn't get the 2009 slowdown right. There is some incompetence also.Chaudhuri: So, what do you do.Q: At some point you would have to ask them to get their own money for working capital. I am asking you whether the blame also lies with promoters? I can understand the instance as you said of airports.Chaudhuri: Don't take the rhetoric so far.Q: I am asking you or of gas based power plants where gas was not given but twice over in 20 years you don't know how to run your steel plant properly. You can't be restructured several times in your cycle.Chaudhuri: Exactly, are you saying that Tatas don't know how to make steel. Now, Tata Steel itself has made a loss of Rs 1,500 crore and we are glad that we have the rating agency here.Q: But they are not NPA. They have not come for refinance. My point is a company is not blamed if they make losses because in a commodity cycle you will make losses but they are able to make good with their own money or with their reserves. You are a 22 year old plant, you are making losses repeatedly and through every cycle if you are coming for refinancing then there is something wrong.Chaudhuri: If you have taken names Essar Oil when they sold their stake in Essar Refinery they got a buyer from Rosneft. I am not holding a brief for them but take the full picture. Are you saying they have never been successful anywhere. Q: Essar Oil also defaulted on their OFCD through debentures very small people got stuck with those debentures. That is another issue. My point is promoters also have to take a little bit of hit. What about the other well known defaulters like say, Winsome Diamonds or Zoom Developers. To what extent can the legal system or the bankers take some of these erring defaulters to court or to put them behind bars or seize their assets. The big anger of the citizen is that they have lavish lifestyles, some of them, even when they are defaulters. Does the legal system permit it, is it all a limited liability case or is it that bankers should have taken personal guarantees?Umarji: One thing is very clear that a mere non payment of debt or a default in repaying loan is not a crime. So, it is a breach of contract and unless you are in a position to establish that there is a diversion of funds the funds given by the banks have been utilised for some totally different purpose or have been used for some personal use and there is some fraudulent act on the part of the promoters any criminal action is not possible against the company and its directors. It has to be established and the other aspect of this is that conducting the business fraudulently or in an unlawful manner has been made an offence under the new Companies Act 2013. Conducting a business fraudulently is punishable with imprisonment up to 10 years. There is a serious fraud office established under the act. Now, it is for this serious fraud office to conduct and investigate, establish that the business has been conducted fraudulently and prosecute the directors and promoters who are responsible for it. It is not enough to say that they have defaulted and therefore they have committed some crime.Q: Mr Pratip Chaudhuri said 90 percent blame lies on the system, the permission, the slowdown and 10 percent on errant promoters. What would be your apportioning of blame. How much to the bankers who are probably incompetent, how much promoters who are incompetent and how much you would say it is not incompetence, it is the economy?Umarji: I would agree with Mr Chaudhuri about 90 and 10 percent on this.Q: What would be your take if you looked at international comparisons have we handled the slowdown very badly. Is this a question of bandwidth competence, bandwidth inadequacy of bankers in India or is this internationally just as bad?Bahl: I wouldn't be able to say how much percent as to the bankers versus the promoters but definitely banks should be owning up to a lot of this blame. Internationally or in India the practices of appraisals are same, they need to be same which is something where banks have been lacking, quite a few banks. If you speak to them a lot of them just depend on a third party evaluation or a lead bank having done their evaluation and then what you have seen a consortium based lending happening.I don't think any bank however small should be taking any exposure in any company you don't understand the risk. That is of prime importance. If we want to act as one public sector bank and that one has done it and so I am okay doing it lending to the same company then why have so many banks. You might as well end up having just a few banks.The blame should be taken by the bankers as much because they have been lacking in their appraisal of the risks to begin with and then they get into the spiral of having to on lend more on what we call greening, ever-greening and so on. That is the spiral that comes much later.Latha: Yes, the slowdown is to a large extent to be blamed and even governmental pressure. After all it was in 2009-2010 wasn't it when the government pressured RBI into increasing the exposure of banks to infrastructure companies. There was all round pressure that banks have to be the vanguard of development. So, the political rhetoric of the day also cannot be forgotten as well you have a lot of promoters who have gotten away with murder.But the key point to note is that the legal system and the manner in which guarantees are taken a lot of the big boys cannot be put behind bar nor can their farmhouses and their jets seized because the limited liability makes only a part of the equity that they have given to be sacrificed. So that NPA problem does become the problem of the fisc and the problem of the depositor which is unfair. Perhaps we can frame better laws and have better diligence in the days to come when the next slowdown hits us.