RBI paper on early NPA recognition likely; bankers view

Below is the edited transcript of Soundara Kumar and P Sitaram interview on CNBC-TV18

Q: Is it possible to have early recognition of non-performing loans (NPL)? Since you have been in this business for so long, do you get signs like bounce cheques or companies coming and asking for money too often? Is early recognition of NPLs possible?

Kumar: Absolutely. We do have a system where the computer system identifies NPAs, but that is based on a quantitative basis -- based on the irregularities in the account or non-payment of interest and other things. But it is possible through early warning signal system which the banks can put in place, which we are also working on; right now it is a manual thing, we want to move to a technology platform. The bouncing of cheques, frequent requests for irregularities in the account, devolvement of letter of credits (LC), invocation of guarantees and certain external factors like frequent movement of the finance personnel in the company, the change of audit firms, change in the balance sheet date - even these things should be tracked which is what we are working on, which is now done manually.

It is absolutely possible and this should be done, because the earliest signs of stress would not be the quantitative factors, but the qualitative ones which are affecting the industry as well as the unit.

Q: If you agree with Mrs. Kumar that you can recognise NPLs earlier, it kind of begs the question why banks are not doing it already, why should it be coming from the RBI. What incentives can RBI offer?

Sitaram: In India so far we have been following certain objective set of criteria for identification of NPAs. The alternate approach could be a subjective criteria where the bank looks at a host of circumstances and decides whether an asset is performing or not, but this can be subjective.

As a country we have avoided a subjective approach and so far we have taken an objective approach and for that we have gradually reduced timing to 90 days. If you look at it from another perspective, this whole question of earlier recognition of NPA, which is in some way linked to the restructuring regime introduced since 2008, probably RBI could also be saying that you do not go ahead with restructuring just because you want to save an NPA. You look at restructuring more on a fundamental basis, that is whether the liability is there or not and on a close look if you feel that there is more probability and that the viability is not established then we better recognise it as NPA. That could also be under interpretation of early recognition of NPA and for that they could perhaps be thinking of some sort of incentivisation. It is not necessarily that they will shorten the period of 90 days or introduce other criteria for identification of NPAs.

Q: What will this eventually do to the NPA situation - will it rise or will it fall? Banks’ average NPAs stand at more than 4 percent in the September quarter versus about 3 percent a year ago. What will this actually do to the NPA situation?

Sitaram: If you look at it from an analyst perspective or from a market’s perspective the bank’s balance sheet has been looked at as a combination of the restructured assets as well as the gross NPA on its books. So to that extent market has already taken into account that the restructured assets to some extent represent a part of the stressed assets of the balance sheets and they have been aggregating it along with NPAs. So now whether out of these restructured assets some assets are early recognised as NPAs instead of being put through the process of restructuring or not is the question.

So overall, yes, if we look at that banks will incentivise to not restructure but recognise more NPAs, the gross NPAs reported would go up, but to that extent I think the restructured assets will come down.

Q: So you do not expect the markets will punish bank stocks too much, is that your guess?

Sitaram: Yes, I think the aggregate is anyway being looked at.

Q: Instead of us trying to outguess what the RBI might say later today or tomorrow what is your guess when the RBI tells you that they want to incentivise early recognition of NPLs. What are you expecting to hear from them?

Kumar: I need to clarify a little more on what we talked earlier about. The early warning signals would only show you the stress in the system; that does not mean the account is already an NPA. I think this is something we need to keep in mind. The stress is first seen and then you decide on whether you want to restructure the account or not depending on the viability of the project.

What RBI would do, whether I want to guess before the discussion paper is out, the governor has in his speech mentioned about forming a committee which would look at whether a restructuring is required in the first place and a call would be taking and speeding up of the restructuring process. Today, typically if you look at the corporate debt restructuring (CDR) process, it takes anywhere between 6 and 9 months before the entire process gets completed. So I think there will be some incentivisation for speeding up the whole process of restructuring, ensuring that the viability of the unit is properly established. I think that is something they maybe doing.

I feel that maybe there is possibility of some kind of incentive in terms of risk capital allocation which the bank will have to do on loan assets if they identify the NPAs earlier, because when an account becomes NPA there is a higher provision. So there is lesser risk capital allocation. If risk weights are reduced then maybe there we could get some benefit, but I am just guessing so and we really need to wait for the discussion paper to come and then see what really comes out.

Q: Do you reckon the RBI could propose a timeline for the recovery of NPAs and if yes what could the impact be?

Sitaram: As I said it is very difficult to say exactly what the RBI discussion paper will be all about. I do not know whether the 90-day norm will now be tweaked or whether they will be looking at restructuring. It should be more oriented towards viability and the less viable should be recognised as NPA. If you look at the other point which has been made on the risk-weighted assets, banks maintain capital on the risk-weighted assets based on the external ratings and where external ratings are not available they go by the unrated exposure, but through Pillar II again, we maintain additional capital based on the inherent weaknesses of these assets.

So to that extent, capital is already being maintained on stressed assets whether they are coming through the restructured route or through the NPA route. The question is now whether RBI will do something on that to incentivise banks to recognise assets faster as NPAs rather than put them through the restructuring.

Q: What is the sense? Is the stress ebbing at all for the economy? Should for the system and for State Bank of India (SBI) the next NPL number look a little lower than the previous, these rules staying as they are?

Kumar: I do not think I would give any future predictions like that. You have seen our Q2 numbers in terms of slippages were much better than Q1. This is mainly because of our ability to restore last ground on the retail banking side. It is just effort elastic that we are continuing. We are continuing to recover more, upgrade more.

The mid-corporate type of accounts and the corporate type of accounts, yes the stress is there, so I would not want to guess any numbers there, but yes overall stress continues. Whether it will be better than Q2 or not I am not in a position to comment on.