Time for banks to operationalise NPA guidelines: Shaktikanta Das

If you look at the overall state of Indian economy today, all the macro-economic parameters are very strong. One issue which keeps coming back is the stressed asset problem of the banks. In the last two to three years, number of steps have been taken, this is one more effective step and our expectation is that this should work. As you said, the RBI has issued guidelines, now, it is for the banks to operationalise this whole idea of identifying the stressed assets and dealing with individual stressed assets, getting the approval of the oversight committee.

Q: Time and again we have heard people from the Finance Ministry, the Prime Minister's Office (PMO), the banks, the RBI itself stressing on the sense of urgency with regards to dealing with these, yet in those guidelines we have not seen any timeline for instance, within which banks may be asked to resolve these. At the Finance Ministry, do you have a sense of by when things should start moving as far as resolution is concerned?

A: I would not like to specify a timeline and in any case, a timeline is fixed, it may or may not add value to the guidelines which are issued. As I said, there is a sense of urgency on the part of the government, on the part of the RBI, and on the part of the banks. Therefore, all stakeholders will definitely take expeditious action to deal with this problem.

Q: The size of the problem itself is also something we wanted to clarify on. Is it a Rs 8 lakh crore problem or is it a bigger problem and with this new ordinance, how much of that problem do you expect to be resolved?

A: The numbers have been given out from time to time by the RBI. The quantum of stressed assets have been given out by the RBI from time to time. Now broadly, if you look at it, you have to deal with about two to three sectors, that is non-performing assets (NPA) in two to three sectors and you have to deal with about 30-40 loan portfolios, large accounts. So, you have to deal with that, and that is spread over various banks.

So, therefore, so far as the sectoral problems are concerned, separate action has been taken by the government. If you are looking at the textile sector for example, government has come out with a package and fixed the problem. So, far as the steel sector is concerned, government has come out with the minimum import price and other initiatives. So far as the infrastructure sector is concerned, the various road projects which were held up and which had become non-starters, what you call the delayed stuck projects, all those delayed projects, almost all of them have now been revived and the work, either they are complete or they are on stream.
Similarly, power sector, you know that the UDAY bonds and other steps have been taken.

So, so far as the sectoral problems are concerned, government has taken steps in the last three years to deal with those sectoral problems and so far as the other side of the coin, that is the problem relating to the stressed assets in the books of the banks, this latest ordinance should be very effective and I would expect the outcome overall to be very quick and very positive.

Q: Another issue with dealing with these large stressed assets is the requirement for capital, whether it is to take large haircuts or to make provisions for those bad loans, and right now we know a lot of public sector banks, most of them in fact, are starved for capital. So how would that issue be dealt with?

A: Need for capital again depends on the actual numbers as per the balance sheet. There was this Indradhanush Scheme according to which whatever was the commitment made by the government, government is making budgetary allocations. The requirement of additional capital again would depend on the exact numbers in the books of accounts of the banks and also it will depend on how the banks are able to deal with this problem of stressed assets. Now going forward, the Finance Minister has time and again said, and in fact he has said it in his Budget speech also, that if additional capital is required, government will definitely take necessary action.

Q: You have been studying these large accounts for quite some time now, you have all the information with you. Do you have a sense of how much capital would be required for this clean-up, will the budgetary allocation be sufficient, how much more would be required?

A: I cannot go into the numbers at this stage because as I said, it is an evolving process. It will again depend on how quickly the banks are able to deal with this problem. Therefore, I would not like to go into this number. However, I can say that currently the budget provision which has been provided in this year’s Budget, Rs 10,000 crore, currently it is felt to be adequate. Let us also remember that the banks are also flushed with a lot of low cost deposits post demonetisation and the credit flow, the credit process also should start flowing; that also should give some returns to the banks.

Overall, I think, again many of the bonds, the investments, which the banks make with regard to the government securities, they also get revalued from time to time, linked to the market rates. So currently they are looking good, that has added additional assets to the books of accounts of the banks. So it is a moving and evolving situation. If and when additional funds, capitalisation is required, government will certainly consider it.

Q: Under Indradhanush as well, the other leg besides clean-up that was mentioned for the revival of the banking sector was consolidation. We saw what has happened with State Bank of India (SBI), after that what would be the next step, would you wait for a full clean-up before you think of more merger possibilities?

A: I cannot say that because as you know many of the banks are listed in the stock exchange. So therefore, till a decision has been taken, it will not be correct on my part to make a policy statement that so and so bank will be merged with so and so, and in any case the timing is also very important. The overall intention of the government has been announced. The timing will depend on so many other factors.

Q: What would those factors be and by when firstly do you see this full resolution happen after which maybe consolidation could be considered?

A: I think again you are coming back to when the problem will be sorted out. I cannot give a timeline but it will be dealt with, with topmost priority.

Q: We also wanted to clarify with regards to demonetisation, there are reports of the army being deputed at the Reserve Bank of India (RBI) headquarters to help with shredding of the old notes, is that true, would you confirm that, please?

A: No, I am not aware about it. I think RBI would be better placed to deal with this aspect because these are internal processes of the RBI, so I cannot comment on that. However, having said that, let me mention that the shredding of the notes are done by machines. There are machine operators who run these machines. Normally they run about one-two shifts, perhaps the RBI is running them on longer shifts now.

Q: They are adequately staffed to deal with this and on an urgent basis?

A: I would think so.

Q: Also wanted to understand a couple of more things from the RBI’s point of view. The consumer price index (CPI) numbers that have come in the last months are now at 2.99 percent, way below RBI’s comfort level. Is there in the government’s view room for further rate cuts in the upcoming policy?

A: On rate cut, if we have any views, we internally convey it and ultimately it is for the monetary policy committee (MPC) to take an independent view on the matter after considering all aspects.

Q: Do you think there is a healthy debate in the MPC members? Somebody from your government, in fact the CEA was quoted as saying there is not enough debate, we are seeing only one directional decisions coming out of the MPC. Do you believe there needs to be more discussion there, more deliberation, maybe more room for rate cuts now?

A: Let us understand the situation. Now the MPC is vested with these powers under the law to decide on the principle of the policy rates and it is for the MPC to evolve its own process. There are six eminent members in the MPC and I am sure they constantly follow the economy, they have their own internal discussions. Now, whether there should be a wider consultation -- people are free to give their views but eventually, ultimately it is the MPC which has to decide and the MPC has some eminent people who are very well aware of the prevailing situation and I am sure they will take a considered call.

Q: Surely, there are eminent, well qualified people in the MPC, what I wanted to ask is does the government feel they are acting in a herd mentality and there is not healthy debate that is leading to different point of views within the MPC?

A: There is no such feeling in government. I think the MPC is just about taking shape. The amendment has been just put into place about a year ago and it is a new institutional arrangement under the law which is taking shape. I think it is working well and in any case, the finance ministry does not give its view on the policy rates out in the market.

Whatever views we have, whatever analysis or if we have any views internally, we will internally sort of discuss among each other and if required, we may convey. Even the law provides that we can convey the views of the government. So far it has not been felt necessary because I think the committee members are sufficiently aware of what is happening all around.

Q: The finance ministry officials also recently met with the DIPP and we believe some policy changes are being looked at as far as foreign direct investment (FDI) is concerned. Could you share some of those developments with us?

A: FDI policy review is a constant ongoing process and from time to time, depending on the requirements of the economy from time to time, we have inter-ministerial consultations. It is an ongoing process. As a part of that, if there is a feeling that some changes have to be brought about, recommendations are made. So far as your other question, whether there will be any change, you have to wait for any decision. I cannot prematurely announce decision. In any case, as and when the government takes a decision, it will be announced.

Q: Is there a possibility, for instance in single brand retail where 100 percent FDI is already allowed for it to go through the automatic route for instance?

A: I cannot speculate on the government decision. If the government takes a decision, any decision for that matter, it will be put in the public domain.

Q: What about multi-brand retail or food retail, will ‘Make in India’ give a push?

A: Again the same thing. I cannot speculate on what decision government will take. It is government’s prerogative to decide. So I cannot prematurely say that this is going to happen.

Q: One more thing I wanted to pick your brains on is the goods and services tax (GST), now the big rollout has happened, we have the four tax slabs. What we wanted to understand is that what is the level of tax buoyancy that the government targets to achieve from where it is at the current levels because we wanted to understand once you achieve that target, is there a possibility of relooking at these GST rates?

A: I think it is too early to talk about a relook at GST rate, it is a completely new system of taxation which is being introduced. The initial plan of action, the initial focus has been to make it revenue neutral as far as possible. So that is why the tax rates have been fixed at almost their current rates, that is the incidence of the central excise or service tax and the incidence of the state VAT put together, whatever is the current incidence of taxation, the current rate of taxation, the GST rates are more or less aligned to that – the closest GST rate is taxed for that good, for that particular item is aligned with the nearest GST slab rate.

Therefore, as I said, initially the focus is on having a revenue neutral rate structure as far as possible. When the scheme is implemented, then only we will know how it is actually working in the field. The GST council has been meeting quite regularly and I am sure they will continue to meet in the initial months of GST also. Perhaps quite frequently and take decisions. However, it is too premature to talk about any relook at the rate structure if the revenue buoyancy goes up. This would be hypothetical at this stage.

Q: We are still talking about branded/unbranded and there is a bit of more policy-making to be done there but even though you are keeping rates as close to what their previous rates were, there is some fear of companies passing on those higher tax burden on to consumers, how do we ensure that that does not happen?

A: The prices will be monitored and the monitoring of prices will show if particular area, the lower taxation and the benefit of the input tax credit, more due to the direct correlation will be with regard to the lower taxation, number of items, the tax rates have been lowered. So obviously it should be quite easy to find out whether the benefit has been passed on to the consumers.

I am quite sure that the manufacturing and the trading community will definitely sort of cooperate with this entire venture and today also they are going to get in the GST structure, they will have the additional benefit of the input tax credit, they will also have the additional benefit of better logistics facilities and overall improvement in the business environment. So I think I am quite sure that the manufacturing and the business communities will definitely pass on the benefits and overall monitoring will be done. The necessary legal provisions may not have to be used and I am quite sure everybody will cooperate.