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Last Updated : Sep 02, 2016 04:14 PM IST | Source: CNBC-TV18

Capacity utilisation growth may not pick up soon: Religare

The provision coverage ratio for Indian PSU banks is at 45 percent. But Parag Jariwala, Religare Capital Markets says the ideal number should be around 60-65 percent. Due to this shortage, he says the credit costs for PSU banks may start rising in a year's time.

Existing capacity utilization mainly in infrastructure and cyclical industry requires a demand from other sectors, says Parag Jariwala, Vice President, Religare Capital Markets. But this isn't happening, he says.

He doesn't expect any growth revival in the coming 12-18 months.

The provision coverage ratio for Indian PSU banks is at 45 percent. But Jariwala says the ideal number should be around 60-65 percent. Due to this shortage, he says the credit costs for PSU banks may start rising in a year's time.

He prefers small to mid-sized private banks like YES Bank, Kotak Mahindra Bank, IndusInd Bank.

Below is the verbatim transcript of Parag Jariwala's interview to Reema Tendulkar and Prashant Nair on CNBC-TV18.

Prashant: What are you picking up? I have got your report here but I want your sense in terms of what you are picking up out there from people at the conference on where we are in this entire navigation process?

A: What we have done here is that we have invited all the stakeholders. There are law firms, there are construction companies, rating agencies, couple of consultants who are working towards the non-performing assets (NPA) resolutions, all of them are present at this conference.

It is basically to understand that at this point of time, most of the investors are confused as regards to what could be the NPA situation going to be in next 12 months etc. So if you look at the asset quality ratio (AQR) done by Reserve Bank of India (RBI) which has cleaned up most of the problems, so how do we go from here and we are hearing a mix review. So there are a lot of things, which needs to be done by the banks, borrowers and the government to come out of the NPA problems.

Reema: You have told us a lot of the discussion points which took place at the conference but what about the answers to all that? Gautam Trivedi, MD & CEO, Religare Capital Markets in his earlier interview was saying that the bad loan problem could be closer to USD 180-200 billion rather than the reported figure of USD 120 billion, do you think there is a lot of underreporting still left, will that be in the public space, the public sector banks, what would be the timeline of the resolution that people are working with?

A: Not all the mess is out. So if you look at some of the bad company, they have some guarantees of balance sheet exposures, which should get accounted as an NPA over the next two-three quarters plus there are a lot of SME, lot of small businesses, mid-sized businesses which depend on this large companies, large infra companies etc. So they are also facing some trouble, so all these things will come out as a recorded NPA probably next one year and towards the loss given defaults -- the larger sense we are getting is that most of the public sector banks are currently sitting at 40-45 percent of provision coverage ratio but the participants are highlighting us that the ideal number should be like 60-65 percent and to that extent, the credit cost will move up in next 12-18 months.

Prashant: What about acknowledging that maybe if growth is picking up? Some of the points that you mentioned -- reasons for why the mess is still not out there in the open? Maybe it would never be out in the open as growth comes back, things will improve repayment capability, you mentioned corporate guarantees, these things will resolve themselves out, we have a large listed port company which recently in its conference call said that we are going to unwind a lot of our inter-corporate guarantees etc, this could happen across the board if growth picks up?

A: Yes, I definitely agree that if the growth picks up, growth generally solves many problems but the unfortunate part is that the private capex -- there is neither an immediate or a medium-term sign of private capex starting to get into the markets. So basically I don’t think that growth is likely to get revived in the next probably 12-18 months. So if growth doesn’t come back, the asset quality problems will get deeper and deeper.

Prashant: We are talking about private capex growth, you said there is no sign now in the near future, but we are talking about existing capacities being utilised, there is existing capacity which is spare across the industry. Even if that goes up to a 100 percent or close, that should help that is what I am referring to?

A: Let us take example of a power or a steel company, their existing capacity utilisation also require some kind of a demand picking up across the other sectors. For example, power plant which is working at 60 percent. If that capacity has to go to 70-80 percent, they need to see the incremental demand coming from the industry, agriculture potentially the retail customer and that is the thing that we are not getting very comfortable on that we don’t see those demand picking up neither for power nor for steel or nor for any other sector. So if that happens then basically there will not be any growth excluding this cyclical or infrastructure sector and since the capacity is already sitting at a very high level, will not see any growth in this cyclical or infrastructure sector. One leads to another.

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First Published on Sep 2, 2016 03:54 pm
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