The merger of State Bank of India and its five associates may lead to a small rise in costs, according to CMD, Arundhati Bhattacharya. The costs will come under control by the third quarter of financial year 2018, she told CNBC-TV18.
She is confident that the merger will complete by April 1. The trading of shares of the associate banks will stop immediately before the merger. The shares of the associates will be discontinued and only the SBI share will remain starting April 1, she said.
There has been a pick-up in interest for fresh loans from various sectors, she said. A revival is also being seen from the steel and mining sector.
"Railways, roads and defense are the growth hotspots of the country. Kick-off of large government projects from these sectors may give a filip to the economy," she said.
She said while the government keeps the reform momentum going, it should not lose focus on the resolution of the bad asset situation.
Below is the transcript of Arundhati Bhattacharya’s interview to CNBC-TV18’s Latha Venkatesh.
Q: A word on the big political change that has come on us. We can now be reasonably certain that there will be political stability not just uptill 2019 but probably even till 2024, at least the market is working with that. What is your sense as the top financial person in the country? Will it be a big difference to the economy, to a banker?
A: This government came in with the mandate of development and jobs. I think they have been working very steadily towards that. In fact what really impressed me was the speed with which they brought the bankruptcy code. They did it all in one and half years. To get it drafted, get it through the houses and have it promulgated as a law in one and half years is really very swift.
Similarly they have done the GST also, which is again a humongous bit of work. Therefore I think the speed at which they have been proceeding, they will try to keep up that speed.
My hope is that today the economy is looking very good on most macro parameters. So, wherever there were difficulties for instance the inflation that has been tamed down, if you look at the current account deficit, the fiscal deficit, they are all very much under control. Even for that matter the exchange rates are beginning to look really good. So, given all of that I really hope that this one area of resolution of assets, that will receive more attention. I am sure it will because that I think is the last thing that is required to bring back confidence into the economy to enable it to really get onto the growth path again.
Q: The important task that you have on your hand is the merger. At what point is it going to be one legal entity? Is it April 1 2017?
A: It will be April 1 2017, yes.
Q: And single share, when do the other shares stop trading?
A: Shares will stop trading immediately. In fact I think the share transfer, we are already closing the registers on March 17 2017. So, from April 2017 itself it will be a single share. The general ledgers of all the companies will merge. Subsequently what we will do is, we will wait for audit to end, which should be by third week of April and then each of the individual data mergers of the banks will take place. However from April 1 2017 the entity will be one. So, it will become State Bank of India from April 1.
Q: Now you will have a fair idea of what kind of rationalisation you are planning over the next year. How much do you think you will be able to save in terms of costs? Initially will you see a rise in cost to income and then a fall?
A: I don’t really think so, there will be small rise because we are simply taking in all of those entities without pairing anything. So, today if we are at 49 we will probably go upto 50 but very soon thereafter it should start coming down. It should start coming down first of all as I said – things like the treasury and the corporate account group (CAG) and the MCG group will very quickly merge because there, there are no issues, it is simply a question of taking the data and starting working there. Very few of the CAG, MCG accounts are different, about 20 percent of those accounts are different. So, that can be taken in into our existing branches. So, that setup will get freed up very quickly.
The head office setups will take a little longer because there has to be an orderly handover of all documents and things like that. However even that should happen within the first 3-4 months. So, we are looking at maybe Q3 of the next financial year to start actually showing the costs coming under control.
Q: What about return on equity (RoE), for a share investor that would be important. You have been at double digits, with the merger I would assume it will come to single digits. When do you see that coming back to double digits?
A: Coming back to double digits would take at least 2-2.5 years It is best for us to predict a medium term recovery there rather than a very short term recovery.
Q: What is your sense in terms of growth itself? With this larger size do you think credit growth picks up next year itself? You will have larger workforce.
A: We are beginning to see some amount of interest come back. The good thing is that there are people out there who are now showing much more interest, especially I am finding that there is a revival of interest in the steel sector given the fact that steel is doing better. There is a revival in the mining sector again because mines have been doing well. People are actually still waiting to see many of these large government projects actually kick-off, whether they be projects like the smart cities or the projects that the railways is beginning to talk about or start bidding out, the major road projects, projects in things like bifurcation of the rural feeders and the transmission lines, in areas of defence. There is a huge amount of interest in defence. We are beginning to talk to a large number of people who are coming from outside and who want to setup joint ventures here.
These conversations were going on earlier as well but today I think the conversations are getting more rooted in reality. So, definitely by the end of next year we will see some of these projects taking off. So, they are about getting off the drawing board level and coming in into the sphere of actually talking finance. So, I do think things are looking slightly better.
Q: I know these are trying times for bankers, NPA resolution. The bankers had approached RBI asking for tweaking of all those alphabet anagrams, Scheme for Sustainable Structuring of Stressed Assets (S4A). Have you heard back? Anything tweaked? Anything likely to get tweaked?
A: We have not heard back as yet. But again, it is like this: whatever the frameworks that have been provided, many of our accounts do not really fit into the frameworks and we do not want to retrofit any accounts into this framework. So, the fact of the matter is that each of these accounts will have to be given a different kind of a treatment.
Now, unless you have a framework, we are not able to get an agency outside of the bank to look at it. So, if you look at the Oversight Committee (OC) which looks at the process and at least confirms that we have done things as per the laid down system, the OC can look at these accounts only if there is a framework and for the bankers, and I think especially the public sector bankers, we are keen that when some difficult decisions like these are taken that at least one other committee looks at it and says yes, it is as per the framework.
So, if you have to provide a framework and yet, you need different solutions for different accounts, then you need a framework that will enable all of this to come in. Which is why, what we had suggested is that as it seems to be difficult to do anything to S4As, Strategic Debt Restructuring (SDR), etc. the Corporate Debt Restructuring (CDR) has been something that has worked quite well in the past. So, maybe what could be done is incorporate these features into CDR to enable CDR to have a framework that will take into account all of these.
Q: So, basically what you are saying is we get back CDR with probably some tweaks so that the OC has a reference when it approves.
A: That is right.
Q: Then I would assume that you also want the OC to go through all the major resolutions?
A: That is right. We feel that that would be good way of doing things because as I said, these are very difficult decisions and anything could be open to question. So, it would be good to have at least one other committee that is totally independent having a look at it.
Q: Dr Viral Acharya had suggested that after the haircut is planned and the restructuring done, let it get vetted by rating agencies. Is that an idea that will wash?
A: The fact of the matter is the rating agencies, at this point of time, even after a restructuring, they leave the rating as D. we have not yet seen a rating agency upgrade a rating immediate after a restructuring. So, normally they take a little time to do it. I am not too sure how they will react to this because I have not seen it happening.
However, if they can be convinced to do it then it would be something that would be really helpful because then you could have ready buyers for the equity that we take in respect of our conversion of our debt to equity which we will have to do in many accounts. We would find ready buyers if the rating goes up immediately. If I know the rating agencies, they will take their time about it. They will want at least one audited balance sheet to come after the restructuring is over before they start having a look about upgrading the ratings.
Q: That conversation has not gone anywhere? Have you already spoken with RBI, rating agencies and yourselves?
A: I do not think so. We have not taken that conversation forward.
Q: Let me get the other structure that has been spoken about so much, bad banks. Has the government come forward? We have not heard any official confirmation that want in. It came in the economic survey which is again an advisory or a recommendatory entity. Do you see anything concrete, government agreeing to it?
A: Frankly, this suggestion has been there for quite a while. It found takers in some quarters, it did not find takers in other quarters. But the main thing about a bad bank is that you need to have to two things. One is you need to have capital in order to capitalise the banks that will give it at a far lower valuation as well as the capital for the bad bank itself. And the second thing is you need to have a very good team that will actually take forward the resolution.
Now, even if the government puts in some amount of equity and expects to leverage it and get money from the market, even then the money is given to such funds only when it has a very credible fund head. So, the fund manager is somebody who has to be very credible with the proper track record who can run it.
Frankly, if this was feasible, it could have been done earlier. It has not been done earlier. So, I do not know what is the change in circumstance that would allow it to find traction now. Now again, I am not privy to all of it obviously. Maybe they have better information than I have. But as market player, I am not finding any material change to say that this is a proposal that will find more traction now than it did in the past.
Q: I spoke to several former central bankers and former commercial bankers. The sense I am getting is that everybody is worried about a haircut. Because of the noise made, all haricuts are seen as cronyism. So, bankers are worried about how it will be interpreted, bureaucrats are worried, politicians are worried, so nobody wants the baby. Is that the problem?
A: It could well be because the fact of the matter is that it is a bitter pill to swallow and unless forced to it, the inclination is to let it slide. The only thing I can say is that it will get bitter by the day. The sad part is that this time around, many of these NPAs are good assets. One does not want good assets to turn bad because today you are not in a position to support it. End of the day, we must realise that India is a resource poor nation. In a resource poor nation, you cannot allow good plants, good roads, good ports, whatever, good assets to not be utilised to its potential.
You look at what was the projection earlier. The projection was that India would need about 300 million tonnes of steel by the year 2020. What is the production capacity today? 80 million tonnes. So, we are far below what is required and therefore, the question of these assets not being used in the future does not arise.
Today, if you look at the power consumption and the steel consumption per capita for Indians, it is lower than many African nations. So if that is the case, with a very young nation that is simply now, so many people coming on to the workforce in a regular basis, the demands of the demography itself is going to drive all of these sectors.
So, if that is the case, if you do not want huge amount of social unrest, if you expect that you will be able to fulfil the aspirations of the youth, then all of these will come in handy. They will become useful. It is a question of keeping it going till such time as demand comes back properly and you are able to utilise capacities properly.
For that, it is required that we try and take these decisions as quickly as possible, then they will get on an even keel, then the banks will be able to give it the working capital it needs to start ramping up. Everything will be on a much more stable platform. Not only that, what happens is when there is a major asset like a plant or a port or a major road, if you ensure that it works well, the peripheral businesses start coming up. These act as the fulcrum around which the peripheral comes up.
If the fulcrum itself, you do not know whether it will shut or not, the peripheral does not come. They do not know whether to set up there or to try somewhere else. So if you are looking for more employment, more job creation, it is important to get these major industries up and running again.
Q: If you have the CDR mechanism back with tweaks and overseeing committee okay it, do you think if these two are given, we should see resolution in 2017?
A: Absolutely, there is no doubt in my mind at all that you will see it. As resolutions happen you will find more and more players who are currently sitting on the fence, they will come into the fray.
Q: Those are the guys I was asking about – the foreign funds, the special situation funds, what is their roadblock?
A: Their roadblock is they don’t really know whether they should invest now. If the recovery is two years away, they would rather invest one and half years down the line. If they find that it is going to happen now, then they will start coming in more. So, the fence sitters have to be convinced. As I told you, what will happen with the resolution – nothing great, except that confidence comes back and that is a essential ingredient in any country.
Q: Have you progressed in your talks with RBI on tweaking CDR?
A: We have spoken to them. I don’t know whether that can be termed as progress or not but we have definitely put our cards on the table. They are aware about where we are, what we need, why we are asking for certain things, so they are aware of it.
Q: You had said at the end of Q3 that your watchlist was for this year and you will relook at the end of the current year. Are you expecting that the watchlist could increase substantially for FY18?
A: I don’t really think so. However I would like to keep it a little open because the other banks are also coming in – 5 major banks are coming in. So, while we have aligned their portfolio with us, more or less it is aligned, but unless you actually have the book, it is difficult to make a projection. We have aligned with what we had. They have still another 20 percent, so we need to look at that bit as well. Some of them are units where we have no exposure at all. Some of the units where I was feeling very happy I have no exposure, I am suddenly finding I have exposure. So, that is something that we really need to look at. Overall what I have seen, I don’t think it will be a huge increase. Yes, there will be some amount but well within control.
Q: What about demonetisation impact itself? If you looked at the GDP numbers or if you look at several parameters, it appears that it is transient. So, are you getting a sense that you will in your MSME or SME portfolio, in Q4 get away with minor injuries?
A: I should think so. What has happened is in respect of the small value loans portfolio, when you give forbearance for two EMIs, in the third month you are asking for three EMIs altogether, which is not easy. For these people it is a day by day existence. If you have eaten up two EMIs, it will be very difficult to put all three together in the third month. That is the reason why we had requested RBI that you backend the two EMIs, don’t say that in the third month you need all three. However RBI didn’t think that that would suit whatever they had in mind, so they insisted on this. So, as a result what is happening is my guys are really having to work very hard in order to follow up with as many people as possible in order to pull it back. Again as I told you these are portfolios that are very effort elastic. So, it is a very high touch portfolio. So, you have to really go after them. During those two months actually speaking we did not have the bandwidth to do demonetisation as well as follow up and so it became a problem. Now we have got that bandwidth more or less back, so we are working a lot in order to see that the impact is minimised. In the SME segment it will be slightly larger. There are another 15 days still, so keeping our fingers crossed.
Q: The other two major problems that you will have next year will be that SDR issues unresolved will have to be provided for completely. Do you think some of the SDR issues will get resolved or will that bulk fall?
A: I do not think a bulk will fall. There will be some amount of resolution. Again if I can see more of the large corporate resolutions coming through, then there will be more interest in those SDR accounts as well. So SDR, basically, we are looking for a buyer in order to take it out. That also will see more interest once there is interest in these large ones.
So it is all bound one to the other and if you can get a virtual cycle kicked off then it will go around in respect of other accounts as well. If that does not happen then we may still take them through the deep restructuring process instead of just allowing it to fall and leaving it. That is really of very little use.
Q: That is my only worry about next year. You will have possibly those accounts like SDR accounts coming and you will have the ageing of NPA. Therefore, do you think financial ratios will worsen much more for Indian banks in FY18 or do you think they will be as bad as FY17?
A: They will be maybe, slightly worse off than FY17 if nothing happens.
Q: But you bet there is something good?
A: Yes, my bet is that 90 percent I am convinced that something will happen because just as you appreciate it, so does everybody else. Everybody does understand that just by doing nothing, nothing is going to go away. At the end of the day, decisions have to be taken, actions have to be taken. So, I still believe that we will do that.
Q: The government and the RBI get it that they have to?
A: I am sure they do. They get it better than you and me, believe me.
Q: The problem with tweaking rules is that way back in 2009 and 2011 when the one time settlement (OTS) was allowed, the fear now is that the loans were evergreen then. I guess that is why RBI does not want to ease the rules.
A: There is a difference then and now. The main thing is here, people are now convinces that pain has to be taken, haircuts have to be taken. Conversions from debt to equity has to be made. That was not how it was in those days. In those days the emphasis or the attempt was to ensure that the debt remains fully protected. Now if you protect the debt in these cases of over-leveraged companies, you are not going to get sustainable solutions. To get sustainable solutions, one has to take that pain.
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