Prime focus is to resolve NPA issues; not aiming at liquidation: Sanjeev Sanyal

The Reserve Bank of India on Tuesday identified 12 non-performing accounts or assets (NPAs), totalling 25 percent of India's gross NPAs, which can be immediately taken up under the Insolvency and Bankruptcy Code (IBC).

Sanjeev Sanyal, Principal Economic Adviser, Finance Ministry in an interview to CNBC-TV18 clarified that just because the bankruptcy process has been set in motion, it does not mean that everything will be taken up tomorrow and sold off or auctioned.

The only thing is that the process is now time bound, he said, adding that it would be good if lenders and borrowers come to a resolution within the stipulated time because liquidation is not something one is trying to push for.

According to him consolidation of banks and NPAs is a separate issue - by consolidating banks one cannot reduce the amount of NPAs. Consolidation is a commercial decision to simplify management etc. So decisions regarding consolidation are taken on commercial basis. However, he clarified that government is not looking to merge weak banks with strong banks, at least not as a way to recapitalise the banking sector.

Below is the verbatim transcript of the interview.

Latha: First up, we wanted to understand the equity holders position, the world of business is still trying to come to grips with whether equity goes to zero or whether after these 12 cases go through the NCLT process, it is quite possible that haircuts are given and the same promoter can come back so equity is not quite zero.

A: Let me right up front clarify that because the bankruptcy process has been set in motion, does not mean that we are just going to take all of this tomorrow morning and sell it off and auction it off. The process has been put in place, some of it will get resolved, but the point here is the process is time bound. As you know, there are 180 days that is normally given, at most extendable maybe by another 90 days in special cases.

So in a worst case, if things have not been resolved in some way, then things just get liquidated at the end of the process. However, what happens now is essentially the lenders and the borrower have an incentive, because it is time bound, in whatever things that they can resolve, resolve it amongst themselves. If it can be resolved, that is great. Liquidation is not necessarily something that everybody is trying to push for.

Sonia: We were just speaking with a couple of bankers a while back and UCO Bank made a point where they said that it would be good if the Reserve Bank of India (RBI) gives a forbearance or amortisation to some of these banks to spread the provisioning over a period of time. Is that something that the RBI would be looking at?

A: I am sure the RBI will consider it, but I am not in a position to comment on this. You may want to clarify this with the RBI itself.

Latha: The other issue that people are grappling with is  - is it clear that it will be a six months process in the National Company Law Tribunal (NCLT)? Can it happen that somebody will take it on appeal to the Supreme Court and the legal process itself is elongated? Do you worry about this kind of development?

A: We hope this will not happen. It is a possibility, but we are hoping that this is something that for the most of the cases will not happen and the process will go through. You have got 12 cases that have been identified, the names will be shortly announced, and they account for as much as 25 percent of the bad assets.

So, the point here is that the process has begun and it is possible that some bits and pieces here and there will get stuck, but I am quite confident that the bulk of those will follow through in a time bound process and you will have an outcome.

Latha: The reason why I am asking you is that when one of the people went to the High Court, the High Court did not stay the process and actually sent it to the Appellate Tribunal, the National Company Law Appellate Tribunal (NCLAT) which promptly send the guys backpacking to the NCLT. So, neither the High Court, nor the NCLAT stymied the process. Therefore do you think that broadly there is a buy-in from the judiciary?

A: So then that is good news. That surely is good news.

Latha: Recently the Supreme Court also said that we have to look at the economic impact, employment and stuff like that, so do you think there is a buy-in from the higher judiciary?

A: I can't speak for the judiciary but as you pointed out they are conscious of the process and the economic implications of all of this. So, the law is clear, the institutions have been created, the NCLT and other institutions. Although they are new and untested so far, nevertheless we are confident that some of these will now begin to move forward quite quickly. These are cases that have been festering for years and years, it is a problem we have had for a very long time and now I think one way or other it will get resolved.

Sonia: So, PSU banks will also have to be recapitalised further as haircuts needed now are likely to exceed the current provisioning norms. Are we looking at more capitalisation for banks?

A: We will see. One of the problems was because these things were festering and were never getting resolved, the hole in the balance sheet was a matter of opinion. Now that we are actually going to resolve, we will know what that number is. It may be a large number, but at least we will know what that number is.

Some part of it is provision, as you mentioned. Some part of it, of course there will be recovery. It is not like these assets have zero value. So there will be some recovery. In the end of that there will be, still, a gap. Now some part of it may need recapitalisation. Where that is necessary, the government will look into it certainly. There are many options, ways of doing it and the government will exercise those depending on what is needed. What is necessary at this juncture is to know what this gap itself is.

Latha: The bankers we spoke to said that in many cases, probably 25 percent is provided because two years old, so 15 percent in the first year and 25 percent by the second year. Some of them have been prudent and maybe 40 percent, but still the haircuts could be 60 percent. The short point I am saying is that capital requirement is going to be large. One of the rating agencies, Moody's came up with a big number of Rs 95,000 crore.

A: No, that is not the correct way of thinking of it. That which has been provisioned is not the only thing you get back. The asset does not have zero value. So that value also has to be added back. So you have to take the provisioning.

Latha: No, not zero, they are looking at 60 percent haircut.

A: It depends on the asset. The point I am making, why would you need a 60 percent haircut because some part, as you mentioned is provisioned, let us say 25 percent. Then it depends on what the value of that asset is. If it is 50 percent then you get 25+50. So you have to take the provisioning plus whatever the remaining value is.

Yes, at the end of it, it could be large. It will depend from asset to asset. Whatever it is, the point of the matter is I am not trying to preclude the market judging what it is. It may be a large one, it may be small. Whatever it is, so far, the number that was being estimated was a matter of opinion. Now, because you are actually going to try and resolve it, perhaps sell some of it off or whatever you will do, you will have a hard number to deal with and then we will be in a position to judge what to do next. So far, because we were not getting this hard number, it was difficult to deal with.

Latha: You also said that we have a couple of options to handle it. What would be those options? Are you thinking in terms of a recapitalisation bond or are you thinking in terms of mergers? What are the options on the table?

A: The consolidation story is a somewhat separate story. There are links, but I do not think you should confuse the consolidation story. That is a commercial decision being taken to simplify management and so on and so forth. I do not think by consolidating banks, you reduce the amount of NPAs and in any case, I do not think we are attempting to do capital arbitrage by merging good banks with banks. That is also not the intention. So there will be some consolidation, but that is being done on commercial basis and thoughts have been given to that and are on a fairly advanced basis.

So as far as recapitalisation of banks is concerned, yes, you could have recap bonds, perhaps even consider paring down some of the government's holdings. Some of it could come from the Budget. It depends on how large the number is. Some combination of tools will be used. Everything is open.

Latha: You give us two very big points. You are saying that it is not the government's thinking to merge weak banks with strong banks. That is clearly not something that the market should fear?

A: Not as a way of recapping the banking sector, no. That would not be a very good thing. Merging a bad bank with a good bank as a way of getting a large good bank is no more valid a way of thinking than we may get a large bad bank. So it will be done on completely different basis. I mean, occasionally you will find a weak bank merging with a good bank, but that will not be because we are trying to somehow improve the average. That is because there is some other considerations which make commercial sense.

Latha: You are also telling us that recap bond is a possibility?

A: All tools are up for grabs. We will consider all of them depending on the size of the gap that we have to fill. Only when we know what the size of the problem is will we know what the combination of tools that will be used. A lot of things, it will depend on it. For example, what has happened, what are the share prices of the stocks could be something that we may consider, what are the tightness of the system in terms of monetary policy, all kinds of things. There may be strategic interests from some private or foreign bank. Anything, why should we preclude any thought?

Sonia: So are we looking at government entities like NTPC looking to perhaps buy into weaker power assets? Are we looking at any kind of stressed asset funds? Any other tools that the government has?

A: Yes, there may be asset reconstruction companies (ARC) that may be interested in taking some of this stuff up. There is the newly set up infrastructure fund that may be interested in picking up some of this as a way of – they already have some degree of finance and this may be an easy way to pick up assets and build up a portfolio quickly at a cheap price. There may be public sector, it may indeed pick up something.

Again, on a commercial basis, it is not like this is the one strategy, no. If a certain government entity thinks that something makes sense for whatever reason, they are welcome to do it. But in every single case, the primary consideration will be a commercial one. Practicality and commercial decisions is basically what we care about.

Latha: So you are saying that the National Investment and Infrastructure Fund (NIIF) could also be a buyer of or investor in some of the stressed funds and what about the one that Viral Acharya put on the table?

A: It is all up for grabs.

Latha: Viral Acharya was speaking about a kind of a government sponsored asset reconstruction company. Is something else in the works other than the NIIF?

A: Possible.

Latha: Possible as in the first shoots has begun? The first work has begun? Is something in the works of a government owned ARC or government sponsored?

A: It is a possibility. Some discussions have happened around those lines. As I said, as we go through this process, we will know what needs to be done. But we need to get the process rolling fast.

Latha: Is there any speeding up of these special situation funds from abroad? The Wilbur Ross variety or the KKR variety or Brookefields, if you can update us on whether they are at a speedy level?

A: Yes, they are open. I cannot comment on specific names, but the fact is if there are foreign ARCs who want to show interest in it, they are very welcome to throw their hat in the ring.

Sonia: You have given us a statement that the market will react positively to the fact that the government is not looking to merge good banks with bad banks, but can you tell us what the government's thinking is at the moment with respect to mergers or consolidations? What kind of timeline are we looking at if any?

A: I am not in a position to give you a timeline, but all I will say is that this discussion has gone fairly deep now. So I would say that yes, we do not want to proceed with the rule of thumb that a good bank and bad bank get merged and that somehow solves the problem. That is totally not the way that this will be done. There may be a case where such a thing happens because of completely different reasons, because it makes sense for some other reasons, branch consolidation or something like that. But as a general strategy this will not be done.

Latha: The one piece of the PJ Nayak Committee recommendation which was not implemented or discussed very seriously primarily because NPAs overtook the problem is thinking of a holding company of all the government banks, something like a sovereign wealth fund company and trying to sell that stake into the private sector. Basically, in short, bringing down government stake in government banks below 51 percent. Is that also a logical next step?

A: Even if such a step was taken, you do not have to create this super holding company to do it. Maybe that will done in the future, but right now, the focus is on getting this NPA thing going and let us not get distracted from that first and primary focus.

Sonia: So on this NPA issue itself, this RBI circular, you spoke briefly about the possibility of some delays. Are we looking at larger delays because the bankruptcy law is still in its infancy? It is an untested legal process at the moment. Do you think that interpretation issues could delay the process?

A: I did not bring up the delay possibility, you did. I just said that it is a possibility of course, but we hope it will not really happen. I think the law is quite clear, we have new institutions, of course, who have not yet been tested, but we are confident that on the whole, this process will now go through quite quickly as you can see. There is obviously, a lot of focus and attention being given to the issue. You had a major ordinance come out just a few weeks ago. Now, you have this list.

I am sure you know from your discussions with others in the government that this is being done quite quickly. And remember, this is a matter that has festered for years and now we are talking in days and weeks. So this is already a huge progress.

Latha: Now that the 2016 NPAs are what the RBI is asking the banks to deal with, would say that in a quarter or two, the 2017 NPAs will be taken up?

A: We are an entrepreneurial economy in which continuously there will be NPAs. This is a process of creating destruction. That is part of what we have signed up for when we signed up for a market driven entrepreneurial economy. So of course, every year, a new bunch will come up and the point is, on an ongoing basis, we need to keep clearing it up. In fact the whole point is we need to get rid of this social stigma against bankruptcy and exit. And just do it as a matter of routine.

So yes, there will be 2017, there will be a 2018, there will be 2019, in 2020 there will be new cases. The problem here was for a number of reasons we accumulated a huge bunch of them and it has jammed up the system. So this jammed up system if being cleared up so that the machine now begins to flow and the system begins to flow in a more normal and orderly way.

Latha: Is there anything you can update us on IDBI Bank? That falls in a separate category because it is not under the Banking Regulation Act or the banks takeover act. The government does not necessarily have to have 51 percent.

A: I am afraid I am not in a position to comment on any specific case.

Latha: Just a word on the delay. I will tell you from where Sonia is coming when she is asking you the delay question. Cases like Bhushan or Essar, there was a plan ready. Even as of January, February, we had reported that almost everything in terms of what is the sustainable, unsustainable portion, what is the portion that has to be converted into cumulative preference shares, everything was ready. But then the IDBI arrests happen and then things got postponed. And then this expectation of the overseeing committees. So the fear now is that will the Bhushan's of the work take another one year to get resolved?

A: Hopefully not. That is the whole point of doing whatever we are doing. That is why the ordinance came up, that is why this is list has very quickly been drawn up. So you are going to see basically in these cases, you are going to have these things being sped up and that is why you have this particular oversight committee based system because the idea here is the oversight committee makes sure one, that enough of the lenders come into the room and agree to a plan.

Two that whatever plan they come up with between the lenders and the debtors. The RBI is not telling them what to decide. It is between them to decide, but once they have decided whatever it is, the oversight committee ensures compliance which is a very major problem that everybody, once they have signed on to it, keep their word.

And finally, the point about the oversight committee is that the oversight committee will, whatever agreement it is, will put a stamp of approval on it to basically certify that processes were followed and that it was all kosher. So then what happens as a result of that is that if in future, there is an investigation, the participants in the negotiations can pull out this piece of paper and say, look at this, the oversight committee of the RBI has essentially approved it, therefore this was all clean and transparent.

So that is why that particular process, using an oversight committee was put in place in the first place. That has been taken into account.