The concept of non-performing assets (NPAs), or bad loans in everyman’s language, is nothing new for the banking sector. Indian banks’ NPAs have been in the spotlight for the past few months. Their recognition as well as prior provisioning (as per prudential norms) in this quarter has caused some of the spectacularly worst results ever reported by the sector. A good part of them originate from public sector banks, traditionally funded by the Government, hence this problem indirectly impacts all taxpayers. It is therefore crucial to publicly discuss the causes of, and the way forward from, this particular situation.
To discuss this, the FPJ-IMC Forum organized a panel discussion with experts at the Indian Merchants Chamber, Mumbai. The keynote address was given by S.S. Mundra, deputy governor, Reserve Bank of India. The panel comprised Abizer Diwanji, Partner & National Leader, Financial Services, Ernst & Young; M.V. Tanksale, Chief Executive, Indian Banks’ Association; and Srinivas Vishnubhatla, CEO, Mosaik Risk Solutions. The event was moderated by R.N. Bhaskar of FPJ with editorial support from Pankaj Joshi.
The welcome address and the vote of thanks were given by Dilip Piramal, president, IMC.
Dilip Piramal: A strong banking sector is important for a flourishing economy. Banks play a vital role in providing financial resources, especially to capital-intensive sectors such as infrastructure, automobiles, iron and steel industries and high growth sectors such as pharmaceuticals, healthcare and consumer discretionary items. NPAs have emerged as an alarming threat to our banking industry, affecting the sustainability and endurability of the banks. High level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net worth of banks, and also erode asset value.
Dilip Piramal, President, Indian Merchants’ Chamber Photo by BL SONI |
To improve efficiency and profitability, banks must control NPAs. The current deterioration in asset quality could be attributed to domestic and global economic slowdowns, delays in statutory and other approvals, especially for projects under implementation, relatively aggressive lending practices and, most unfortunate of all, corruption and collusion between dishonest businessmen and bank officials. It was observed that infrastructure, iron and steel, textiles, mining (including coal) and aviation services had significant shares in stressed assets.
The Reserve Bank of India released a framework in early 2014 for revitalizing stressed assets in the economy. It outlined a corrective action plan to incentivise early identification of problem cases, timely restructuring of those accounts considered viable, taking prompt steps for recovery of sale of unviable accounts, selection of right borrowers, adequate finance and timely disbursement, correct use of funds and timely recovery.
The Indian government has also undertaken reform measures like introducing insolvency and bankruptcy code bill, which create a robust safety net to ensure time-bound winding up of entities. That will help in reviving companies and rebalancing the equation between debtor and creditor.
The speakers today will discuss about non-performing assets and measures in making lending a viable option in a structured framework.
FPJ: Mr. Mundra has been one of the earliest speakers about the danger of NPAs in the country. He has a great deal to offer by way of insights into the problem the country is facing today. Mr. Mundra, could I request you to come up for the keynote address?
S.S. Mundra: Good evening ladies and gentlemen. I must compliment FPJ-IMC for choosing this subject, which has become one of the most widely and heartily debated topics in the country today. Whenever this topic comes, emotions run high, and they oscillate widely. At one extreme some people would think that that there is no problem, the country is in safe hands and God is kind. At the other extreme, there is another opinion that whosoever is doing business, running an industry, is a thief and is out to deceive the financial system. The reality lies somewhere in between. And so these kind of informed discussions are very important.
S.S Mundra, Deputy Governor, Reserve Bank of India
Photo by BL Soni |
So, from that perspective, I find it that it is very, very relevant. And I really feel happy to give some of my perspective through a small presentation. You can see a magician’s hat sitting in the presentation. There is debt entering into the hat from one side and then coming out as equity from the other side. In essence, this is what we are discussing today.
An analogy for those familiar with homeopathy medicine, and how it is prepared. You take the mother tincture in a certain quantity, mix it with the liquid of spirit, and churn it. Then a part of that is taken, put in another spirit, and churned again, so potency keeps increasing. After this churning from 30 to 100 to 1,000 or a million, there comes a point comes where they very typically say, “dawai kuch nahi bachti hai, sirf bhavana reh jaati hai,” but that bhavana works. However if you apply the same principle in bringing promoter equity in the enterprise, I don’t think any enterprise can run on that bhavana. It needs real equity.
I’ll quickly run through some of the data points, which would be relevant to set the context. I have chosen the period from March 2009 to March 2015, a period where many developments took place. You will find that the sectoral distribution of bank credit to industry during this period increased from 37 to 44%. Agriculture remained at the same level of around 12%. In services, there was slight uptick from 18% to 21%. In retail, in fact, there was a reduction, which apparently defies common wisdom, but if you do the break-up, you find that retail exposure had increased in private sector banks and come down in public sector banks (PSBs).
Hence from April 2009 to March 2015, industry saw the maximum bank credit growth. Infrastructure segment saw overall credit share enhance from 8.1% in 2009 to 13.6% in 2015. Infrastructure, as a segment of industry, rose from 25.7 to 30.8%. It was a period of high growth for infra, because the public private model had been introduced plus our economy growth forecast was in double digits. Those were all known things.
Next is again sectoral growth in credit for all banks. The exposure of entire banking industry to industry was around Rs. 10 lac crore in March 2009, which increased to Rs. 31 lac crore by December 2015. For PSBs, it went up from 8 lac crore to 23 lac crore. The CAGR of credit to industry growth during this entire period was around 18% for all banks, and 17% for PSBs.
This growth distribution was not even – from March 2009 to 2013, the CAGR credit to industry grew at 24% CAGR for the banking sector, and for PSBs the corresponding figure was 32%. These, against the overall CAGR of 18%. Quite clearly, after 2013, there was not so much growth for obvious reasons.
When we look at the gross NPA sectoral distribution, the biggest uptick is in industries, which has seen NPAs rise to 8.55% at industry level and 10.47% for PSBs. The others have elevated but not to the same extend. One area where the NPAs have come down is in retail credit.
Next is the sectoral distribution of restructured assets, where similarly, if you look at it for PSBs, it was around 5.74% in March 2009, which increased to 14.41% by December 2015. For the banking industry as a whole, it moved from 5.65% to 11.5%. Here the December 2015 figure is lower compared to March 2015, but that only represents the migration of restructured advances to gross NPAs.
Next comes operating and net profit. All across the sector, be it PSBs, provate or foreign banks, there has been a growth in operating profit. But provisions and contingencies – a large part of which is providing for the NPAs – have outpaced the growth in operating profit. And resultantly, there is either subdued net profit or even a net loss in a particular quarter. This means, while the core earning capability of banking system has remained intact, the much larger provisioning has impacted net profit.
Coming now, I think, I come to the main question, which is that who took the bank’s money, and there are three situations to look at. The first is projects, which have suffered from genuine difficulties; the second is where there had been imprudence – not necessarily malfeasance, not necessarily fraudulent intention but certainly imprudence; and the third is clearly, misdemeanor, fraudulent intention, malfeasance, malpractices, whatever you call it.
The first bucket of the genuine difficulties would have delays in granting the permissions, clearances, some judicial activities which resulted into the cancellation of coal block allocation or the iron ore issues or the spectrum, environmental clearances – these were all things which probably could not have been foreseen. When these events happen, it results in a time overrun. A project time overrun reflects in two ways. First, by the normal course of inflation, the input costs get escalated, so does the total project cost. Next interest keeps on accumulating, so these two things put together impact project viability where then there is a mismatch vis-à-vis the cash flow which is expected to be generated. Then of course, the global slowdown, the excess capacity, also has an impact.
(Left to Right) : Abizer Diwanji, Partner and National Leader, Financial Service, E Y; R.N Bhaskar, Consulting Editor, FPJ; S.S Mundra, Deputy Governor, Reserve Bank of India; Dilip Piramal, President, IMC; M.V Tanksale, Chief Executive, Indian Bank Association; Srinivas Vishnubhatla, CEO, Mosaik Risk Solutions; Abhishek Karnani, Director, FPJ; at a panel discussion (NPAs: Who took the Bank Money?) organised by The Free Press Journal and Indian Merchants’ Chamber Forum in Mumbai. – Photo by BL Soni |
Second category is imprudence. The economy had been growing very fast, there have been expectations of double digit growth, and someone then chose to really take very high bets, being slightly obsessive with the growth potential and putting the normal prudence aside. Despite, knowing of excess capacities globally in sectors like textile or steel, you decide for massive expansion, unrelated diversification funded totally or hugely by debt.
Global events have also contributed, because it was a period where many countries in the world were pursuing very easy monetary policy. Easy credit availability in foreign currency meant people taking such exposure without hedging, which when the cycle turned, came back to hit projects. For power projects, many did not have a proper fuel supply agreement in place, only a letter of intent and a hope that the allocation would be granted. Promoters here entered into 20-25 year power purchase agreements without providing a pass-through of fuel input cost or even a linked escalation clause. Now you think that no prudent judgment would have accepted those kinds of conditions, but then there was too much of optimism. Many people went with the belief that you can work within the system and then get things modified to suit your requirement in future. That kind of mistaken belief also brought the people to grief.
Now the third category which is quite well known, how these things happen is that there will be layers and layers of entities. There is one HoldCo sitting in the cloud in heaven, which will put some equity and leverage it. That entire fund comes back to the step-down subsidy which is another part of the heaven, which again is leveraged and the entire amount becomes equity which travels to the step down through various corners of the globe which provide this kind of facility. – the British Virgin Islands, Cyprus, Mauritius, various places facilitate this veiled corporate structure and absence of equity.
The original philosophy of finance says if you need two units of equity, keep two and half or three units of equity which comes handy during uncertainty. Today that is forgotten, we have gold plating, fund diversion, projections which were way off the mark, studies which validated those kind of projections, a small community of professionals who bring a bad name to their profession where the certification impacts the validity of financial statements, valuation of assets, purchase of equipments. All this has happened in the past, but even recent experience is that when a project is taken up and it is decided to run a forensic audit and handover this job of doing the forensic audit to the professionals who are trained to do this, more often then not, the report which you receive has 80-90% information which can be picked up from any public source, like Google or Wikipedia.
At the banking community, there were issues like governance deficit or skill gaps, leadership vacuum in many of the organization, and also misplaced incentives. Infra finance, especially the PPP model, was something new in 2009 for lenders who chose to enter and they did not take adequate pains to understand. Consider road contracts under the NHAI, you must understand that in a road contract there is no physical security and auction backup, the entire thing is a realistic cash flow which you need to control.
Second, on the NHAI estimation, you get a second professional opinion and if that estimation is 70% more than what the NHAI has estimated, you chose to finance it. But if things don’t go right, your claim remains limited to the original estimate, not the cost overrun. There are many cases where you see this problem.
This is essentially the framework for discussing who took the banks money, but diagnosis is meaningless, if you don’t care it further and try to remedy the situation. The first situation we talk about, is when the projects have run into difficulty because of genuine external factors. I think the way forward will be to extend helping hands to the existing promoters and also be clear that if we have to remedy that situation, it will involve taking pains on the part of all concerned. I cannot go into details here, only give a broad direction on how the pain should be structured.
Second is the imprudence category, which is not an unqualified hand-holding. It may not prove fraudulent or malafide intention, but it certainly proves that promoters lacked management capability. So there we have to separate between the management and ownership, take management away. As far as ownership is concerned, the call would be after assessing the situation. Maybe they continue as an owner of the project for the time being, but they have to take the first and full haircut with minimum token control. If and when the project is running efficiently with the new management, with their corporation, generating cash flow, then after meeting their liability, they can have the right to claw back their ownership progressively over a period.
The third is self-explanatory. Where there are clearly fraudulent intentions, it has to be a change of ownership, change of management control, call on project disposal and all related things. Needless to say, while all this happens, banks should maintain any ongoing clean-up exercise, keep on improving their provision coverage ratio.
Bankers as lenders also grapple with a serious moral dilemma also. A project has had many things happen to it, which is one side of the matter. That said, any large project supports a very large ecosystem, workers, vendors, suppliers, contractors who are surviving on the enterprise. It is easy to move a pen and kill an enterprise, the difficult thing is to wade your way through all the difficulties and try that, while the wrongdoers do not go scot-free, a productive enterprise should not be run to the ground as far as possible. As a responsible regulator, as a responsible citizen you have to be sensitive to all these things. We need to discuss a way out to derive a solution in the interest of all concerned – the banker, the promoter (if no criminal action), the ecosystem supporting the enterprise, the exchequer and the economy at large.
I would say in very strong terms that it is in the interest of borrowers themselves to cooperate. Those who believe in making it difficult to find a resolution, would probably come to grief in other ways. There are several agencies in this country which specialise in doing various kinds of investigations, there is a penal law. If things don’t move by a proper understanding, then those provisions would obviously come into force to have their own outcome.
Two last words of caution. With what has happened to the lending book, it has suddenly become fashionable for everyone to talk of portfolio rebalancing and moving to retail. That is fine in itself but retail doesn’t happen in the air. You have to have a whole ecosystem, back office, whole preparedness, data churning capabilities, analysis, collection capabilities. Otherwise, you end up only increasing the book and later on facing another problem having dealt with one.
Finally, bankers do not have the no-equity option which borrowers have followed. They have to have a real equity, and they have to look at how the capital with them is utilized most efficiently. You have to dilute business which is not using capital efficiently. If there are such pockets within your system, they must be cleaned up and going forward you have to pick and choose, modulate your business model accordingly. I will conclude here.
FPJ: Thank you very much for a very insightful talk. Now could I invite all the three panelists onto the dias. The idea of creating this panel was to have one person from banking field, one person from the audit consultancy, giving a macro view, and one person focusing on the forensics. Solving a problem of sick assets will require the skills of all the three. Abizer, could you start the entire discussion?
Abizer Diwanji: While I come from a consulting firm, we also have a micro view, because I’ve spend the last two years trying to do some work in the fairly complex distressed asset space.
I’d like to take a view on how this is evolved. It starts when we all believed in 2008 that India was a decoupled economy. While the rest of the world fell off, we said we are an insulated economy, we won’t have a problem. While we were of course partially insulated, we did believe that we were completely insulated. So our system continued to lend, and I do remember around 2008-09 our lending was growing at 20-26%.
Abizer Diwanji, Partner and National Leader, Financial Service, E Y – Photo by BL Soni |
Now deployment. First one, we deployed where the PPP opened up as the Deputy Governor said, and borrowers bid heavily and, because money was available, bid without a contingency. The other area, we said, oh, the world is available cheap, let’s go out and buy. So we went out and we acquired. Third, we said India is going to grow at 8-9%, so we went ahead and building rampant capacities. Fourth, in all this, because one bank had to grow at 26%, another bank also had to grow at 26% and so also the third and the fourth. Every banker landed up on door of every possible corporate and today you see every corporate having 20-25 bankers.
Where else was the deployment? Another avenue was buying and holding real-estate. I remember, one promoter actually told me, that in 2008, he had 4,000 crores in his bank account lying there, excess credit given by people and his father, who was then alive, told him to give the money back to the banks if it was not needed. The promoter replied that he was the young entrepreneur and he would invest in real estate and the sector would grow. That is precisely where the money is today.
So in aggregate these are really the causes of our problems today. In addition, what happened was a bit of policy paralysis in the government. But clearly our aggressive bids had not factored in any kind of contingency so we fell.
The overseas markets continue to be bad beyond what was foreseen. We are optimistic, so is the rest of the world who said this is a 2-3 year problem, revival will happen whereas revival has not happened almost a decade down. In fact India is falling into recession. So frankly those assets could not monetise what was expected of them.
Third, of course, is the industry capacities themselves, within the context of a global downturn. Steel is the biggest example for the world today where because global capacities couldn’t kind of hold international prices, therefore we had to suffer.
Another innovation we did – because of this free money or easy money policy – borrow from overseas. There was a clear arbitrage to play around between international real interest rates and Indian interest rates. That is another hole – a lot of us made derivative losses, others today are sitting with FCCB/ EBC issuances and even export credits, all sitting with letters of credit issued by Indian banks. So frankly we all leveraged ourselves, to different levels. Bankers were over-anxious to extend credit, promoters were over-anxious to grow capacities. At the same time frankly there are enough and more promoters who actually pulled out their capital in the bucket.
So if you look at it, this is really the cause of where we are today, however just look at the positives. Today we do have the capacities. Today despite whatever you say, India is still the fastest growing country. The opportunity I see in this whole space is these capacities needs to be sweating.
As rightly being pointed out by everybody, to sweat these capacities they will need additional funding. Now, to allocate additional funding, you have to decide on the quality of the promoter, whether the promoter needs to be funded, needs to be replaced. Clearly, these are very horses for courses specific situations.
Does the country today have the absorption to take those existing capacities? Yes, we have. Is there going to be growth? Yes. Do we have competitive advantage compared to the rest of the world? We certainly do.
Yes, we have a bad debt problem, but I think we have the ability to build those capacities in the right time. In the bargain will we see some losses? We will. These are my initial thoughts.
FPJ: Thank you, Abizer. This was a very good start. Could I now move to the perspective of the banker?
M.V. Tanksale: I am going to speak about my four decades experience in the banking industry. In these four decades we have seen various cycles and Mr. Mundra has discussed from 2009 onwards. I’d like to take you for a minute back to 2002. The gross NPA of the banking industry had been 12% and from thereon in 2009 it has come down to 2%. What has helped this? I must attribute it to the growth period scenario. I remember borrowers would come rushing that their collateralized property – accepted by bank at X valuation – had already become 2X and he would like to liquidate, repay and take his part of the balance money.
M.V Tanksale, Chief Executive, Indian Bank Association
– Photo by BL Soni |
The SARFAESI Act coming into being was also handy for the banking industry, the DRT mechanism also to some extent. The same thing is getting repeated now with the bankruptcy code, amendments in the SARFAESI and DRT and all that, but all these are not going to offer you a ready resolution tomorrow. Even in developed countries the Bankruptcy Code does not get you your money back. The Code creates a deterrence in a society where an individual feel that if I go wrong what is going to happen with me and from thereon are the resolutions.
Regarding 2008, I think in every crisis we have helped out via the government, via the banker, I can even talk 1997 crisis of the Asian Tigers. In 2008, when the whole world was bleeding and on caution, we immediately started supporting the industry by getting into a restructuring of the industry. A scheme was floated, and naturally some wrong elements also tried to benefit.
From our macro viewpoint, India started claiming to be a resilient economy. Also a country which doesn’t have roads, doesn’t have adequate power, adequate infrastructure, $1 trillion capital absorption story was acceptable.
Bankers get into financing based on a Techno Economic Viability Study. We first look at the techno side, feasible or not, based on certain surveys, benchmarking and so on. The economic study is certain assumptions – India’s GDP growth going at 8% to 9% maybe 11%, all assumptions start from that.
Mr. Mundra rightly pointed out the equity game – had the bankers asked promoters to put 25% at the initial stage, probably none of the projects would have started. How it flows is the investment requirement, the cycle of construction and cash requirement for first year of operations, and against that cash flow from existing businesses showing in the balance sheet, and lastly so many investors are waiting. If you read Breakout Nations by Ruchir Sharma, there is a wonderful story in the preface that youngsters of India feel that anyway money will come. Many of our good borrowers have gone into valuation game rather than focusing on the actual project. Capital will come anyway, money will be available – all that stopped 2010 onwards with various problems. Money dried up and then all projections have gone haywire.
Today everybody is sitting on judgment, whereas the need is to sit together and find a solution. Ultimately, things haven’t evaporated, there are assets lying across the country. When the infrastructure was to grow, steel producers thought I must increase my steel capacity, likewise for cement. Next thought was that I become integrated, with a coal mine, with captive power. Now everything in the industry supply chain has got hit. We have money here in the system, it has to be found out through a proper solution. Thank you.
FPJ: Thank you for explaining, how that money could be somewhere what is needed, is for people to sit together and find out ways in which the money could be tapped, recovered and put to profitable use.
FPJ: We now come to the third panelist, who is into forensics. If you want to trace money or to make sure that money even at the time of giving it does not go the wrong way, you need forensics. Could I have your view Srinivas?
Srinivas Vishnubhatla: First of all, I would agree with Mr. Mundra, forensic by itself is useless. If you try to trace money after it’s left the system, you are essentially cleaning up the stables after the horse is bolted. There is just dung left after that. What is important is to have a forensic approach and more importantly understand that risk of any kind, credit risk included, is dynamic. In banking systems globally is, credit risk is evaluation at the point of time. The challenge is that it’s expensive to do dynamic credit risk.
Srinivas Vishnubhatla, CEO, Mosaik Risk Solutions
– Photo by BL Soni |
The second thing is size of crisis. IMF put out a report in terms of increased corporate debt between 2004 and 2014, globally in the emerging markets; it went up from about $4 trillion to $18 trillion. That increase is huge – a part of it was probably due to the exuberance prior to the financial crisis, but obviously the Fed Reserve and other central bankers in the West accentuated the problem by passing it on to the rest of the world. 40% of corporate debt in India is assessed to be at risk, the number for China is about 25%, on a base of increased debt.
Coming back to the original thing of taking a forensic approach both in appraisal and monitoring, the RBI had come out with a guidance to have a monitoring as a part of the credit system itself. But how do we have a system which is cost effective and meets stakeholder requirements? Fundamentally, everybody operates under constrained circumstances. There is no infinite time or resources to undertake an assessment. You are basing it on a certain amount of risk calculation, but how do you have systems when things change.
You do not continue on a path which doesn’t fit in the current situation. For instance, if steel capacity in China has literally doubled over a period of time, does it make sense to extend loans to the steel sector projects, beyond what was originally decided?
Finally, while I come from a technology background, I am also a former soldier. In that sense, I’d like to insist that ultimately we need to look at system integrity, and integrity of promoters tends to be the key aspect of any appraisal.
FPJ: Thank you. I would like to kick start a question-answer session by asking the panelist just two questions. First, could I have your gut feel, each of you, on how much of this money that is gone out is recoverable, or the converse, the estimated haircuts the banking industry will have to take.
Abizer Diwanji: Rule of thumb, I personally think that at least for the last four years, banks have funded interest, so if I were to take 10% rate of interest, and if I were to take four years, 40% of outstanding is nothing but interest funded and loaded unproductively on an asset.
The other is asset deterioration where, again on a thumb rule, 15% on as-is basis, is not recoverable. I use as-is very carefully, because I think that when you sweat assets over a period of time, you recover much more. If you insulate good businesses within the larger bad, you recover much more. If you are able to change management, put in better people, you recover much more.
This we lack today and maybe it will evolve. What is needed is more innovation in recovery and not just do a forensic of somebody, take over his asset, conduct an auction. These are great things to do, but in the last category as Mr. Mundra said. In the first two categories, where I think you will find the bulk of your recoveries, I think that 50% can come down to half of that.
FPJ: So in other words you are saying you might have to take a haircut at 25% minimum.
Mr. Tanksale, as a banker what would you think is the haircut banks have to take or conversely what is it that you think is recoverable? Even when Maddox cheated the U.S. system of $50 billion, $21 billion were recoverable and were recovered. There’s always recovery possible in the worse scenario.
M.V. Tanksale: Well, honestly I would not like to hazard any number, because neither do I have a base, nor am I am an operating banker. Having said that, as rightly said by Abizer, ultimately what we need to do is see how much of the investment can be made productive and how much of that productivity could be taken beyond our optimal level.
Even when as Abizer talks of haircuts, there are evidence available in the system where the recompense is serviced by the co-operative borrowers provided things have change, things have changed. If you look at the CDR database, the end number of accounts who have come forward, recompense whatever has been lost by the industry and have become healthy accounts.
FPJ: Srinivas, would you like to guess?
Srinivas Vishnubatla: I would probably take a pass at it, only because I think I don’t know exactly how much we have at risk. The issue here is what is that risk today is something which is challenging because in some cases it’s not been recognized in entirety.
How much is recoverable depends on how much is at risk. Second, in certain places, certain industries where there are tangible assets or assets which can generate cash flows, it might be a high percentage but as Mr. Mundra indicated, in a road project there are no assets except cash flows. So it’s a very specific project by project recoverability.
M.V. Tanksale: I will just supplement an element of change in the economic scenario. I have given the example of 2002-09, where real estate zoomed and the recoveries were by default not by the bankers’ efforts. If a similar situation happens here where the people are sitting on the assets of those kind, I think the recoveries could be anywhere near what you are looking for.
R.N Bhaskar, Consulting Editor, Free Press Journal
– Photo by BL Soni |
FPJ: In other words, such asset bubbles help. Let’s take the second question. We see these laws related to bankruptcy. What do you think is good about them? Will they help or will they go the SARFAESI way, which was also a very good law? Could the three panelists talk about the bankruptcy rules and where you see this thing?
Abizer Diwanji: The good part about the Bankruptcy Act is that it brings every other law under this law. Today, there are bankruptcy provisions under different laws and so people, as in promoters, owners, managers arbitrage between one act and the other, which I think will stop. The second is focus on implementation. The Bankruptcy Act says that recoveries have an essence of time, please do it quickly. Time and again, the whole concept about 180 days, 270 days is about please act. What the system has not done until now is not acted in time.
Third is that it professionalizes the concept of either revival or distribution. Insolvency professionals have to have their buck on the line – their credibility, financial penalties or something. Today, for people who involved in a liquidation or a winding-up, the consequence to them is nothing. How can you hand over businesses to them and expect them to revive those for the benefit of creditors?
However, the act will go the SARFAESI way if the essence of that idea is not implemented.
M.V. Tanksale: The Bankruptcy Code will operate the deterrence, but it will take anywhere between 8 to 12 months of time when it get into action. Once it is an act, then we have to get into rules. A vital part of this piece is that the country as a whole has to develop sufficient pool of the people who can do the operation and maintenance (O&M) activities on assets taken over. Bankers have invoked so many Strategic Debt Restructuring (SDRs), but post invocation everybody has got a question mark – what next? Bankers cannot do O&M, cannot run a steel or textile plan. What the banker can do is exercise the right to convert debt into equity to make the promoter into a minor shareholder, but who will run the industry? You will need to generate a good pool of O&M practitioners.
Do not forget that Bankruptcy Code is in favor of the debtor as well. Today the debtor who doesn’t have an opportunity for an early exit, will have that opportunity when he says, “Sorry, I can’t really go beyond this. I would like to exit here.” It will help genuine people, who would like to exit one of their ventures, get back to zero and start again.
M.V. Tanksale: We as a society need to learn to avoid stigmatization of bankruptcy, see it as the natural order of things. A significant number of businesses end in failure and what we see highlighted are successes. Unless related to malfeasance or fraud or willful default, I think we need to accept bankruptcy or failure of business as a natural order of things. For the growth of the country, you need an entrepreneur ready to take risk, and a banker ready to take a risk on entrepreneur. If both these are absent, from where will the growth happen?
FPJ: Can we have the next question?
Shailesh Haribhakti a noted chartered accountant: I have two thoughts. First what is the objective probability that anyone can exercise the three choices that Mr. Mundra discussed, without fear or anybody re-questioning? Second, it has been reported that the average utilization of any car in the world is 8%, which gave rise to Uberisation. Is there an opportunity somewhere to uberise all our underperforming assets?
M.V. Tanksale: A point which I have had in my mind as a banker is, if somebody comes to a banker for a particular capacity in any industry to be setup, the first thing that should occur to him is how many of such assets are lying in the country which could be upgraded. The key is the kind of assets available at that point of time, and their upgradation possibilities.
Where assets are upgradeable and where the replacement cost is much less, I think there is a need to uberize and it is happening – like ITC using so many soya plants to do their activity. I would rather appeal to the large industry players who should look for uberisation and support the small players who are not in a position to really use their capacities.
I would like to slightly differ with my colleague on whether India should create industry capacity, given that China has created larger capacity.
Srinivas Vishnubatla: I agree, not to say that Chinese overcapacity is something, which should deter lending in our local context. The only concern is having factored in impact of dumping and potential lack of sales on the local entity to whom you are lending.
If you have a micro producer of high quality steel in a particular niche, obviously, you should go ahead and lend. But a generic capacity and its ability to compete in the international scenario, and impact on its working, is something I believe we should consider and take a decision.
Abizer Diwanji: Uberisation is good for Uber, who is not an operator but a renter. I am not sure it is good for any industry. We can surely consolidate plants but there has to be an operator.
The more important thing – can we work as Rabindranath Tagore said, where the mind is without fear and the head is held high. Indians love to judge other people and that trait prohibits us from taking innovative decisions. But I think this too is changing in a slightly evolutionary manner. India is good at picking up changes and India acts when its back is to the wall, as it is on the issue of bad debt. And I am hopeful that now we will do something different.
FPJ: Thank you. Can we have the next question?
Audience: My question to Mr. Tanksale – when accounts becomes NPA, SARFAESI notice is sent for two months, then my suggestion is that after that period, all cars at home and office and all the air conditioners at office and home should be taken physical possession by the bank. This will be possible only if all the cars and air conditioners are hypothecated, which is not done at present.
FPJ: For that you have to first find out which assets can be sweated, which cannot be
Audience: The banking sector also has a large number of co-operative banks and they too have loans, and they are also at stake. But sometimes these banks get taken over just on the basis of the report of the auditors of the Reserve Bank or similar, which may be drastic. Instead, an option would be to appoint a panel of experts, give everything in the charge of those people and bring the bank up again.
M.V. Tanksale: It is obvious that as suggested by Mr. Mundra, timely recognition of a problem and timely mutual resolution is the way forward.
FPJ: Mr Mundra will cover that later. Just one point in your favour, though – when an administrator is good, he can change the organization. Take the Maharashtra Co-operative Bank, which was making a loss of 1000 crores. The administration changed with the Government behind it, it turned profitable the very next year and the whistle was blown by the RBI.
Audience: Today bad loans at State Bank of India are Rs.4.4 lac crore and of this 50% appear willful defaulters. Is there any solution which the bankers are able to implement effectively?
Aziber Diwanji: Clearly as Mr. Tanksale also indicated, we need more O&M people, and there are more coming up. You are now seeing a new class of entrepreneurs – people who have worked in industry are actually coming back and running businesses. People who have actually run and sold their businesses now want to come and revive businesses. We did not have it until now.
Secondly, I don’t think it is a job of a bank to recover beyond a point. If an asset goes bad, the bank has to take a call – should they be spending time only to recover or can they be deploying that capital into more productive assets. We have a separate class of people like asset reconstruction companies who are recovery specialists. This is all evolving, as the law comes up.
Thirdly, today the problem is really large but we must understand that sometimes it is normal to fail. You will not have each business giving you back 100% of your money. Else why would they be banking? Losses today are higher than acceptable, but this whole system of good recoveries, etc will evolve over time.
FPJ: As the Deputy Governor himself mentioned, there is always an element of risk. Banking is risk. Business is risk. The question is how you can minimize risk, which is what he very eloquently mentioned right in the beginning of his presentation. Could I now request the Deputy Governor to come and give some summation remarks?
S.S. Mundra: I will touch briefly on a couple of points. First up, the Co-operative Bank matter. Here, when an administrator is appointed in a bank, it is generally a professional. So the case you refer is maybe an isolated case. The main issue in the co-operative sector is that of dual regulation. Because of that, it imposes certain constraints on the part of a normal banking regulator to regulate it the way a normal banking entity could be.
Another was about haircut, yes, haircuts do look imminent. But we all know that hair, once cut, does normally grow.
Lastly, we talked of the time value of money. I would only like to mention that whatever we are discussing let us reverse the phrase there is also money value of time. And money value of time is to be preserved. Thank you.
Dilip Piramal: Ladies and gentlemen, we had a very interesting session today, one of the best so far. And I would like to thank profusely first of all the Deputy Governor of the Reserve Bank, then all our three panelists and our moderator and all of you thank you for attending this program.
