Romesh Sobti MD & CEO of IndusInd Bank. He has 37 years of experience in all 3 sectors of banking – public, foreign and private. In an exclusive interview to CNBC-TV18, Sobti said IL&FS resolution will bring definitive cash flows and the bank has taken total provisions of Rs 350 crore on debt-laden NBFC. He also said that there is a resolution plan which will detail out impact on lenders of IL&FS.
Watch: IndusInd Bank has taken total provisions of Rs 350 crore on IL&FS, says CEO Sobti Edited Excerpts: A marquee stock but after the results, maybe even a little before that, the stock started falling and one of the problems that the market repeatedly asking is what is IndusInd’s exposure to IL&FS? You said that you have kept aside Rs 275 crore or thereabouts for provisioning but what is the exposure?
We didn’t disclose the exposure because at the end of the day just disclosing it is meaningless unless you also say what is the hit that you would expect from that. I think that the only reason that we held that back is the fact that there is a resolution plan, which will detail out and bring out what the impact is going to be on the lenders. The lenders to the holding company and the lenders to the SPVs.
What we had explained in the call is that we have exposure to the holding company as well. We had explained how that exposure was taken and on what basis it was taken, which was linked to a definitive inflow of funds, which came from an assurance from shareholders with the board meeting having passed that and increasing the rights issue. So now it looks like that has been deferred and therefore, I think we need to wait for the resolution plan to bring out the extent of whatever impact that it is going to have on the bank.
When there is an unknown number, the market tends to expect worse, so maybe giving out the exposure would help?
Giving out the exposure may not help but giving out an estimation of what it will mean in terms of the total profit impact that is more important. We are debating that, we are also talking to the IL&FS new board and I think in the next few days, we may have more clarification on that and if there is a need then we will come out with some of the other numbers which give comfort to the market.
The other worry was that you have provided Rs 275 crore is it going to be enough or will you need to make more? And what is your comment on rights issue postponement of IL&FS?
We have Rs 275 crore, we also have a floating provision already there, so net-net we have about Rs 350 crore. For us, today, we are the only bank that has made the provision - when it is uncertain on what the resolution plan is going to be. The resolution plan may come out with some degree of a haircut, which may mean that you may have to take little more provisioning but at least we made a beginning. It is difficult for me to say how much more provisioning that we may need to make.
The fear is that this Rs 275 crore provisioning was done on IL&FS for the holding company, which effectively means that the overall exposure to the IL&FS group will be much large and the provisioning that you have made right now is just 20-25 percent of the provisioning that you may have to make going ahead, is that a rationale fear?
No. I don’t think so because we have also explained during that investor call that the other exposures, which are non-holding company exposures are to a specific SPV where there is annuity income already flowing in, we talked about a tunnel project.
It was rated AAA because of some refinance that were to happen. Refinance did not happen but there is an annuity flowing now, it has been operational for 18 months and our estimate is - talking to potential buyers - that the total debt is going to be covered and maybe some release of equity may also happen in that project. So there we don’t expect to take a haircut.
Under normal circumstances, the bridge financing given tide to the rights issue would be the first to be paid out when the money comes but now the entire IL&FS group is a National Company Law Tribunal (NCLT) case, so does this work?
Yes, that has got to play out. The contractual obligation is that if there is a rights issue then 100 percent takeout and in the case of liquidity support then 50 percent takeout so that contracted obligation is not being denied, right?
I don’t know will the new board respect it, when it is a company law board enunciated NCLT case, then do these contracts work or does everyone become just fall in line and you get a pari-passu return?
That may well happen. It is not that it may not happen but as things stand today, all the contracts are sacrosanct, contractual obligations don’t vanish but what could vanish is that the rights issue may not happen.
The other issue, which has been plaguing your stock and it has been down much before this whole IL&FS saga came and of course I don’t want you to comment on the stock price behaviour but what I want you to comment on is that this issue that is plaguing the market is that is there a succession plan in place once you retire in 2020 because you have created a lot of wealth for shareholders, the worry is what after you because the second-run leadership all are almost at the same level, so that is also one issue which has been plaguing the stock offlate?
Yes, I heard some rumours yesterday that I will be leaving in a few months or something like that. I am glad that I have this opportunity to quash that rumour. I am very much here, my term expires in March 2020. In the last four years, the board has been engaged on succession because I got a one year extension at the age of 64 and that is when this whole thing was triggered supposing we don’t get the extension.
I think there have been a well-debated and documented session planning with this bank, there is a process of grooming that is going on for the past few years now, there are several candidates within but there could also be candidates outside this thing but that is the board’s prerogative but it is our definitive task and it is my task that we have a successful and smooth succession plan.
It is a responsibility I have personally to shareholders, stakeholders, employees, regulators everybody and I am very sure that there will be a smooth succession.
What is your exposure to real estate space – that also appears to be a niggling worry?
Yes but we have not had a single overdue on real estate and a single NPA, in fact, we have had prepayments on many of our exposures.
What about the commercial paper (CP). Do you have exposures to CP? If yes. How much?
No. CP exposure is negligible. So let’s just stick with real estate. We have got top end names on our real estate exposure. They are paying before time. They are not one day overdue. There are some old legacy names where there are small single digit, Rs 8-10 crore exposures which are running off.
The other one we can talk about is NBFCs; NBFCs ex-IL&FS. The NBFC exposure is 3-3.5 percent of our total exposure. We have already done a full review and presented it to the board including looking at the ALM liabilities and as of this moment, we do not see a cause for concern there.
Why you are not disclosing the numbers to other SPVs since it’s such a pain point?
Disclosing numbers will create more speculation.
The devil’s argument would be – it may create more panic but at the end of the day we will know the exact number and the rumour mongering will stop in terms of what is the exact number.
We will work on giving details to the market on this core, not in terms of just exposure. Possibly what is the worst case in terms of the hit to the bottomline. I think that is more material than just talking about exposures.
On what basis did the bank lend to IL&FS at the time when the lending was done. Were you aware that the company was loss making and insolvent? I am just trying to understand whether the risk department had cleared it at the time?
Yes, somebody has written a nasty article on that. I think the ill-informed article saying that the company was insolvent. You just have to look at the balance sheet, somebody has to read balance sheets properly and understand when they talk about intangible for a holding company like IL&FS and what it means – these annuity flows and receivable had come from the SPVs. If you look at the balance sheet of IL&FS, it was never insolvent. If it was insolvent, how is it that rating agency giving AAA for the last five years?
Is there a case for writing off this entirely because the SPV in which you have investments, they have been downgraded by various credit agencies. There is a good chance that the money doesn’t come back at all?
It depends on which SPV you are doing it. We have got our exposure to SPV where the project has been operational for 18 months and there is annuity income which is flowing in from the National Highway Authority of India (NHAI) and it was rated AAA for a refinance that was to be happen.
In spite of annuity the project has been downgraded – that’s the only worry.
No, this project has not been downgraded.
Therefore what can you look at in terms of a second half performance? Now that all the pieces are in front of us in terms of the NBFC problem, debt refinancing not happening for a large number of housing finance companies. Does the terrain look better for IndusInd Bank because even the last 10 days has been a long time for the financial markets?
The underlying businesses are showing strong momentum and that was reflected in our Q2 numbers whether its loan growth or whether growth in interest income or fee income and also the quality of the book if you saw, the credit cost actually fell during that quarter.
So the underlying businesses have good momentum and we cannot be distracted only by this one-off thing on the IL&FS. I think the second half, without taking the impact of IL&FS, absolutely on the core to deliver the numbers that we delivered in the past 44 quarters.
You do have large exposures to the commercial vehicle space as well. In the auto sector, we are hearing that in passenger vehicles, in two-wheelers the demand has slowed down considerably, financing has become an issue as well. What about the commercial vehicle space and how has it done so far. Are you seeing any cause of concern there?
Commercial vehicle space is booming and we are in a secular boom which probably will last a couple of years. So our disbursements last quarter, on CVs, were up 44 percent and vehicle portfolio as a whole was 40 percent, loan book has grown by 30 percent, the days overdue have reduced, freight rates are holding up firmly in spite of diesel prices going up which means there is a pass-through on that score as well and its holding up well.
Two-wheelers were lagging behind. Two-wheelers are not flat but they are up 5 percent or so, but two-wheelers are small part of our portfolio but it’s a profitable part of the portfolio. So vehicle finance as a whole is going pretty strong.
The gem and jewellery exposure in a book is around 4 percent; 8 percent of a book. When we bought the portfolio it was 7 percent of our book. It has grown. It has been absolutely trouble-free. The portfolio is performing better than expectations. We have not taken any hit except for one legacy account, that Gitanjali one, had legacy account with the bank for 20 years, but the portfolio we have bought has performed exceedingly well.
You gave us a lot of details on your real estate exposure and the NBFC exposure. Gems and jewellery is the other worrying point for the market. How much is the exposure and how clean are they?