After former Reserve Bank of India governor Raghuram Rajan talked about non-performing assets (NPA) in banking industry, CNBC-TV18 caught up with HR Khan, former deputy governor, RBI; MR Umarji, former chief legal advisor, IBA; VG Kannan, chief executive, IBA and AK Purwar, industry expert to discuss Rajan's take on bad loans.
Q: You must have seen in 1993, we thought Debt Recovery Tribunals (DRTs) is nirvana and in a couple of years, they got clogged. We thought the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) in 2003 is nirvana, but that also got stalled. Now, one thought that all large cases first 12, then 29, then another 60-70 will go to the NCLT and that has got stalled today or delayed. Would you say that reform has kind of been stalled?
Purwar: I don’t think so. In my view, the NCLT process or the resolution process of the sorting out large amount NPAs has to go forward. Well, court in its way and there must have been very valid reasons to do so. They must have tried to further examine it and take a view on this. Having said that, I don’t think that this process is stalled. I also feel in addition that this is a good opportunity for some of the companies who have been fighting here and there and trying to resolve the issue, they get some more period to find some sort of an amicable settlement. So, I personally feel it's just a temporary setback, but it's an opportunity for a lot of people to sort those issues out.
Q: The February 12th circular has some very salutary impact, let us face it. A lot of special mention accounts (SMA) cases; SMA 1 and 2 have drastically reduced, because everyone now knows who the defaulter is and they are all reporting to Central Repository of Information on Large Credits (CRILC). It also had the salutary impact of forcing power companies, lenders and even the government. Look at the power ministry, they have put a set of new draft rules to amend the electricity act to force the DISCOM to pay up for the power that they consume. So that was like putting a gun to the head and making the system reform. Do you think the Supreme Court has stopped this pressure to resolve assets?
Khan: I have not seen it.
Q: Nobody has seen the order, because the order in all probabilities is going to be dictated tomorrow morning. All we know is what the solicitor general told reporters that power, textiles and shipyard companies are going to be excused from the application of the circular, all the cases will be at status quo till November 11th?
Khan: As you said, nobody knows what exactly has gone into Supreme Court verdict. This problem is enormous and the matter went to Allahabad High Court and there, RBI and government had taken different points of view. I think this is something very interesting, when both the regulator and the government have different points of view and possibly that could have been in the mind of Supreme Court that there is some reason where there is possibly a scope for going a bit slow and there are some possibilities of resolution so we can get some time. Probably, that could have gone into the minds of Supreme Court while giving this verdict. But as you said, we do not know the rationale, but I agree with Purwar that this is not going to be a showstopper as far as resolution process is concerned. Some time is bought by some banks and borrowers, and this time should be gainfully used to reflect and see what we can do to see that these problems do not return.
Q: What is your sense, the resolution mechanism was moving in full speed, do you expect it to slow down a bit now, who knows November 11 you may get another status quo order.
Kannan: There are two resolution process, one is the pre Insolvency and Bankruptcy Code (IBC) process and the post IBC process. In the sense that, once the application is made to NCLT, then you have the resolution, where under Section 29A, the new promoters or the existing promoters do not comment. So that is the major deterrent for many promoters who find that they will be thrown out.
For various reasons some of the projects may have been stalled due to no fault of the promoters in a few cases. Like you rightly mentioned a few minutes ago, saying that the discoms, etc. have been asked to make payment and most of them have not paid or they are reneging on the power purchase agreements, etc. So, I have a feeling that this possibly gives some time for them to do a resolution before the IBC process, which is what the Sunil Mehta committee has been thinking upon.
In fact, the RBI, if we see the February 12 circular, it very clearly says that do a resolution before this process. The only thing is they have put a date of 180 days, which could be disputed saying that it's too less or too long. Different people have their own questions and you cannot have an indefinite period for resolution and therefore, the time was given and maybe the Supreme Court will give a particular time.
However, subsequently what is going to happen is, in case a person does regulation now, before the IBC process, and in November, hypothetically speaking the Supreme Court agrees with RBI, then what happens to the prices. In case, he extends it or gives a different version, what will happen? So, this actually creates more confusion, but I think the IBC resolution process is firmly in place and it's a very welcome feature and in the long run, it should be help proper resolution.
Q: At the outset, how does this one line order look to you that textile, power and shipyard companies will not be proceeded against under the February 12th circular until November 11th. Is this the smelling of the first threat that you saw to the DRT and the SARFAESI processes?
Umarji: It's a sort of a temporary stay of the action under the RBI circular. But it's an effort to work out some resolution schemes for the purpose of these projects. I don’t see it as a stay of any law or anything, it's a circular issued by RBI. So, I see that it will ultimately be for the benefit of the industry and the bank.
Q: One of the things Raghuram Rajan said is that a large part of the loans is because of over optimism and then, the system didn’t allow you to get out and therefore, the zombie loans continued. He has not been harsh and called the bankers corrupt. He said I would hesitate to say corruption, unless we can prove disproportionate assets with a banker. Do you think that is a fair stance to take that this is more over optimism and incompetence and slowdown and not necessarily corruption?
Khan: I think it’s a very balanced and deep analysis here. Like a good doctor, his (Rajan’s) diagnosis is near perfect. Maybe he have some points here and there. He has not emphasised the way it should have been emphasised maybe lack of pace, but all points he has covered in a balanced manner, both exogenous factors and endogenous factors. Therefore, you cannot just say because of corruption things have gone like that. There are elements of that.
When we studied banking as a student, we used to say that lending should be based on character, cash flow and capital. We realise now that it's based on confidence, crowd behaviour and connection. So you have to balance. You cannot just take a view that it's all, because of corruption it has happened. Certainly, there are cases but he has rightly analysed that there are overenthusiasm, exuberance and unrealistic assumptions about growth. So I think it’s a balanced, but the point which he has not emphasised that much is the role of intermediary and in-house capacity of the bank to evaluate project finance in the absence of long-term institutions.
Q: Would you say that this is an absent faculty due diligence in many banks, because the origin of public sector banks itself was to give working capital, only the development finance institutions (DFI) were expected to give long term capital like in those days, ICICI Bank and IDBI. So, is that a valid point that faculty needs to be developed, due diligence across the banking sector and not only be left to SBI Caps and IDBI.
Kannan: One of the points you made rightly is the absence of DFIs. In IDBI and ICICI merged, did a reverse merger with the banks, one of the reason was their inability to raise funds to lend to large products. So, the only reason the bankers actually have to step in was the absence of DFIs.
Second thing is, in many cases, these banks had taken up project finance because it's one of the easiest way of achieving topline growth. There is also a mention by Raghuram Rajan saying that the overall exuberance in the market because the things are doing very well. Up to 2007-2008, all the purchases were being executed. So, there is no reason to say that went right in the past will go wrong in the future.
There are certain other factors for example, the clearances, which did not come also. So, it's not a question of only relying on the investment bank of promoter. One more thing is the investment banker of the promoter will always project the proposal from the promoter side and make it very rosy, very attractive for the banker to take it up. It's the banker, who has to do the due diligence and then take it up.
There was a mention that people are coming with checkbooks to write, because they all want the topline and there is huge pressure everywhere saying that how much credit growth is good. That is no reason why people would shy away from achieving credit growth.
Q: Would you agree with that, every budget used to give a farm loan target and likewise, credit targets used to the fashion up until recently that is a cause of NPAs?
Purwar: I wouldn't totally agree with that, when we are budgeting within the banking systems. For example, State Bank of India (SBI), we would like to take the total environment of the economy, we would like to have certain budgets.
Q: Bankers giving himself target is okay, it is when the government gives you?
Purwar: I would agree with what Raghuram Rajan has said, but I would say some kind of budgeting, appropriate budgeting, taking all economic factors into account for credit growth and deposit growth is compulsorily necessary for a bank. Having said that, one thing we must see that in the past also NPAs have been there, NPAs have been the part of the system and NPAs have been tackled. The sudden spurt today, which we are seeing is why? Because if you look at it, you analyse these things, you will find that infrastructure sector, particularly power sector, there are huge amount of NPAs, which have been created. Now, can we not focus on this sector? See to it that this gets resolved.
Q: Your views on this. Raghuram Rajan says – both the out of court restructuring process and the bankruptcy process needs to be strengthen and made speedy, the former requires protecting the ability of bankers to make commercial decisions without subjecting them to enquiry. Just how is this possible? I mean you are spending public funds so to speak because you are PSU banker you will be subject to this CVC and CBI, the prevention of corruption act. So how do you bring back the bankers courage to sign loans?
Umarji: In order to bring back the courage, it's necessary that the mind-set that any default committed is something equivalent to a crime committed has to undergo a change. There has to be a proper investigation, unless there are some specific facts, which indicates corrupt practice on the part of the bankers and the loan has to be treated as a it has gone bad on account of various other factors in the economy. You can’t presume that a default is equivalent to a crime or a corrupt practices.
On the other issue about the out of NCLT resolution plan, you see the issue is that, I am the borrower, I am running the industry, I know when the loan is becoming due, I know that I have committed a default. Once having, I will even know that I am going to committee a default, so you are aware that you are going to be subjected to a scrutiny and a preparation of resolution plan and you are facing a insolvency petition against you, because you have committed a default. It can be filed, if I commit default today, tomorrow insolvency resolution order can be passed against me. So, therefore I can myself prepare a plan, find the cause for my default, study the viability, prepare a plan, place it before the banker, get it approved and then formally get the approval of NCLT.
Q: For that, we must be sure that the NCLT is a stick available with the bankers?Umarji
: But if you don’t do it, the bankers will do it themselves by filing a resolution application. So, it's something like a system of pre-pack, which is prevalent in UK, where you need to do some work on your own to get the insolvency resolved and that would be outside the NCLT. So the pressure on NCLT will be reduced.