PS Jayakumar, Managing Director & CEO of Bank of Baroda, spoke to CNBC-TV18, says accounting policies don’t decide what the losses are.
What did you make of Deputy Governor of Reserve Bank of India (RBI) NS Vishwanathan’s speech, should you now think that February 12 circular is a given?
PS Jayakumar: That is a regulator’s call but let us work on the assumption, it is given. We were talking about 30 days and I was looking at our data, what I find is within 8 days of the 30 days, 80-85% of them autocorrect themselves and come back to normal. And then when you look back at it, it is probably some intimation delay or other forms of communication issues but they sort themselves out.
For the rest of them, some of them flow into bucket 2. Whether you follow with the customer on day 8 or whether you follow it on day 31, I don’t know what difference does it make. So I think we should not be first to bought it. It is a principle that identify the customer early and try to work at a resolution early. But you should look around the data on how Special Mention Account (SMA) works.
The other point that bankers were hoping would come from the RBI is a rule that 66% or 75% of bankers nod is adequate to resolve alone. Yesterday, the RBI DG completely washed his hands off and said that banks will have to come to their own patterns or structures. Do you think resolutions will therefore be delayed and more will go to National Company Law Tribunal (NCLT)?
PS Jayakumar: That is going to depend on two things. One is going to be the maturity profile of people who are there in that particular transaction. The second thing is that the continuous discussions we are having with corporates to reduce the number of bankers and concentrate their exposures with fewer number of institutions so that there is far more alignment in the way things move forward.
I am, therefore, hoping that these kind of policies will stimulate that process and therefore three-four people largely manage a particular account will reduce the risk that you are talking about in terms of set of people behaving very differently.
In a theoretical sense, the bank which has lent the least is likely to be the most aggressive because they have less to lose and therefore, they start with a better bargaining positioning in all those discussions. This is what I feel about it.
What is your own view, do you also believe that this one-day default clause is quite onerous as a lot of people have told us earlier?
G Padmanabhan, Non-Executive Chairman of Bank of India: To start with, probably it looks as if it is onerous, but then I would think that any change that is being brought about in terms of the way the things are done would create some kind of a disruption. Having been on the policy side for three decades, I can vouch for this that for any change there has been a resistance in the beginning, but then the system will get used to it.
Now the issue is, are we looking at certain issues which become so disruptive that there could be serious problems that we are looking at? No. In the way, I think the biggest problem that is going to come about is that what is the kind of rules that we have?
Once we start recognising an account that is an NPA, to get it back to the normalcy, is a big problem. It is a huge new process that has been put in place. However, to recognise a stress on day one and to make sure that we take the resolution within the 180 days or whatever stipulated time, yes initially there could be some adjustment issues, but I think the system will get used to it.
A few bankers I spoke to said and even I think Jayakumar just said that, instead of chasing a defaulter 31 days after the default, now you may have to chase the borrower 31 days before the due payment so that it is paid. Is the system geared to this advancing the cycle by 60 days?
G Padmanabhan: I think any system has to be geared on day one. So we will have to put in place the arrangements to make sure that this happens. So I think the important point that the Deputy Governor made in yesterday’s speech is that for the same project, if there is raising of money from the capital market and then raising of money from the banks, why should we have different set of rules? Accept it that capital market and the credit market today works differently, but what is sought to be done is to synchronise the two. I don’t think you can fault that basic objective.
There is one set of positives for the banking sector in that, surely you are going to get back some money on Bhushan Steel, on Bhushan Power, on Essar perhaps sooner rather than later. Now, if you looked at what is coming in terms of income or lower haircuts and in terms of higher non-performing assets (NPA) provisioning because of the rule, where are you placed? How much worse can it get for instance for Bank of Baroda by June 30 or September 30? Do NPAs go up by 5 percentage points, by 3 percentage points?
PS Jayakumar: We all have to reinforce to ourselves that accounting policies do not decide what the losses are. That depends upon the substance of the transaction whether it happens on day 1 or day 15 or day 40, it doesn’t matter. In a period of time, loss is going to happen. So policies don’t decide loss. It is underlying company structure etc. that makes a difference.
As far as Bank of Baroda is concerned, the data is in the public domain. We have some Rs 5,000 crore that are sitting on. Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A) are under implementation. They do move into NPAs, most of them, maybe many of them. Some will correct and that would result in a bulge in this quarter. It will also result in increased provision in this quarter but it is equally right to say that it should correspondingly in the next year reduce our burden whatever maybe the outcome of this S4A, SDR eventually. So I hope the markets look into that.
As far as we are concerned, two things stand out positive. One is our coverage ratio is high, about 68-69% and our endeavour has been to go do 70%. I am hoping with all this extra that is coming in, we may be able to go there. So that would be the first way of looking at it for us.
Second thing is quarter-to-quarter. Our SMA-1 has been coming down. That is a good pre-indicator. At some point of time, this correction is going to happen whether it is quarter one or quarter two. So therefore, as we project next year without getting into the numbers, we are very sanguine about it.
I was going through a UBS report where they suggest that the earnings for the sector as a whole could be impacted by almost about 25 to 27% because of a combination of things, the RBI new rules and higher NPLs etc. What is your own view on how things could move now?
G Padmanabhan: Difficult to come out with specific numbers now. But obviously I think in terms of the overall picture, in terms of the additional stress that we are looking at, and the kind of issues that we are facing, we are more or less on par with what Jayakumar said, more or less two banks of similar sizes and having similar kinds of exposures. However, then there will be an impact, but we don’t see a major blow on that.
For this industry would you have a view, I mean I think the stressed asset number is in the public domain and that is quite high, companies like Macquarie and Credit Suisse and all put it at about 15%, so do you see the system NPA rising to 15%?
G Padmanabhan: You are talking about gross?
Gross.
G Padmanabhan: Somewhere close to that, before it starts sort of tapering off.
Do you see banks coming in and buying bonds? That is the other area which is creating a stress and public sector banks are using the highs to sell, but not using the dips to buy?
PS Jayakumar: Actually, it would depend upon how you take an interest rate view and then you are able to act on that. It also dependent upon market liquidity. Sometimes, the whole market views the outcome in a singular fashion and therefore everybody wants to do the same thing at the same time and therefore the liquidity by itself gets kind of constrained. That is what I would say is where we are today. But we have been conservative overall in managing our portfolio
I know it is hard to give numbers, but wanted to understand from that what percentage of the stress loans could be recognised as non performing loans, say over the next three to four months because of the new RBI rules?
PS Jayakumar: For us the total amount of a restructured asset whether it is standard or performing, I think it is close to around Rs 9,000 crore, out of which this S4A, SDR not sorted out is around Rs 4,000 crore. So we are left with Rs 5,000 crore. Not all of these accounts are going to be in problem. I would think that 70% of them should not have any risk because they are on course correction to becoming normalised. So, we have a risk on the balance, so that is a very tolerable number in my view.
As someone who has been on the other side and now on this side, how would you read the DG speech, it is a done deal now, we work with what it is, if you still want something tweaked, what would that be?
G Padmanabhan: Always we need to live in hope, but I think the DG speech, I would say that rather than putting out an FAQ which the market was demanding, he has given an FAQ in the form of a speech. So, clearly RBI stance in the matter he has made amply clear. Basically I think at some stage we will have to get used to the new order and that is what the RBI is trying to say.
However, having said that I don’t think the heavens are going to fall down, if instead of six months the whole issue gets resolved in seven months. The central bank has taken a call and then we need to abide by that.
I don’t know if you all reached out to the RBI yesterday. What Bahram Vakil said is that the way to read the circular is, if one bank reports overdue or default from one borrower, all banks will have to recognise it as such? Is that how it is going to be one bank reports default then everybody has to consider it a default?
PS Jayakumar: I would think if you were to work with this 30-day, 180 days framework, then a default to one which is unsorted would result in the same outcome at the end of 180 days. Therefore, I think whichever way you look at it, we all have to converge the point of view. So this is going to happen more on the larger accounts and the smaller accounts we are trying to be the single most a single lender and therefore the outcomes are much more predictable from our perspective.
While the discussion on the RBI Governor’s speech has been around the technicalities of 30 days and all of these things, to me the larger question that we ask ourselves is, how are these revised regulations going to affect three things? How is it going affect our provisioning, how it is going to affect our future lending and what is it going to do to our collection monitoring policy? Once we put that into three buckets and then we take what we are doing today we don’t see any dissimilarity over here.
To a large extent what we are trying to do is converging with whatever policy measures are being announced in a real sense and it doesn’t make changes to a capital adequacy in any significant way. Our lending programs in any case are now becoming data oriented with GST and cash flow oriented and information oriented which is also taking place. Collection programs are coming forward, more anticipated early warning system, so to a large extent there is a convergence, there are some changes we have made which makes us if you say so more in a better position to appreciate and act to the RBI policy.
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