 "Some companies are mis-utilising the CDR mechanism: Shubhalakshmi Panse")
Shubhalakshmi Panse, who took charge as the chairperson and managing director of Allahabad Bank in October 2012, feels some companies are mis-utilising the corporate debt restructuring mechanism and delaying loan repayments. In an interview with Somasroy Chakraborty, she says the bank is stepping up efforts to recover loans and shares her outlook on Allahabad Bank’s asset quality. Edited excerpts:
How big is the loan restructuring pipeline? Are banks actually benefitting from loan restructuring?
Our pipeline is somewhere around Rs 4,000 crore. We are getting requests from companies in sectors like steel, textiles and food processing. It is too early to pass a verdict (if banks will benefit by restructuring corporate loans). Having said that, I have seen a big change in recent months. There are some companies, which are mis-utilising the CDR (corporate debt restructuring) mechanism. For instance, some companies reported substantial profits in 2011-12.
But in 2012-13, they showed huge losses. Now, the economy has not turned so bad that they will incur such huge losses. By showing these losses, the companies are approaching banks and seeking loan restructuring. I have not agreed to restructure their loans and allowed the accounts to become non-performing.
How do you plan to restrict deterioration in credit quality?
When I took charge, the Reserve Bank of India (RBI) had just conducted an inspection. They identified fresh non-performing assets (NPAs) to the extent of Rs 1,800 crore. This, coupled with the economic scenario, had an impact on our asset quality. We expect the pressure to continue for next two quarters and are focusing on loan recoveries. It has already yielded results. In the third quarter, we recovered Rs 900 crore and in January-March, recovery has been more than Rs 700 crore.
Will you make more provisions in the coming quarters?
The non-performing assets are rising, so to that extent, provisions will increase. Also, on account of reduction in the fair value of restructured loan accounts, we have to make provisions. Wage negotiations are happening since November 2012 and according to RBI guidelines, we have started making Rs 20 crore provisions every month for this purpose. Lastly, in case of pension, when yields fall as per actuarial valuation more provision is required. Since the 10-year yield has softened, we increased the provisioning for pension funds. We expect provisions to rise probably for two more quarters.
What is your credit and deposit growth target for current financial year?
In 2012-13, our advances increased by 17 per cent, while deposits grew by 12 per cent. The slow growth in deposits was due to shedding of bulk deposits. In the current year, we are aiming for 17 per cent growth in advances and 15 per cent growth in deposits. We expect to cross Rs 360,000 crore of business by March 2014.
You have cut the base rate in February. Is there further scope for reduction in your base rate if RBI cuts the repo rate this week? Will you be able to maintain margin at three per cent?
We need to see to what extent will there be a repo rate cut and whether it will be accompanied by a reduction in the cash reserve ratio. So, we will have to wait and watch. We expect margin to remain under pressure, because when interest rates fall, the impact is immediate on loans; but in case of deposits, there is a lag effect.
What is your capital requirement for complying with Basel III regulations?
We are already Basel III compliant as on March 31, 2013. We had requested the government for Rs 1,500 crore and I am confident we will get the capital this year. If we get that capital, we will be Basel III compliant even in 2013-14. We have sufficient capital to finance our growth.
In your assessment, what are the strengths and weaknesses of Allahabad Bank?
Let me begin with the strengths. The financials of this bank are very strong. The net interest margin has remained above 3 per cent for many quarters. We have more than 2,700 branches across India and more than 60 per cent of these branches are in rural and semi-urban areas.
The government’s financial inclusion initiatives will result in a lot of actions in rural and semi-urban regions in the next couple of years. We will directly benefit because of our presence in these areas. We also have a committed workforce and adequate capital. Coming to weaknesses, we expect asset quality pressures to continue. We have a restructured loan portfolio of over Rs 13,000 crore and we expect it to rise further.
How big is the loan restructuring pipeline? Are banks actually benefitting from loan restructuring?
Our pipeline is somewhere around Rs 4,000 crore. We are getting requests from companies in sectors like steel, textiles and food processing. It is too early to pass a verdict (if banks will benefit by restructuring corporate loans). Having said that, I have seen a big change in recent months. There are some companies, which are mis-utilising the CDR (corporate debt restructuring) mechanism. For instance, some companies reported substantial profits in 2011-12.
But in 2012-13, they showed huge losses. Now, the economy has not turned so bad that they will incur such huge losses. By showing these losses, the companies are approaching banks and seeking loan restructuring. I have not agreed to restructure their loans and allowed the accounts to become non-performing.
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How do you plan to restrict deterioration in credit quality?
When I took charge, the Reserve Bank of India (RBI) had just conducted an inspection. They identified fresh non-performing assets (NPAs) to the extent of Rs 1,800 crore. This, coupled with the economic scenario, had an impact on our asset quality. We expect the pressure to continue for next two quarters and are focusing on loan recoveries. It has already yielded results. In the third quarter, we recovered Rs 900 crore and in January-March, recovery has been more than Rs 700 crore.
Will you make more provisions in the coming quarters?
The non-performing assets are rising, so to that extent, provisions will increase. Also, on account of reduction in the fair value of restructured loan accounts, we have to make provisions. Wage negotiations are happening since November 2012 and according to RBI guidelines, we have started making Rs 20 crore provisions every month for this purpose. Lastly, in case of pension, when yields fall as per actuarial valuation more provision is required. Since the 10-year yield has softened, we increased the provisioning for pension funds. We expect provisions to rise probably for two more quarters.
What is your credit and deposit growth target for current financial year?
In 2012-13, our advances increased by 17 per cent, while deposits grew by 12 per cent. The slow growth in deposits was due to shedding of bulk deposits. In the current year, we are aiming for 17 per cent growth in advances and 15 per cent growth in deposits. We expect to cross Rs 360,000 crore of business by March 2014.
You have cut the base rate in February. Is there further scope for reduction in your base rate if RBI cuts the repo rate this week? Will you be able to maintain margin at three per cent?
We need to see to what extent will there be a repo rate cut and whether it will be accompanied by a reduction in the cash reserve ratio. So, we will have to wait and watch. We expect margin to remain under pressure, because when interest rates fall, the impact is immediate on loans; but in case of deposits, there is a lag effect.
What is your capital requirement for complying with Basel III regulations?
We are already Basel III compliant as on March 31, 2013. We had requested the government for Rs 1,500 crore and I am confident we will get the capital this year. If we get that capital, we will be Basel III compliant even in 2013-14. We have sufficient capital to finance our growth.
In your assessment, what are the strengths and weaknesses of Allahabad Bank?
Let me begin with the strengths. The financials of this bank are very strong. The net interest margin has remained above 3 per cent for many quarters. We have more than 2,700 branches across India and more than 60 per cent of these branches are in rural and semi-urban areas.
The government’s financial inclusion initiatives will result in a lot of actions in rural and semi-urban regions in the next couple of years. We will directly benefit because of our presence in these areas. We also have a committed workforce and adequate capital. Coming to weaknesses, we expect asset quality pressures to continue. We have a restructured loan portfolio of over Rs 13,000 crore and we expect it to rise further.