BS Banking Annual 2018: IBC is helping improve recovery substantially

Edited excerpts from a discussion at the Business Standard Banking Round Table held in Mumbai

Is the worst behind us in terms of non-performing assets (NPA)? 

Rajkiran Rai G: The trend is very clear, gross NPAs are going to come down, slippages are moderating. But we never use this phrase, “the worst is behind us”. Whenever we used this phrase, usually that quarter was bad with something different. We are now fed up of making this statement. If you ask me if good times are ahead of us, yes, very much because now NPA slippages are moderating. In the system as a whole, the recognition part of NPA is coming to an end. We will have NPAs, but the recognition part to a great extent is complete. Now it is the provisioning part which is ahead of us.

Chandra Shekhar Ghosh: What we have observed is that the lesser the ticket size of the loan, the better the repayment rate. Repayment rates have improved, weathering demonetisation and GST (goods and services tax)-related impact. But there are some customers who are irregular in their payments; we are trying to regularise them.

Pramit Jhaveri: Even after 10 years of global credit crisis, it is difficult to say that the banking system, globally, has entirely recovered. If you compare that crisis with our own mini-crisis that we had in India, my sense is that we will have a mixed bag. In terms of the environment, a number of things have happened over the last few years in terms of new laws, creation of the National Company Law Tribunal (NCLT), the Insolvency and Bankruptcy Code (IBC) regime, and new regulations. The most important thing that has also happened is the change in behaviour of the borrowers. This gets overshadowed by the negative narrative prevailing now. Let’s not forget that there are opportunities for banks to grow out of these problems as well.

Romesh Sobti: In terms of the impairment of assets and the earnings cycle, I would imagine that we are very close to the peak.  A rough estimation is that maybe about 80 per cent of the recognition has been done. Now the loan provisioning cycle is behind us. There is an aging provision that hits you, even if you recognise the NPA, that’s going to lag behind. That will be a little bit of more pain. Loan recovery has got a massive boost as a consequence of the IBC. But there could be accidents such as we had. You could have Nirav Modi, or Infrastructure Leasing & Financial Services (IL&FS), and those would all add to the whole issue. 

Rajnish Kumar: As far as the NPA cycle is concerned, March 2018 was the peak, and after that we are seeing a decline in the overall NPA cycle. Our bank’s balance sheet is now much stronger than what it was.

After corporates, there seems to be stress in the micro, small and medium enterprises (MSMEs) and agriculture. Are there reasons to worry about the retail segment too?

Sobti: It’s been a 10-year hiatus since we had any sort of negative movement on the retail part. My experience of 45 years shows that there is cyclicality to it. Of course, there is a nascent sort of delinquency there. The role of the rating agencies probably has been exaggerated, but they played a role in keeping people compliant. 

Kumar: As far as retail is concerned, each bank has a different definition of retail. As far as car or housing loans are concerned, I will agree that whatever lending is done, both require specialisation and capability to process volume. Each bank’s capabilities are different for retail, and project or large corporates. Rebalancing of the portfolio is the need of the hour for any bank. 

Rai: Stress is there on  MSMEs, but then the quality of risk assessment in the banking system is also growing a lot. GST is playing a great role here, because the MSME assessment was more on their projections earlier, but it is not cash-flow based as GST is giving more data. Now, MSMEs will be the new retail.

Ghosh: The skill-set of the staff is key in taking advantage of the MSME segment. You need to reach out to the MSME clients. Despite demonetisation and GST, when we softly approach the customers, they return the money. Human touch is very important.

Has recovery improved after the IBC?  

Kumar: The approach of the banking system earlier was of rehabilitation; we are not doing that anymore. If today your account is an NPA, either you pay me, or I sell to asset reconstruction companies (ARCs), or I take it to NCLT. Rehabilitation, restructuring, all that is not possible in today’s environment.

Sobti: Although IBC is a very well-crafted legislation, bad losers are testing it right now. So, it’s like I lose here, I go to the Supreme Court (SC). It’s going to die down in the next six to ten months with just one or two SC judgments. Probably you are going to see a sea change in how borrowers behave. Twenty years ago if you threatened a borrower with a suit, he went and opened a bottle of champagne. Because for 20 years you are not going to recover the money. Now in six months time you lose your company. That is the best thing that has happened to banking. The first two quarters’ recovery figures are astonishing. Every rupee recovered is capital infused.

Rai: The first six months’ recovery has been the full year’s recovery of the last year. So that means we are practically doubling the recoveries this year. Probably by the end of this year, we may see recoveries being better than slippages. That will be the best signal for the industry that the worst has really ended. It is not insolvency, but the fear of insolvency that is putting sense back into corporates. Today we don’t run after them. With all the rules in place, they come to us. 

Jhaveri: Over a period of time we will start gravitating towards the precedents that worked. Think about the economic cycle. It also contributes to the recovery. If you see the steel industry, the amount of recovery that has taken place, it is really a consequence of the cycle, and certainly beyond most people’s expectations.

Are promoters voluntarily coming forward to pay up on their dues?  

Kumar: A bird in hand is better than two in the bush is definitely the approach now. If I can get a reasonable amount of money given the state of affairs, and if there is a certain threshold in our mind that once we recover this much money we are alright, we don’t hesitate to go for one-time settlement (OTS). But once the case is referred to NCLT, then very rarely do we sell it to an ARC. We decide it before and upfront. There are clear metrics on which the bank works — OTS, sale to ARC, debt recovery tribunal/Sarfaesi action, and NCLT action, all four are evaluated, and we take the time value of money and realisability. In the first 12 large accounts referred to by the Reserve Bank of India (RBI), the recovery would be more than 50 per cent, but NCLT’s second list will be lower at around 35 per cent.

How do you improve the IBC process?

Sobti: Today it’s a closed bidding process. That’s the chink in the armour. When somebody wins the bid, the loser goes and makes a direct bid, and then you go and challenge it in the SC. Why don’t we do an open auction and close the issue right there? They all have the money, but they think because the banks have taken a 50 per cent haircut, so I can get away with it. They want a really cheap buy. That’s not happening.

Kumar: If we allow these things to happen (re-bidding), in future the signal that we are giving to all the other bidders is that please don’t bid. For 14 months we run the process, and then somebody comes in with a fresh proposal. Here lenders are losing money due to the delay.

So, can we say the banking system will not face spurts in bad debts anymore? The IL&FS case has jolted the banking system. 

Ghosh: The notion that ‘AAA’ is all good, is not right. When we were a non-banking finance company (NBFC), and used to borrow money from banks at 11-12 per cent, whereas other NBFCs were getting at 9 per cent, banks used to tell me you are A, not AAA. Now, after the IL&FS crisis, I know what AAA rating is. Due diligence should be made in finding the cash flow. Whether they will be paying back, which is our learning from microcredit. We assess our customers first on that.

Kumar: If you don’t want NPAs, the best way is not to give the loan. Definitely there are factors which are macro and factors which are not in your control. In your control are your policies, practice, and risk management capabilities. As much as you may wish, the capability of the human mind and technology is limited in preventing an account from becoming an NPA. That is why we should do only those things that are within our risk appetite framework. If you are not equipped to handle large corporate credit, not equipped to handle large volumes, or retail credit, please don’t do it. There are policies which are regulatory, which puts certain guidelines to your exposure norms prudential exposure norms, capital adequacy, all those things are at the macro level. You have to diversify your risk across industries, across geographies and price the risk also suitably.

I don’t think today’s situation will be repeated. I don’t think we will lend the way we were lending in 2008-10. We have IBC, we have the February 12 RBI circular (one day default norm), which is stronger than IBC.

Jhaveri: The cost of this crisis has been very high. One would like to think that a lot of lessons were learnt. 

Ghosh: Due diligence should be made in finding the cash flow. Whether they will be able to pay back the money, we assess our customers first on that.

Is the investment scenario better?

Jhaveri: The answer is yes. Public spending, state spending, PSU spending as far as rural infrastructure and roads are concerned, and cement and steel consumption are good factors, which are going to tell us what will come. We have seen an increase on the working capital side for some time now and it is already starting to follow on the capital expenditure (capex) side.

Ghosh: It is growing well now. Our MSME segment has registered growth of 23 per cent, we are seeing a good number of new customers coming to the banks. In the last five years, there has been a 35 per cent growth in new customers in the MSME segment, and 25 per cent of them are taking loans. Simultaneously, the NPAs are coming down.

Rai: Corporate credit is growing, initially reflecting in the working capital cycles. We are seeing traction in steel, cement, textiles and chemicals. When capacity utilisation breaches 75 per cent, such as now, the capex cycle starts.

Sobti: New sectors such as renewables have taken a lot of money in capital expenditure. It’s not brownfield, it’s greenfield. Power transmission has taken a lot of money, generally we are seeing a pull beyond working capital. Capex is coming back. We are also seeing an expansion in the bankable market as a consequence of events like GST. The SME promoter has got a larger balance sheet, which is now disclosed. Therefore, he deserves a larger amount of funding. 

Kumar: We have a lot of proposals. I think we are now becoming a lender of last resort. For the first time in three years, SBI is growing in line with the industry, otherwise we were below the industry. A year-on-year growth of 14 per cent for a bank like SBI is a very good number. We are seeing demand from across sectors — government sector, roads, renewables, etc. There are proposals, even from oil and gas, and from NBFCs.