 "Each public sector bank can pick a niche area: R Gandhi")
In an interview to Manojit Saha and Nupur Anand, Gandhi also said focusing on niche areas is the road ahead for public sector banks. Edited excerpts:
During the Gyan Sangam event earlier this year, it was felt that public sector banks should focus on their strengths and not try to do everything. What is the central bank's view on this issue?
A professionally-run bank will try to find its niche area. Strategy-wise, one would always like to put greater weight in one area, where it has strength. Even though all banks have pan-India presence, they have concentration in specific areas. It is not that every bank is uniformly spread across the country.
A professional board would like to take a call on a particular strategy. That is what we are now emphasising and several steps have been taken following the PJ Nayak committee recommendations to increase the professionalism of the boards. Even though all banks are owned by the government, each of them can pick up one particular niche area and grow.
The P J Nayak panel has recommended formation of a bank investment company and a bank boards bureau. Were these recommendations accepted by both the government and RBI?
While we have accepted those recommendations, transferring all banks' stake to a bank investment company (BIC) will not happen overnight because certain legal enablement will be required. So, in phase one, there should be a bank boards bureau (BBB) which can be done through administrative means. The government has accepted that and is likely to set up BBB now. The investment company (BIC) plan has also been accepted by the government in principle, but that will be in the third stage.
Do you have any time frame for the formation of a BIC?
Since that will need legal changes, it is difficult for the government to put a date. The Nayak committee said it will take two to three years. I think that time frame is feasible.
RBI had said it is open to examining on-tap licences for universal banks. By when can we see the guidelines? Will that be applicable for niche banks also?
We are committed to bring it, we were waiting for the process of licences for small and payments banks to be over. We will look at it after that. Ideally, we will have on-tap for both but that will be down the line. First we will have to see how the niche banks function as we will need to have some learnings before we reopen.
Do you think the worst is over for banks so far as asset quality is concerned?
There are indications that we have ridden over the hump. Last quarter figures suggest it is not likely to worsen further. If we look at the total stressed asset scenario, the situation has not worsened. But if slippages from restructured accounts rise - those that enjoy regulatory forbearance - then NPA (non-performing assets) will increase. There are two areas where the challenge is - power distribution companies and stalled projects. Discom loans were restructured and the moratorium period was over in June and the borrowers have to pay in this quarter, that is, before September 1. The second issue is with projects that are not yet completed, that is the stalled projects.
There is a concern that banks are not following the 5/25 rule in true spirit. Do you agree with that?
5/25 is a new thing. There was no need for us for coming out with the norms, banks could themselves have done that. But banks were not confident about the regulation. So to give them confidence we have given them the guidelines. By and large they have been implemented properly. Wherever we have seen it is not followed properly, we have cautioned them. First, banks have to see that it is a long-term project and there is economic life for 20-25 years. Second, if banks have financed it for a shorter period then they can restructure it for a longer period. And finally, 5/25 is meant for projects which are functioning and have cash flow and not for projects which are still in the pipeline. That is where some aberrations have taken place where banks have gone for 5/25 rule while the project was not functional. Sometimes, banks wanted to give moratorium on repayment under 5/25 which we have not allowed. Operating projects don't need moratorium. Banks are only supposed to rearrange the cash flows.
Concerns have been raised about mis-reporting of NPA numbers. How prevalent is the issue?
When we go for inspection of banks, we see things differently. We believe that the regulation is clear and in that case there should not be any difference in the way bankers have identified NPAs and the way we do it. And the same holds true for auditors also. Because of legacy issues, the way they interpret the regulation can be different; so these differences do happen.
So the NPA numbers for the previous quarter can change as a result of these differences?
We are debating that now. If the difference is too much between what they have seen and what we have seen, then we need to think differently. If it is only marginal then we can tell them to make additional provision. But in case the difference is big, there is a debate on whether they should rewrite their financials, or how to disclose it.
There have been issues raised on whether to classify an account as NPA if the money comes on the 92-93rd day...
If you follow the regulation strictly then it becomes an NPA. But a bank may not have classified it as NPA if the money comes on the 92nd day. Now this is where we have to be forward looking to see if the account is worth giving the benefit of doubt.
If the account has been servicing loan regularly then you can give the benefit of doubt. But if an account is SMA-2 (overdue between 60 and 90 days) in one quarter and the same in the other succeeding quarters, that means it is a misplaced confidence. In this case then a particular judgement may be applied.
While the government has increased capital allocation in public sector banks, that may not be enough and banks have to raise capital from markets. Do you think they will be able to tap the equity market to raise funds?
That will have to be seen. Market does not mean only further equity offering, it can also be additional Tier-1 (AT1) or Tier-2 capital. So each bank will have to explore all the options. The amount to be raised on their own may look daunting but that may not necessarily be. Banks have to readjust the balance sheet and shift focus to less riskier assets which will free up capital.
Banks will need huge capital from next financial year onwards considering the growth trajectory. That is why we have been sounding them off to shore up capital.
The wholly owned subsidiary (WOS) for foreign banks were introduced to ensure greater participation from foreign banks. But we haven't seen more than one taker for it yet.
WOS has not been mandatory as of now and the banks are in discussion with us, but they have certain hesitations. For instance there was some clarity needed on tax-related matters. The most important issue is that once they take the WOS route, they cannot leverage on the balance sheet of the parent. And that is where the entire problem comes. Today the big ticket finances that are done by the parent will have to stop. We understand this but the way overall regulation is moving and so you need to localise.
So going ahead is there a plan to make it mandatory?
Going ahead we will have to explore that if they are not coming on their own.