 "S S Mundra")
Reserve Bank of India (RBI) Deputy Governor S S Mundra says banks should have been given more time and a road map is needed to attain the efficiency parameters required to get capital from the government. In an interview to Manojit Saha, he also asked banks to conserve capital. Edited excerpts:
RBI has penalised quite a few banks in recent times for violating know-your-customer (KYC) norms. How serious is the issue?
We are probably too lenient on penalties. Globally, regulators have been very strict on such issues. This is one are area where the dimensions may change. While there is awareness among banks, the problem is dissemination of the policy among front-line staff. Banks have to become much more proactive in educating their front-line staff. This cannot be something that can be taken care of by merely issuing administrative circulars. We have a zero-tolerance policy on KYC violations.
Life Insurance Corporation (LIC) has invested heavily in the Indian banking system. How do you see this?
The other regulator who should be equally worried about it is the Insurance Regulatory and Development Authority of India (Irdai). As a banking regulator, we should be worried for a variety of reasons. LIC on average holds 9.21 per cent stake in Indian banks, including private ones, making it the second largest shareholder after the government. There is a contagion risk or interconnected risk. Suppose the banking sector is not doing well and is in trouble, the equity holding of LIC will see a value erosion. This effects the capability of the insurer to serve their policyholders.
The other interconnected issue is if LIC wants a fire-sale of the shares, then it creates a contagion in the markets. In any case, if too much of bank shares are held by one entity, the habit and capability of banks in tapping the market gets impacted. This has an implication for financial stability.
The Centre has decided to allocate capital to banks based on their efficiency. If this decision is to continue, what is the road map for weaker banks?
The government's approach is right in a sense, as capital is not available infinitely. It also corrects a more fundamental issue. In the past few years, when there were cases of stronger banks getting less capital, weaker banks got more. So, less capital was given to those who would have used the capital more efficiently. But the efficiency-based approach cannot be brought overnight because the industry is passing through stress. To my mind, there should be a road map. Banks should have three to four years' time to meet the required parameters. Banks should have been given time to get prepared rather than getting surprised. I believe there is some rethinking [needed] on this issue.
So what's the way ahead for weaker banks?
What these banks need to do is: One, they should try to retain as much profit as possible. That should have a linkage somewhere with the dividend they pay. Second, they have to conserve capital. This can be done in two ways - by re-verification of the existing balance sheet. There will be some room to save capital. I had done it when I was at Bank of Baroda [as chairman and managing director], and 70 basis points of capital was saved [impact on capital adequacy ratio]. Also, they should conserve capital by being selective on lending, like lending to sectors that have lower risk weight.
Incidentally, most of the weak banks have higher government holding, so they have more room to divest.
Do you think merging smaller and weaker banks with the bigger ones is the way forward?
The criteria cannot be only small and big or weaker or stronger. For example, if you merge a weak bank with a strong bank and in the process the stronger weakens, the objective of merger is defeated. Merger has to be strategic. It should have a geographic advantage or product advantage or talent advantage, etc.
There is a room for consolidation but I cannot comment on when it will happen.
Is the worst over on asset quality?
After looking at the bank results for quarter ended March, we find a mixed trend. In some of the banks, the pace of incremental non-performing assets has slowed down. For some banks, there is no such visible trend. At this point of time, I really would not be in a position to make a definitive statement that the worst is over. We need to see some more data.
There are two-three things that will determine the future course of action. If growth picks up, it creates a lot of ability for both banks as well as the borrowers, which will lead to an improvement in the asset quality. The other determining factor will be various policy actions, like approvals of projects, a lot of which is already happening. The third point is what happens internationally, because a lot of linkages are there, like many borrowers have currency exposures, etc.
Was there a surge in restructured assets in the fourth quarter, since the regulatory forbearance window was withdrawn at the end of the period?
It was not something that was not expected. But if I look at the individual results of a majority of the public sector banks, yes, there was a pronounced increase in debt recast in Q4. Most banks saw 50-100 per cent increase in restructuring, compared either with the previous quarter or the same quarter of the previous year.
Bank loan growth was tepid in the last financial year. What kind of feedback did you get from banks about this year?
It's still early days to predict about loan growth but whatever I hear from banks suggests they are expecting only a marginal improvement from last year. But this is the beginning of a financial year and a better trend will emerge after we enter the second half.
You had earlier raised concerns on credit absorption level, as all the banks are rushing towards retail loans. Do you foresee any systemic issues?
There are two aspects: One is the repayment ability of an individual with respect to his income. The second is because corporate credit demand was sluggish, every bank thought retail is the panacea. Lending to a corporate [borrower] and lending to retail are different. A bank needs to have the necessary capability and structure to offer retail loans. Otherwise, there is a very distinct danger the customer that the bank will get is not the best one. Maybe the customer was rejected by other established banks.
In the enthusiasm to become a retail player, if you continue to underwrite these loans, then there will be a problem. Because my neighbour is doing retail so I will also do retail is not a good philosophy.
How successful is the Joint Lender Forum (JLF) that was set up with the idea to recognise stressed assets early and for quicker resolution? There are issues regarding non-cooperation among borrowers.
JLF has come a long way since its inception about a year ago, so has Central Repository of Information on Large Credits (CRILC). Over a period, we can see there is a consistency so far as data are concerned. We also keep on hearing JLF is facing quite a few issues. The guidelines are, however, very clear.
Essentially, banks should ideally sort out the issues among themselves. A forum like Indian Banks' Association can try and resolve the issue. The issue has also come up during the performance review meeting with government officials. The government being the majority owner of the public sector banks, some initiative can also be taken by it. Banks should also show some maturity in resolving the issues.
