State Bank of India chairman Rajnish Kumar says that the recapitalisation bonds would lead to banks get a bit more daring in taking hair-cuts to resolve bad loans. In an interview with ETs Saloni Shukla, Kumar also said that this would also accelerate the action at the National Company Law Board where most of bankruptcy cases are not moving ahead due to lack of banks’ ability to take haircuts. Edited excerpt:
Bank recap was a long pending demand now it has come, how do you see these helping banks. Should it be performance linked?
Some prioritisation the government will have to do because all banks need capital and it is a scarce resource. Even though it is a mega capital infusion this time, in my view it will come with caveats around better performance, strengthening of organisational structure and improvement in risk management. And these would be legitimate demands because if the government does this what will the banks do in return.
So how will the capital be distributed?
My expectation is that there will be a MoU (memorandum of understanding) where banks may have to specify what is their business plan going forward, how are they going to manage their risk, how they are going to improve their corporate governance structure. So these are some relevant issues where government may ask banks to give a firm plan.
What should the banks do to manage this capital efficiently?
Capital is required for growth, meeting Basel 3 norms and risk capital needs which includes loan loss provisioning. So when we talk about the efficiency of capital management … it should gauge how much return on assets and return on equity banks are generating. So there has to be a specific target on return on equity given to banks that has to be reached within a given timeframe.
Do you believe that decisions related to infrastructure along with recap will spur credit offtake?
So the government has taken care of the supply side and demand side issues at the same time. Banks should be in a position to lend but there should be people who are willing to take funds and more importantly who need funding. There might be a two-three month lag but the announcements made today by the government will lead to credit offtake and increased economic activity. For quite some time the demand from Reserve Bank of India, the demand from banks and people who are concerned with the economic stability of the country has been capital. All of us were aware that the country was facing a twin balance sheet problem. There were losses which were sitting in the balance sheet of the corporates and there were losses which in turn got reflected in the banks books. So to address the problem the only way out was to take the bull by the horns and that has happened.
So now do you think haircuts will happens, state-run banks were been accused of not taking decisions, do you believe that issue will be sorted?
See a lot of provisioning has already happened depending upon the asset classification, so haircut would depend upon what is the debt an entity is carrying and what is their enterprise value. There are a lot of factors but haircuts are inevitable in a stressed asset.
The government has also spoken about HR reforms … what reform in human resource capital are you expecting and what role can BBB play in this?
The role of the government is to appoint the right kind of people on the board or finding the right type of MD & CEO whoever leads the banks. Also important are the right kind of executive directors, so the government appointments will have to take care that. They may also look at appointing a high-quality board and a high-quality management team then rest everything will fall in place. The constraints that public sector banks face on the human resource side will also be a further point of discussion. The government will also have to decide the role of the Banks Board Bureau … when it was set up it was supposed to be a precursor for banking investment company, it was supposed to be an interim arrangement, so how does the government use the BBB in this whole process will solely be their decision.
What about NCLT do you think that the processes there will get fast tracked once the recap is done?
I don’t think that the resolution process under NCLT is slow, it’s a 6 month process the resolution only started in July-August, so by December- January the resolutions should start happening. Because there are many cases which are in the expression of interest stage and they will soon be coming up for bidding stage. A lot of interests have come in for steel assets. This is a time bound process and I am confident that those timelines will be met. The only issue is of infrastructure which should be augmented once that is sorted more cases will continue to flow.
Source: Economic Times