Mumbai: Reserve Bank of India\u2019s deputy governor Anand Sinha, who holds the critical portfolio of banking and non-banking regulations and has been busy drafting new bank-licensing norms, said in an interview on Friday that non-performing assets of the banking system have almost bottomed out. By his estimate, at the worst about 20% of the restructured assets in the banking system can turn bad. Sinha also said the central bank is well prepared with the new bank licensing rules that can be released as soon as Parliament amends the banking law and empowers the regulator to supersede a bank\u2019s board. Edited excerpts:
\nThe cabinet has approved the amendment to banking regulations laws. This will give you the power to supersede a bank\u2019s board, which you have been demanding as a precondition to allowing corporate houses entry into banking. When will we see the new banks?
\nI suppose this will have to be approved by Parliament. We will have to wait for that and see in what format it comes, because in our draft guidelines, we had written very clearly that we will finalize the guidelines after we see the amendment.
\nIt is very difficult for me to say how long it will take because this is a legislative process. If it happens in this session (of Parliament), then we are geared up to move quite fast. We will have an external committee which will be looking into the applications for evaluation.
\nManaging transitions: Sinha says there is a lot of misconception and negativity about restructuring of loans. Photo: Hemant Mishra\/Mint
\nWhy are you insisting on amending the law?
\nWe are venturing into a completely new area, and even in the past, we have felt handicapped because of our lack of power to supersede the boards. Consolidated supervision is another very important area, particularly when you are dealing with complex groups. It is absolutely essential for us to have these powers to move forward.
\nIn the December quarter, the gross non-performing assets (NPAs) of Indian banks were 2.9%. Experts say these could go up to 3.5% in the next one year. What\u2019s your estimate?
\nIt\u2019s a fact that NPAs have been increasing and it couldn\u2019t be otherwise. Look at the stress in the Indian economy and NPAs are only a reflection of that. We should also remember one more thing that NPA is composed of two parts. One is what slips into NPA and the other is what you recover. In a stress situation, both are inversely correlated\u2014the slippage increases and the recovery gets depressed. It is the difference between the two which is leading to increase in NPAs.
\nWacth Video
\nAnand Sinha talks about the state of the microfinance industry and whether he believes the problem of bad loans in India\u2019s banks is going to get worse.
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\nWhat is the real issue?
\nThe real issue is that while we have to accept that the NPAs have increased, we have to also learn to manage them well, in the sense that we have to be more proactive in our credit monitoring system. Ahead of the policy meeting, when we met NBFCs (non-banking financial companies), they were all very emphatic that their asset quality is very good and they are hands on in managing… I take something from this…
\nSo bankers are not hands-on?
\nI won\u2019t say that but you can always improve. All I am trying to say is that given the economic situation, NPAs have risen… We have to make more efforts in monitoring the accounts and that is where the issue of restructuring comes. We are keeping a close watch but it is difficult for me to say whether it will become worse. It may go down a little bit.
\nI would expect that it should have bottomed out now… If you look at the world economy, in the US there are signs of the economy improving… In our own economy, despite the potential upside risk, inflation has subsided now and there has been a rate cut. Taking all these things into account, I would expect that NPAs should have bottomed out.
\nAre the numbers real or you see banks fudging?
\nWith so much of oversight with system-generated NPAs, I would hope that the figures are real or very close to real. There was a time when there used to be huge differences between the NPA estimate done by the banks as certified by their statutory auditors and as that would come out in our AFIs (annual financial inspections). That\u2019s very much controlled now.
\nAre banks suppressing their NPAs by restructuring loans? One estimate says that by 2013 there will be Rs 2 trillion worth of restructured loans.
\nThere is a lot of misconception and negativity about restructuring. How do you manage your advances portfolio? You have to be proactive in monitoring and should not let the assets slip into potentially weak categories. Despite your best efforts, it may happen because of the environment. Now, if an account is under stress, you have only two options\u2014either you call back your advance, which will be very injurious to the economy, and if that account is viable, potentially with a little handholding, it can come out of the stress. Restructuring is a very important tool in managing advances portfolio.
\nIsn\u2019t this tool being misused by some banks?
\nThere are apprehensions. Restructuring certainly is an indicator of stress in the system…
\nSomething as fundamental as an NPA is not measured in a uniform manner across the world, and similarly, the ways to deal with restructured accounts also vary… If you look at the West, they don\u2019t automatically downgrade an asset. If there is a conviction that the restructured loans would come back and the loss in the fair value is provided for\u2014which we also do\u2014the accounts remain standard.
\nSo you are not worried.
\nWe are not worried, but at the same time I can tell you that we have set up a committee to look into this whole issue.
\nHow much of the restructured assets can go bad?
\nAnecdotal evidence shows that roughly 15% of such loans do slip. In some banks, it may be much lower, but overall, this is our sense. Even if you take an outer limit of 20%, still 80% will remain standard. So you have two options\u2014either 100% of the restructured standard advances in the year of restructuring you add to NPAs and next year you take out 80% of that back to standard asset, or you keep 100% as standard and next year you downgrade 20% or 15%.
\nThe base rate, or the minimum lending rate of a bank, is supposed to be more scientific and transparent but it\u2019s not so.
\nThe base rate is ultimately linked to your cost of whatever anchor that you have… I would expect that if the banks are changing or not changing the base rate, they have to demonstrate as to what has happened because of which the base rate has either remained the same or changed. As far as the spread is concerned, it has got certain components. The spread should also change scientifically.
\nMost banks do not give the benefit to the old customers when they cut the loan rate.
\nI am aware of the fact that there are customer issues, distinction between customers. There is a committee under me which is looking into these issues. The banks have their own points and we have to listen to them; we have to find out why they are doing it. Purely from logical and theoretical perspective, one would expect that the spread should not change if the credit quality doesn\u2019t change.
\nSo the base rate is not scientific.
\nNo, I am not saying that. What I am saying is the base rate has been defined in a scientific manner. If a bank changes or doesn\u2019t change the base rate, it has to prove as to what are the factors that are prompting it to do what it is doing.
\nAre the banks treating base rate as a transparent tool for loan pricing?
\nThe base rate is certainly much more transparent than the benchmark prime lending rate. Nothing is perfect. We have to have supervisory feedback to know what is happening.
\nYou seem to have a bias against NBFCs. They play a very critical role in a financial segment where half of the population does not have access to bank credit, but you keep on hiking their capital requirements. Recently you changed the gold loan norms. Do you want to kill them?
\nFar from it; we want the NBFCs to thrive and serve their clientele. They are very important and I want to make it clear that for us the NBFC sector is a very important segment. Now we have to look at the fact that NBFCs do essentially a bank-like service and the lesson from this crisis is that if you are tightening banking regulation, you have to keep that much of oversight on NBFCs and if you don\u2019t do that then the risks will get shifted from the banking sector to the NBFC sector.
\nWhatever we do, we have not yet made the NBFCs fully bank regulation-compliant. All that we are trying to do is to make the system safer, more robust and ensure that the arbitrage between the more tightly regulated banking system and the less tightly regulated NBFC sector is contained.
\nWhat about microfinance institutions (MFIs)?
\nThe Malegam committee report has laid down a number of parameters and we have moved ahead on that. We did issue a circular in December 2011 defining a new category of NBFCs and MFIs. We were hoping that based on that criteria, the NBFCs which are into MFIs business will be able to transit to that, but there are quite a few difficulties, particularly because of the fact that their loan portfolio in Andhra Pradesh seems to have got stuck.
\nThe sector has told us that by November 2012 roughly Rs 6,000 crore of assets will become NPAs. Now the issue before us is managing the transition because if Rs 6,000 crore of capital is lost, how do you manage the issue? We are working on this now.
\nThis means those MFIs that have restructured loans will not be able to survive even after that.
\nOf course the Rs 6,000 crore figure is for the system as a whole and individually they will have much less, but the issue is that CDR (corporate debt restructuring) addresses your liability side, and addressing only the liability side doesn\u2019t help unless your asset side is also managed. So, either they would default on CDR, or they will have to manage their rescheduled liabilities out of the rest of the India portfolio.
\nAre you really concerned?
\nYes, we are concerned in the sense that we want them to transit to the new framework and the new framework has certain requirements of capital adequacy, etc., which in the current situation is proving to be difficult to achieve. We have to find a way out.
\nWho will have the last word on MFIs, RBI or the Andhra Pradesh government?
\nThat\u2019s a difficult question for me to answer because the microfinance Bill is there and once it gets passed, I really don\u2019t know constitutionally what will happen.
\nYou have told foreign banks that they can convert their Indian operations from branches into subsidiaries but not a single foreign bank has approached you for this.
\nBoth we and the government of India are very conscious of the issues involved. Essentially they are tax-related issues. We have flagged these to the government.
\nHow soon will it happen?
\nIt is with the government and is difficult for me to say, but they have assured us that they are trying to do it as quickly as possible.
\nWhy do you need to consult the government for everything\u2014from new banking licences to foreign banks\u2019s subsidiary? You have autonomy.
\nIt is not a question of compromise on autonomy. There are issues\u2014for example, for the new banks, there are legal issues and RBI has to necessarily get it through the government through the legislation. It has no other dimension. Similarly, for foreign banks, if the tax regime is to be looked into, then the government has to do and RBI has to necessarily go to the government for that.
\nAre there any pockets of concern, particularly among old private banks?
\nWhen licences were given to two new private sector banks\u2014Kotak Mahindra Bank Ltd and Yes Bank Ltd\u2014we had said that we would take up the next set of applications after three years. We did not do that and the reason was that we wanted to consolidate the private sector banks. Today we have succeeded in complete consolidation; there is not a single private sector bank from the old generation which does not fulfil the prudential regulations. There have been compulsory mergers and we have cleaned up.
\nWe will not see any compulsory merger, that\u2019s what you are saying.
\nAs far as weak private sector banks are concerned, compulsory mergers have been taken care of. If something goes wrong in the future, I can\u2019t really comment…
\nI don\u2019t want to name any bank. There could be temporary difficulties but banks do get into temporary difficulties and that is not something so unusual.
\nHow is our preparedness for the Basel III norms?
\nIn that context only I talked about the consolidation phase. Our capital adequacy ratios are all well ahead of the minimum requirement under Basel II. When we translate them into Basel III, we find that our ratios are higher than what is required. So, our transition is going to be smooth and we want to take advantage of this smoothness in transition to accelerate the compliance.
\nIn fact, in many jurisdictions, the compliance with Basel III is being accelerated very substantially. From that point of view, the system is well-geared and I should also tell you that unlike Basel II, Basel III doesn\u2019t introduce many new methodologies, but once you get into that, there will be capital requirements which will be quite substantial.
\nLife Insurance Corporation of India is there…
\nI would not comment on that but additional capital will have to come. The essential issue there would be raising capital from the private investors and commensurately government will have to put in the required capital. The finance minister has said on many occasions that the government will provide capital needed for Basel III.
\nThe banks need capital and they need to approach the market for that. Your final word on the banking system for investors?
\nOur banks are sound, strong. They need more sophistication in risk management and technology, but that is a different development agenda. That does not take away from their basic strength and investors should not shy away.<\/p>\n","protected":false},"excerpt":{"rendered":"
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