‘For strong growth, strong demand has to come, but it will take some time’
S.S. Mundra, a former deputy governor of the Reserve Bank of India, speaks in an interview about the government’s Rs2.11 trillion recapitalisation plan for public sector banks (PSBS). Edited excerpts: The big talking point for the past couple of weeks has been the big PSU bank recapitalization. Is the amount enough in your assessment?
I think it is a very important and meaningful step which has been taken. I wish it could have been taken a little earlier...but nonetheless, it is an important step.
As far as the adequacy or non-adequacy is concerned, first we have to understand what we are looking at this capital for. Broadly, to my sense, if it is to be looked as resolution capital, the issues which are already in the banking system and the references which are met as resolution capital, it looks almost adequate, it should be able to take care of the provisioning requirement...
If you are looking at it as growth capital, then I don’t think that having made the resolution requirement, there would be enough to say that it can support the growth in a big way. So basically, broadly this is how I look at it. There would be a related dimension, how it is distributed (to PSBS), I don’t think that it is going to be distributed uniformly, should not be also. So in that case, if there is a differentiated distribution, then probably the players who are getting it can also use it as growth capital while the others would remain where they are. So that will be important. How soon it is distributed, that will be another important point. Broadly, this is my take on the capital infusion.
If it is only to provide against (loan) impairment, you are saying it is enough. But again as some have pointed out that would also depend on the haircut one assumes during the resolution process. I mean if one assumes 50%, if one were to go up to 60% the numbers become dramatically different and larger...
That is true. I fully agree with you and if you do some back-of-the-envelope calculation, what I have spoken, I have spoken with a roughly 50% haircut assumption because the estimates are all wide—30%, 70% but I think average 50%looks good and realistic. Also, the fact that unlike what was believed earlier, in each large case which is under reference, now we are finding that there are several interests. There are multiple bidders who are emerging. When bidders are multiple, it means rate could be very competitive and which automatically translates into a lower haircut. So, those are the basic assumptions I am taking.
You are saying that when the government hands out this capital it should be very selective?
I am not prescribing anything for the government and I am not telling that it should be very selective.
What I am telling if you look at the recent narratives, it is expressed by the government that the capital would be distributed selectively, it will be linked with some of the parameters; that is why I said it is quite possible that it may not be distributed uniformly.
Even if you look the past few years’ history the paradox is that in the public sector bank, the banks which have been using capital inefficiently, they have been getting larger capital and the banks which have used the capital efficiently have not been able to garner more capital. I think it will be a good idea to correct this situation and see that every penny which is put into a bank brings the maximum multiplier impact. In that process, if some banks have to only take care of past problems and remain stagnant, nothing wrong in that.
How should these bonds be designed in your opinion should they have statutory liquidity ratio (SLR) status, non-slr, held to maturity (HTM), non-htm?
To my sense the bonds are going to be cash-neutral, that is quite obvious. If you can look at the past structure also, I think to begin with one can be non-tradable, they may not immediately get the SLR status, so that the impact on the market is minimized.
I think going forward with some passage of time, then the bond can attain more flexibility. I think that would be the best way of probably addressing it.
But as I understand these are all the matter of details and government is also engaged with all these issues.
A lot has been said and written about the recapitalisation and what can happen after that as a result of this. But what is also commonly agreed is that this must be followed and almost go hand-in-hand with PSU bank reform. The government has also spoken about it. What do you think the government means by that and what do you think, in a couple of points, those reforms should be?
Obviously, yes. Otherwise, I think it will be a job half done and those reforms, the most fundamental requirement would be the governance reform and in the sense that there has to be a clear separation of the ownership and management. And that will be the key requirement.
Once that is done, automatically it takes care of HR (human resource) practices, hiring of the managers, their tenure, their rewards system. Most of the issues emerge from them. So I think that will be very important.
Could it also mean squeezing out some of the weaker banks? Can the government do that merger? Do you see that as an imminent likelihood?
What I was mentioning about the capital infusion, if there are some entities which resolve their old problem but then remain where they are, eventually, they will have a reduced market share. Going forward, I do not see any of these things happening in a hurry. That is not the thing. Going forward, once the present issues are sorted out, a better clarity is emerging, then those are the options which can certainly be thought about.
Very briefly, this amount which has been talked about taking care of impairment, will it, in your opinion jump-start credit growth?
The jump-start of credit growth will have two dimensions. One is the demand and the other is capability. So, as I said I do not see a situation where there is suddenly a huge demand...because from the infrastructure and industrial sector, still there is no great demand. Percentagewise, retail, SMES (small and medium enterprises) may look like there is a strong percentage demand, but if you look at the present share of these loan in the portfolio share itself is low.
So with a low base, higher percentage does not make much of a difference. So what I mean to say, the capital which would be available may take care of the demand which is normal demand which is emerging, but for strong growth, a strong demand has to come which will take some more time.
The other issue is the big divergences between bad loans reported by banks and estimated by the RBI. We have seen that particularly with some private sector banks and of course, others as well. Do you think RBI should start taking some really tough action to penalize those banks?.
It is a long discourse and if I try to give a very sharp reply to it, there is always the possibility that it is looked only in parts and not understood correctly. But let me tell you, number one, the very fact that the divergence, a threshold was put at 15%...if divergence is above that then the disclosure is required. That itself is suggestive of the fact that some of the divergences are quite possible within the given framework. Second, there could be room for differences in interpretation.
There can also be differences coming because of the passage of time which happens from the closure of result to be added by RBI. So there are various possibilities. I am not telling that it all takes away the very fact of divergence. What I am trying to say that these are the things which has come recently.
There could be some genuine gap in understanding, gap of interpretation in some cases, it may not be in all cases. And so, it will not be really meaningful to take any hasty move on this. But if it has happened twice or thrice consecutively, I think everyone has to learn the right lesson. The concerned bank, their boards should pick up those few cases and do the complete analysis of those cases that what was their understanding and why that understanding was not correct.
I think it is to be taken as a huge learning exercise, huge corrective exercise...with the establishment of enforcement division, even more emphasis and focus will come on this activity.
S.S. Mundra, former deputy governor of RBI.