‘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.

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