How to solve bad loan problems
The theme of the Mint Annual South Banking Conclave this year was Bad Loan Resolution: The Road Ahead. The session moderated by Mint’s consulting editor Tamal Bandopadhyay saw some big names like State Bank of India managing director Rajnish Kumar, Lakshmi Vilas Bank MD and chief executive Parthasarathi Mukherjee, and Canara Bank executive director P.V. Bharathi discuss the challenges of bad loan resolution in the banking system. Edited excerpts:
Partho, you were with a large, new private bank and now you are with a relatively small, old private bank. We are not talking about bank-specific problems but tell us what your reading is of the trend and how do we get out of this?
Mukherjee: Our ability to read is just about as good as our ability to misread. What happened was that we read at a particular point of time and at that time, things were rather good, it was needed. Here in Bangalore city, while coming from the airport to this venue, my God, it’s terrible. This country badly needs infrastructure. The banking system, at that point of time, stepped in and developed infrastructure. That was needed, everyone read it right. Where things went wrong subsequently was that various projections went wrong. Some of it was on account of policy perhaps, and various other things, and perhaps we made mistakes too but I would say that we didn’t really misread the situation at that point of time.
The other question is this: should the Reserve Bank of India have been more aggressive with this AQR (asset quality review)—that you recognize bad loans and also clean them up? It has happened chronologically. First, you have recognized and now you are being forced to clean up. Bharathi is this bank-specific?
Bharathi: As public sector banks (PSBs), we have our social responsibility, we have a responsibility towards the economic development of the country. We have been asked to play a role in economic development. Initially, we were conservative, we had just five to seven years of term loans or at the maximum 15 years, depending upon the sector. Then the country decided that we have to go for linkage, we have to see that the roads are developed, that power is developed and that we have the required infrastructure to build that.
Then, the PSBs were called in and given the responsibility to contribute towards this. Now when we go for this, these are actually 30-year loans which were done with due appraisal at that particular time, presuming that everything was in place but when the unit was ready, the PPA (power purchase agreement) was not available. At one point of time, we said there is shortage of power, now we say we are withdrawing the PPA or we contracted at different rates. The earlier rate was, say Rs5, now we say we are only going to give Rs2. So these sort of things were actually there at that point of time.
A project is envisaged or is looked into going by the circumstances at that point of time and what we expect the future to be.
As a banker, our interest would be to recover the money as much as possible. We would not straightaway jump into the question of recovery or recalling of a loan. Our first preference would be to recover the maximum amount today. So, probably, had the AQR not come into the picture at this point of time, these loans which we have contracted, being long-term loans, we might’ve thought not this year, maybe the next year we’ll do good. So, we might’ve prolonged it for a long time.
So what the AQR has done is that it has actually identified that the environment has changed so we may not get the cash flows which we had anticipated. And therefore, it is time to call it a bad loan. It has become a stressed loan. Now that there is a stressed loan you have to provide for it. And when we have to provide for it, on the one hand, we are talking about this development and on the other hand, we are quickly moving towards international compliances, that is Basel. So all the banks are now gearing up to reach the Basel norms where we have the challenge of maintaining the higher capital level.
So all this is a challenge. Ultimately we are going to go down and zero in on capital because whatever the provisions, all the methods which have been suggested by the government are really good and we can go on. But everywhere it is the question of the postponement of my realization. I am not going to get the cash flow which I had envisaged. So when I don’t have the cash flow, there are the obvious challenges of profitability and making provisions.
Kumar: We have spoken about the external environment and about the other things but definitely one error in my view which we committed was allowing the corporates to overleverage. That is where we should have been more careful and going ahead also, we should be very careful about overleveraging corporates. Everybody thought there is growth tomorrow, so everybody was in the mode of becoming Dhirubhai Ambani. Banks that are flush with excess liquidity looked for top-line flow without pricing risk adequately in the competitive mode. This was something that was at least avoidable but we could not avoid it because everything is clearer in hindsight but going forward, we must learn that lesson which has come at quite a heavy price.