Whatever we know is an NPA has been disclosed as an NPA: P.S. Jayakumar

Shares of Bank of Baroda (BoB) surged 25% on Monday even though the bank reported a net loss of ₹ 3,342 crore for the October-December period over the weekend as bad loans and provisions soared. Markets, however, took note of the management’s assurance that no major stressed assets were left unprovided for and that the bank was not looking for capital infusion from the government.

In an interview on Monday, BoB’s managing director and chief executive officer P.S. Jayakumar explained where the slippages came from, the bank’s future lending strategy and its plan to free up capital. Edited excerpts:

Where did the slippages in the third quarter come from?

Out of the total slippages worth ₹ 15,224 crore, about ₹ 7,400 crore-odd came from the reclassification following the RBI’s asset quality review (AQR). These are customers who are paying to us but not paying to some of the others. Theoretically speaking, these accounts could have gone to NPA status over the next few quarters. This means that some of the embedded risks on your books are already disclosed. About ₹ 1,000 crore came from the restructured loan portfolio. Another thing that we did during the quarter was to conduct an internal review to see if the NPA classification was correct for about ₹ 3,300 crore worth of loans.

Sometimes, there are data entry errors, some system errors, algorithms are not correct at times, but basically these problems are of a one-time nature. Whatever we know is NPA has been disclosed as NPA, which is an important thing. The balance ₹ 3,000 crore effectively flew from the rest of the balance sheet. These customers are those who haven’t paid in 60-90 days. Large part of these accounts which have slipped are from iron and steel, metal, power, roads sectors. Our average provision on AQR was around 30%. As a general rule, we provide about 5% more than what the RBI requires us to do.

What would you pin down as your learning from managing the large amount of NPAs and the surrounding issues?

The significant takeaway that I have is that the economy does matter in the way NPAs play out. The second point is that the equity component in these firms could have been higher so that they would have been in a better position to service the debt that they have. Finally, one hopes that when times will change and cycles will reverse, these corporates will build big enough countercyclical buffers.

Do some of these learnings translate into an adjusted lending strategy for the bank?

What we are asking ourselves is how do we lend and how do we rebalance our portfolio. On the first part, our goal is that the customers we deal with are those which with whom we have ‘warm-nosed’ relationships. Just taking some share of something that is going around doesn’t make much sense. In fact, in my discussions, I have stated before that we should exit some of these relationships to support our customers with whom we have a deeper relationship.

So, we will sell-down some of these exposures. It also means that customers who we keep relationships with, we will have a detailed understanding of his business, we will also sell them more than one product. We have a unit called BoB Caps, we have built sector specializations there which essentially means that the proposals which come to us, go through a filter of sector specialization. This means that we have assessed the risk beforehand and therefore, we can pitch to the customer better, saving us a lot of time. We are also looking at lending with more conviction saying that we believe in the business. We would like to take a larger share of the total requirements of the customer, but we still are not very big on the ticket sizes.

That is just on the corporate lending side. On the retail side, we are focussing on using more credit bureau data, more risk-based pricing, improving the quality and standard of services to improve turnaround time and bringing greater flexibility in products. So, being more agile, giving more options by way of flexible products, use of more analytics and bringing in more speed are the focus.

How are you approaching schemes like 5/25 refinancing and the strategic debt restructuring (SDR) scheme that has been made available from the Reserve Bank?

We have very limited play in any of these avenues. To the extent that we are part of a consortium which decides to do this, we would also be following that (route). Some of the things that we have to be careful about are releasing the liabilities of the promoters such as guarantees once SDR comes in. These are also some structural things that we should be looking at closely. As of now, we are very small players in all of this. On 5/25, we would be a bit concerned about well performing borrowers coming and saying that they are eligible for it. We will have to look out to see that the cash flows of the projects are looked at closely. We have to be careful to not approve long amortisation periods, large balloon payments and all these things. It starts to look like you are postponing some problems using this mechanism.

You have refused any infusion from the government. Where will you release capital from?

We have been very clear about how we are doing it. It is not a magical statement. The first push to better capital management is efficiency. Exiting from cold relationships, releasing the risk weighted assets and lending to customers that need it, which will give us better spreads anyway. These are not just loans, they could also be corporate deposits, debentures, participation notes. Secondly, we can also aim at some housekeeping efficiencies, for example, we have some (credit) lines lent out which are large in number and those people are not using it and our capital is blocked. So, we have to rework that and try to release some of that.

We are also disposing of some of the non-core assets. We have a variety of these like investments in UTI, couple of stock exchanges, credit bureaus and asset reconstruction companies. Taking a one-year view of it, we should be able to monetise some of these. We are also planning for multiple scenarios where things may not work out very well and even then, we will not be in need of additional capital infusion. The generation of revenue in the new financial year would be more than adequate to provide for the losses and the stress scenario. This is from the perspective of capital and not from return on equity.

What are the scenarios you are painting with respect to credit growth?

In our lending portfolio, there are consortium cases where we have a very small share and we could look at increasing that. So, part of the credit growth could come from that. Moreover, there are sectors where we are grossly under-represented. For example, on the financial sectors, we are not very large. We are also not present in a big way in the real estate sector, e-commerce we are just beginning to lend to, supply chain lending is another area we could grow in. Finally, when we look at credit growth, we have to look at capital, liquidity, how your market share is looking and whether there are any sunshine industries where you are not present. You have to strike a balance between excess of valour and excess of caution.

Will you relook at the bank’s international presence?

The countries where we are present in a large way are where we have local currency businesses, places where we can raise funds in the currencies in use there. Then your ability to lend to the customer there is much better. If your business is entirely based on offshore financing, you need to look at whether you need to be there or if you can fund your customer from here. Scale and regulatory environment are the two other things that we are looking at closely to see how we can grow. Otherwise, we can always exit.