Deputy governor of the Reserve Bank of India (RBI) S S Mundra said that banks should consider extending a helping hand to businesses that have faced genuine business risk. Wherever there were cases of imprudence, there might be a case for replacement of the current management.
There may be times when the banks may allow the promoters to continue for the present, and after taking the first inevitable haircut (a writeoff in some loans) either claw back to recovery or exit the business altogether. A third scenario would be where there have been misdemeanours.
In that case it might be necessary to alienate the present promoters/management, and bring in new promoters or management. In some cases it might be necessary to restructure the business as well.
He stated this while delivering the keynote address at the FPJ-IMC Forum, jointly organised by The Free Press Journal and the Indian Merchants Chamber in the city on Friday. The panelists at the discussion included Abizer Diwanji, Partner and National Leader-Financial Services- EY, Srinivas Vishnubhatla, CEO of Mosaik Risk Solutions and M V Tanksale, Chief Executive of Indian Banks Association.
Mundra said that banks should not slow down the pace of the clean-up exercise even after the current provisioning for Asset Quality Review is done, and said that they must increase their provision coverage ratio again towards the originally prescribed level of 70%. “There is no prescription at this point of time but let’s say there was a benchmark earlier, it would be a good thing to at least aim for that benchmark,” Mundra said. He said that banks must continue to improve their asset quality, by continuing the clean up exercise and improving their provisioning buffers.
The deputy governor in his address pointed out that the core earning capability of the banks over the years has remained intact. “It is on account of setting aside much larger sums for provisioning that is impacting their profitability currently.”
He pointed out that the operating margins of PSU banks have risen in the last four years from Rs1,21,834 crore in 2011-12 to Rs 1,34,190 in 2015-16 (provisional unaudited figures), while provisioning in the same period has gone up from Rs 71, 334 crore to Rs 1,39, 876 crore. As a result of this, profitability has declined from Rs 50, 583 crore to Rs (18,179) crore in the same period. Nine out of the top 10 banks holding bad loans are PSU banks.
He said the key reason why loans went bad was governance deficit, skill gap, leadership vacuum, misplaced incentives, he added. He called on banks to improve their credit appraisal and accountability framework to prevent future spurt in bad loans.
Mundra insisted that banks must not believe that retail lending, which has seen negligible bad loans at a time when corporate loans are going bad, were the panacea for their woes and put recovery systems in place before embarking on large retail lending. “Otherwise, you end up only increasing the book and again face another problem, after having dealt with one,” he said.
During the panel discussion, answering a question on how much of the money that is in default is recoverable, Abizer Diwanji, partner and head of financial services at consulting firm EY, said, “In order to recover the lost money, the bankers need to understand that we need to bring in changes in the management and bring on board a group of better and talented people. Further, the bankers have to keep coming up with innovative ideas and solutions and extract the good business from out of the bad. If we are successful in doing this, then we can recover around 75 per cent of our lost money.”