I doubt rating agencies' ability to spot misconduct by IL&FS: A K Pradhan

'What is the point in having ratings of double and triple-A if that doesn't give any comfort? You cannot depend on these ratings even for six months,' Pradhan

Kolkata-based United Bank of India is under the Reserve Bank’s Prompt Corrective Action (PCA) clamp, for having had too many loans turning bad. ASHOK KUMAR PRADHAN, its new managing director and chief executive officer, speaks to Namrata Acharya on what he intends to do and related issues. Edited excerpts: 

What is your vision for the next year, especially to come out of PCA?

We have already hit rock-bottom; things should improve from here. The major issue we now face is a capital constraint. We will adopt a ‘4CN’ approach — capital conservation, control and compliance, cost rationalisation, comfort of technology — and, most important, non-performing asset (NPA) management. This formula we will follow in the next six months. 

Cost rationalisation is crucial; our cost to income ratio is very high, at more than 60 per cent compared to the sector average of 45 per cent. What steps are you taking towards cost rationalisation?

We recruited almost no one last year, not even against retirements, and have no plan for any recruitment for even next year. We are looking at every component of our overhead expenses. For example, rent is a major item; expense on stationery and postage is another. We have pockets of overlapping presence which we also need to rationalise. 

Your capital requirement estimation for this year?

We will be needing Rs 26-27 billion and have requested the government for the infusion. We expect some amount to come this quarter. 

Where are you in terms of PCA thresholds?

On capital adequacy, we are still adhering to the benchmark. On Gross NPA, we are seriously lacking and are working on its reduction. By the end of this financial year, we should be getting a GNPA of 14-15 per cent, and net NPA to below nine per cent. That will take us out of that PCA radar. On returns, we should, hopefully, be positive by the end of this financial year, returning to profitability by the fourth quarter. 

Your assessment of (loans to) power sector companies? 

If power sector companies go to the NCLT (the insolvency tribunal), banks will have to take a huge haircut (write-off). A large number of (these) assets are complete but waiting for fuel supply arrangements. Our exposure to the sector is around Rs120 billion. If they go to NCLT, the banks will get not more than 50 per cent. If NTPC comes to the rescue of these units, thee banks can recover a large part. 

What recovery are you expecting from NCLT? What is the status of your loans stuck there, especially from the first two lists of RBI (of major defaulters?

A large number of (these) cases are going beyond 180 days (the desirable limit the law states for deciding; some are more than six months old. So, things are not speeding up the way it was expected. More than 40 per cent the banks can recover in both the lists. 

Any exposure in IL&FS (the infra major which has sunk under a tide of bad loans)? Have you made any provisioning already (for loans given there)?

We have a good amount of exposure, in four digits, in eight to 10 of these accounts. IL&FS should have a resolution, now that the government has engaged professionals (to oversee it). There is apprehension that banks will have to take a haircut of 10-15 per cent. Perhaps there could be some restructuring. 

  

Since you have major exposure to IL&FS, did you have any inkling about the impending crisis?

We didn’t see it much, as the rating agencies were giving IL&FS triple-A and double-A ratings. I now have a serious doubt about the ability of rating agencies to read into misconduct on the part of these companies. What is the point in having ratings of double and triple-A if that doesn’t give any comfort?  You cannot depend on these ratings even for six months. Bankers were unaware of the crisis. The way IL&FS was requesting support from time to time, we sensed a problem but not of this proportion. 

We will provide whatever the regulations require. We have taken this into account. 

Do you see UBI as a candidate for merger?

I have a strong belief that UBI is a family name in the east, with a strong regional flavour. I think the (central) government will continue to have it as an independent bank. For that, my team will have to work a little hard. We expect to be in a profit trajectory from the fourth quarter onward, If no then, certainly by the first quarter of the next financial year. 

Your view on the merger of Dena, Vijaya and Bank of Baroda?

It might provide a long-term solution. However, if merger is considered as an alternative to the problem of NPAs, that will not be the case. If we are talking about funding big-ticket projects, we will need fewer banks and a merger will do a good job. 

What credit growth are you expecting?

MSME (micro, small and medium-size enterprises) should be a major driver of growth. We are doing some structural changes in our system, which will expedite my turnaround time. We also need some upgradation in technology and there are some skill deficiencies that need to be addressed. I am expecting 15-16 per cent (loan) growth in the MSME segment,10 per cent in agriculture and 18-19 per cent in retail (meaning, loans to individuals). In the corporate sector, I do not see many good projects worth funding in the near future. 

Do you think only retail credit will help in turning around the bank?

We have requested the government that our RWA (risk-weighted assets) be allowed to operate at the level we achieved last year, which was Rs 710 billion. The government wants (us) to operate at the level of Rs610 billion. As of now, we are within their parameters but six months is a long time. If the government agrees to our proposal, it should be possible for us to make a turnaround by the fourth quarter. Even if it doesn’t come, we expect turnaround by then or, as I mentioned earlier, at most by the first quarter of the next financial year.