'We need a strong bankruptcy law'

Edited excerpts from a discussion at the Business Standard Banking Round Table held in Mumbai on December 2

Are banks shying away from funding large projects?

Aditya Puri: If there is a viable project and if there is a capital requirement, banks will definitely lend. There is no liquidity crunch if the project is viable. And it is a myth that banks are not lending because of NPA (non-performing asset) issues.

Arundhati Bhattacharya: To say that growth is not coming because banks are not financing is extremely wrong. We have more than enough liquidity to fund if a project is good. From 2011, the number of projects that have been put to us has significantly come down. Just two months back we saw that the non-infra projects that were 17 last year is down to three. So, it is more a question of getting projects off the ground than financing.

How do you see the next twelve months?

Shikha Sharma: We are definitely seeing focus on clearing some of the bottlenecks. There are two positive signals that we can see already. One is that some of the projects that were earlier stuck are moving. We are beginning to see some expenditure happening. The second is that in the case of highly leveraged companies, they have managed to start some of their assets. And as those projects become more productive, it adds to capacities, allowing them to do the next round of investments. Recovery on the ground will take a couple of quarters but we are fairly optimistic that things should look better next year.

Ravneet Gill: Next year, we expect things to be better. We expect earnings growth in the range of 16-17 per cent next year.

Are the savings rates for depositors attractive?

Bhattacharya: Currently, depositors are gaining money and not losing money by putting it in bank deposits. There are certain disincentives that deposits have in terms of tax deducted at source; so that continues to remain a disincentive and people will continue to use other instruments. My advice to savers is that when any market is trending upwards they should not jump in with everything.

Puri: Given the fact that there is a real return available on deposits today, I would strongly recommend people access these deposits. The second point is normally we find retail investors come into the market at probably the wrong time. So I am not saying don't go into the market; I am saying keep a proportion.

Pramit Jhaveri: I think with depositors getting a positive real return, the trend will start reversing in favour of financial assets. On the other hand, there is a wonderful opportunity for the government to find ways to once again try and increase the average savings rate for the average individual.

Are you looking at lack of projects from the capacity side for companies and if they don't have profits, they don't have the equity component of projects. So, when you look at company balance sheets, do you see a change in profit levels?

Bhattacharya: A process of consolidation is already on. What we are seeing is that many of the companies' completed projects are getting sold. People are now trying to bring down leverage to a bearable level.

Companies which had got over-leveraged on account of lack of access to capital markets are also beginning to access capital markets, and this is happening for small companies as well. As that happens and they bring in more equity, their ability to come in with further projects will be restored. So this is a process and will take 12 months. This is why you are also seeing that credit growth is almost at the bottom.

One of the reasons is that people have put up capacity which was not getting used. Now the time has come to start using that capacity.

But for ramping up capacity, you need working capital funds which are short-term. And short-term is better available in the CP (commercial paper) market, especially for well-rated companies.

Gill: I think we need to recognise that India is a political economy and to that extent government policies play a big role. Second, all the capacity that was put up in 2007, 2008 was because people took it for granted that India would grow at 9 per cent. That 9 per cent became 4.4-4.7 per cent. So you have surplus capacity on the ground.

Further, you have large projects which are fully commissioned, capex is completely in the ground, but they have not come on stream and hence banks or lenders become the victims. Third, India Inc is highly leveraged. I think these issues need to be sorted out.

What is the picture from the SME sector?

C S Ghosh: Our customers typically do not have balance sheets, they take small-ticket loans, have no collaterals, no income tax statements. We are financing them on the basis of cash flows. These companies have been growing. They face a challenge on the administrative part as they do not get trade licences and face other such issues. But their repayment practices are good and their cash flows are good. The problem arises when they do not get returns on their business. I think this is an area where we can grow more.

The RBI governor raised the question of 'super equity' the other day. Promoters don't suffer and the person who gives credit takes the hit. Your comments.

Sharma: For credit to grow, it's very important to ensure collectability and we have a lot of systems and structures to allow that to happen, such as SARFAESI, DRT. But, sometimes they are not very effective. The governor is talking about getting them to be more effective, timely decision-making and so on. If we can actually execute that, it is going to improve the credit culture and will allow credit to be delivered more easily and priced more rationally. The effect of that will probably be felt in the medium term.

Puri: We need something on the lines of a Chapter 11 here. They have to be committed to better delivery whereby if a project is unviable or if it takes a hit, then the equity should take the hit first and if the company still suffers, they (promoters) have to leave. There have to be laws to enforce that. The laws exist but the execution has to be there. And maybe you would need more laws. There has been already some beginning.

Jhaveri: What the governor spoke about is having more skin in the game. Maybe there has not been enough skin in the game. In the recent past, we have seen evidence in the banking industry of that changing. Banks are asking big borrowers to have skin in the game. Also we have seen that banks are facilitating consolidation when there is not enough skin in the game.

On financial inclusion, the Jan Dhan Yojana and payment banks have been the foremost initiatives. How do you look at that?

Sharma: Success of Jan Dhan has been more than what was anticipated and that is why the target has been increased. Yes, a lot of those accounts do not have much balances, but that is what we have found in various financial inclusion accounts. It will become viable as these accounts are used for direct benefits transfers at some point of time.

Bhattacharya: We have to take the very large number of accounts as an investment. It is indeed costly to open an account, especially when you are opening it with a card. The only way we look at it is if at some point of time, money flow comes into these accounts that enables us to set up a pattern that enables us to lend to them so that we take them out of the clutch of money lenders into the banking system. These customers will need to be served closer to their doorsteps. We cannot expect them to come to the banks' branches. So the cost of serving them has to be brought down.

Puri: There is enough for everyone to do. When you talk about Jan Dhan and payment banks, you are talking about financial access. Financial inclusion is a wider term where you are creating a sustainable system.

Arun Tiwari: Talking about competition, 20 to 25 years back we were working in manual form, then the computers came and we had to adapt faster because of the competition and the customer has always benefitted from it.

Jhaveri: The role of a bank is to facilitate progress and create economic value for its customers. If you think about India for the next 10-15 years, if you think about any of the drivers that have been talked about-whether it is penetration, whether it is access or digitisation - banks will facilitate progress and create economic value.

The problem we have is that of instant gratification. We are looking at payment banks and saying will they create value next year? Will they have good market cap in a short period? Good institutions are created over a long period of time.

How do foreign banks see the opportunity? Will it be part of the game or do you feel left behind because the environment does not give you the room?

Gill: The point that was made was there is enough room for everybody to play. The second thing is banking has been at the forefront of innovation.

A lot of that innovation comes in banking because you are pushed to the corner. It will make banks more competitive, the cost structure will improve, and the overall efficiency will improve. We need to look at these changes more constructively.

Why is the percentage of NPAs in PSBs' assets higher than private banks'?

Bhattacharya: Seventy per cent of banking in India is done by public sector banks (PSBs) and the private sector does only 30 per cent. So naturally, PSBs will account for 70 per cent of the NPAs, but it's a fact that the NPA contribution of PSBs is higher at 90 per cent.

Large corporates are funded by both private- and public-sector banks but they are not the ones that become NPAs and they have other funding avenues, for instance, from their non-core assets. So they may be stressed but they don't become NPAs.

The difference between the PSBs and private-sector banks lies in mid-corporate, SME & agri areas. Here the private sector's contribution is of recent origin unlike PSBs. In the private sector, you can make bilateral deals but in the public sector I cannot do a bilateral deal till I have convened a committee that comes up with a reserve price and I do an auction. If it fails then I will have to repeat the process and only after that I can do a bilateral deal. Even if I do a deal after two auctions then the possibility is very huge that I will get an RTI and then I will have a CVC enquiry and may be even worse. So you have to understand the constraints under which PSBs work.

What are your primary internal and external constraints?

Gill: This is a growth market and will continue to grow. Internal constraints are not that many. Externally, the banking opportunity will be bigger than ever before, but I think we need to see in a very different fashion. For example, the trade finance/panel business has changed in the last year and a half, because of the micro economic environment and because the entire universe of clients has got severely squeezed. Margins have collapsed. That business needs to be reinvented and the challenge for us is how quickly we can reinvent ourselves and reposition ourselves.

Bhattacharya: Human resource is the biggest challenge. We have a workforce of 220,000 and we have large-scale retirements coming up every year for the next several years. To get in that many people, to train them, to have them ready. Not only that, internally also, promotions are taking place much faster because we have a gap in the middle (level), because of 12 years of non-recruitment; so, that is definitely a major challenge. Externally, low credit growth is a challenge.

Puri: We see a fantastic opportunity and no constraints. With 60 per cent of rural India underpenetrated, India growing at 6.5-7 per cent, and a complete change in the digital environment with a large population moving to digital, this may be the best of times.

Jhaveri: We have to make significant investment in talent; it's both a challenge and an opportunity. The priority sector lending regime that exists today needs a change.