Narasimham Committee Is Our Mckinsey
Q: Has the government moved ahead on the proposal of providing guarantees for kickstarting infrastructure finance?.
A: The biggest problem in infrastructure finance is the large asset-liability mismatch. Even the funds available to financial institutions have a maturity of only 5-7 years, whereas the asset-side maturity for infrastructure projects has to be about 10-15 years. The question is: what are the type of instruments that can be developed for credit enhancement? For one, IDFC is thinking in terms of having relations with other term lending institutions to pick up the latter maturities of the loan. For example, if IDBI or ICICI gives a 7-year loan, then IDFC would pick up for the latter 3 years.
The other issue is development of the domestic bond market. But in the case of private investors, to make them invest in bonds floated to raise long term funds, some kind of guarantee must be given to them. So IDFC or somebody else could guarantee such bonds so that the domestic debt market can develop. The other important aspect to enhance the maturity of the loans is to facilitate securitisation of debt. But that would require some legal simplification.
Q: What is the future agenda for financial sector reforms?
A: Reforms is a continuous process. I would say that the reforms initiated on the basis of the last Narasimham report, concerning the various prudential norms in the banking system, have all been implemented. But the structural type of recommendations on reforms like what to do with weak public sector banks, and how to improve the accountability of the stronger banks to the markets have taken a little longer time compared to the arithmetical type of recommendations, like a 8 per cent capital adequacy requirement, asset classification, provisioning etc.
Q: Could you elaborate?
A: For weak banks, the issue is how do we go about giving them more capital so that they continue to grow. The model we have been trying to follow for such banks in the last one or two years is the Uco Bank case. Here, we tried to address the whole range of problems the bank was facing, like developing a strategic revival plan, the role of the management and also the commitment of the work force to improve the health of the bank. We also looked at the kind of capitalisation the bank would require and the problem of non-performing assets.
The Narasimham Committee had recommended setting up of an Asset Reconstruction Fund (ARF). For various reasons, at the time when the recommendation was processed, it was felt that an ARF could pose problems, such as who would fund it, how will the assets of the banks be valued, who would provide the money for buying out the assets at discounted value, and who would handle the recovery of those loans. It was then felt that the way out is perhaps through capitalisation of weak banks by inserting some tight conditions in their memoranda of understanding (MoUs) to ensure that capitalisation is not a soft option for the banks. The effort was to get away from the soft option and try and put certain performance benchmarks these banks would have to follow.
Reduction of NPAs is a key part of the revival plan. Everything hinges on that. Today, the cost of funds for a bank is, say, seven per cent, and four-five per cent goes into making provisions against NPAs. So you are already at the 11-12 per cent mark. Then you add other transaction costs, and arrive at your lending rate. So the capacity of that bank to compete will be undermined because of the NPAs.
In the revival plan, the workers and unions were required to reaffirm their commitment. And as a token of their commitment they have agreed to roll back certain allowances that have over the years grown outside the wage settlement, like overtime allowances etc. They have also agreed to redeployment of staff, identification of loss making branches, and their mergers and closures.
Q: What about the use of Voluntary Retirement Scheme to rationalise the workforce?
A: VRS is a not part of the package. But certainly there will be no recruitment to fill up unskilled type of vacancies arising out of retirement. About four-five per cent of the workforce retires every year from a bank. Today, in public sector banks, every sixth person is an unskilled sub-staff employee. Over a period of time, the vacancies arising out of retirement will be filled only by skilled persons so that overall level of skill in the workforce of banks is upgraded.
Q: Which other banks come under this Uco Bank model?
A: At the moment, only Uco Bank and Indian Bank have come under this package. We are now looking at United Bank of India (UBI). It has a very high percentage of NPAs about 35 -36 per cent.
Q: Is there any other model under consideration?
A: The alternative model is the concept of the Asset Reconstruction Fund (ARF) in a new form. The Narasimham Committee is again trying to revisit the idea. A special purpose vehicle must be created which can take over these assets at a discounted price. And against these assets, bonds must be issued to banks. Today, the government is putting money as capitalisation support, and in return it gets a stake in that bank. But if the government puts its money in ARF and not in capitalisation support, instead of getting shares in return, it would get assets.
The other alternative model is the idea of narrow banking where you turn some banks into retail-type outfits with mainly deposit taking activity. This would mean that they would not do any risky business; they would either lend in the call money market or make investments in government paper.
Another alternative is the merger of banks weak with strong. But the experience so far has not been very good. The New Bank and Punjab National Bank (PNB) merger took an excruciatingly long time.
Q: What about strengthening regulations to help recover NPAs?
A: It is being generally felt that the reform of external legal environment has not kept pace with the financial sector reforms. Enforcement of bank securities is a problem, for instance. But NPAs can be for a variety of factors one is that the industry has become uncompetitive per se, say because of technology. In that case the banks must have access to securities against the loan. The other could be just bad credit decisions.
Then there are all kinds of risks in the system today interest risk, market risk, exchange risk etc. And banks will have to take into account all those risks and provide for them. These are the real challenges now. Therefore, the reform process must now move into a micro stage for banks, in that sense. We have created a macro environment which favours autonomous functioning. But the next part now is that banks must be equipped to work in that environment.
Q: Press reports suggest that the banking division has hired McKinsey to suggest changes...
A: The banking division has not hired McKinsey. We have just appointed the Narasimham Committee. Narasimham Committee is our McKinsey.
Q: What is the scope of the Narasimham Committee?
A: It is basically to do some stock taking; that is, to assess at what stage we are and where do we go from here.
Q: Will the Committee meet the March 1998 deadline?
A: Theres no reason why it shouldnt. It is working at a fast pace.
Q: What is the status of the Khan Committee set up to look into the review of operations of financial institutions ?
A: The Khan Committee has been set up by the RBI. It would study the role of the financial institutions vis-a-vis the banks universal banking so to say where banks are doing more and more of term lending and the FIs are extending working capital. The Committee will recommend measures which will take into account this trend to prevent any asset-liability mismatch.
Q: Is the increase in offtake in bank credit secular in nature?
A: Compared to last year the numbers are much better. But as in any sort of situation, there will be certain sectors which do well for reasons like their cyclic nature. But credit offtake is much better.
Q: Does this mean that there is a turnaround now?
A: I wouldnt like to hazard a guess on that. We have to take into account a host of factors like access to foreign capital etc. So to develop some sort of a linkage between credit offtake and the performance of the corporate sector is premature.
Q: Is there a move to categorise infrastructure as a priority sector?
A: No, and I dont think it would be a good idea because then the real priority sector would suffer.