IL&FS mess could turn into a big contagion, says SBI Pension Funds MD & CEO

'There is not enough depth in the market. You might be able to sell a few corporate bonds, but not beyond that,' said Kumar Sharadindu

The IL&FS issue could turn into a big contagion if defaults continue, says Kumar Sharadindu, managing director and chief executive officer of SBI Pension Funds (P) Ltd. People have given money to IL&FS on the basis of its AAA rating and the rating agencies must be held accountable for chasing growth and compromising on quality, he said in an interview with Anup Roy. Edited excerpts:

SBI Pension Fund is a bond holder of IL&FS. Are you worried about that?

We are and had met the previous management on this. Thankfully, there is no default for us as of now. The situation will hopefully be under control by the time our payments are due. The good news is that the government has intervened. 

How much do you blame the rating agencies for this mess?

A lot! From AAA, the company’s rating became default grade in 46 days. Where is the surveillance the rating agencies have been doing? There were two rating agencies. We have our credit analysis system in place, but then, finding good credit strength, we thought the risk was worth taking. Based on their AAA creditworthiness, we gave money. Maybe if we have a situation in which somebody’s licence is cancelled, rating agencies will be more particular.

Will this result in a widespread contagion? We have seen only some signs of it. 

It will be a big contagion. No part of the financial market will remain unaffected. 

The government and the Pension Fund Regulatory and Development Authority (PFRDA) want more of corporate bond participation from you. Any plan of scaling back G-sec purchases in your portfolio?

There is not enough depth in the market. You might be able to sell a few corporate bonds, but not beyond that. If you increase the size of the issuance, it will be tantamount to increasing illiquidity in the market. AAA papers do get sold, AA also has a challenge, but anything below AA is difficult to sell. We are permitted to invest in up to A grade paper. 

You have earlier complained about the fee.

Funds are bleeding because of an ultra-low fee structure. I am sitting on assets under management of roughly Rs 1 trillion, and I am still making operating losses. This means that if you are making operating losses over 10 years, you will be eating into your share capital. It is another matter that our net worth keeps increasing but that’s because the investments we have made give us enough returns to compensate for the operating losses. We are the largest pension fund now.

What are you doing to overcome this situation?

We will have to wait for the PFRDA to float the next RFP (request for proposal). That will happen when it receives clarification on foreign direct investment guidelines. There are two pension funds sponsored by life insurance companies. Those life insurance companies are themselves subsidiaries of some other companies. And, in the parent itself you have an FDI or FPI, and the step-down subsidiary has a substantial number of foreign investors, and then the fund is the third level. Some of them will have to dilute their share of sponsors. The government has been asked to clarify this.

Analysts say NPS returns have been low...

That’s not correct. Somebody who has chosen too many government securities and very few or no equities might get returns of more than 8 per cent. But people who have chosen at least 40 per cent equity or higher get more than a 10 per cent compound annual growth rate. Even within bonds, if you have a choice between government securities and corporate bonds. Remember, there is a huge tax benefit also in the scheme. If you combine all, nobody can match the returns. 

Why is there not enough marketing for the NPS then?

Pension funds were not permitted to market their products, but now they can work as a point of presence and do the marketing.