Cant change rules midway, process for bank licences wont be rolled back

Written by Arun S | Updated: Oct 9 2013, 08:59am hrs
Promoters who dishonour the loan restructuring pact with banks and willful defaulters should not be shown any leniency and must be asked to give up control of their companies and surrender their entire equity in them, if possible, according to financial services secretary Rajiv Takru. In an exclusive interview to Arun S, Takru responded to questions on a range of issues. Excerpts.

What action is being considered against promoters not sticking to the terms and conditions of the loan restructuring agreement

A promoter who has messed up the project must not be allowed to hold on to his equity and keep putting the entire stress on the banking system. What is happening now is that if the project recovers, the promoter's equity is there, but if it doesn't, the entire hit is taken by the banks. This cant be allowed to continue. So, in such cases, the promoter must take a hit, bring in more equity besides surrendering some equity to the financial institutions.

Will it be made mandatory for promoters to pledge with banks a specified minimum percentage of the equity that they are holding in the company for loans to be restructured

We dont have in mind any specific percentage of equity that the promoter must surrender. In fact, we are asking why such promoters must retain any equity at all. The government (being the owner of public sector banks) and the RBI governor (Raghuram Rajan) have said that if banks are putting any money into the project and the promoter is messing it up, we have to go for a management change.

The promoter can retain some equity if he wants, but, certainly, he cant have a controlling equity in such cases. If you mess up the project, you can forget about control.

Recently, the government announced that it has, in principle, agreed to sufficiently enhance the capital to be infused into PSBs. Would this reduce the cost of funds for banks sufficiently to enable them to extend loans at lower interest rates to consumers of two-wheelers and consumer durables

Data show that demand is a bit slack in certain manufacturing sectors. Through this additional capital infusion, we want to create a multiplier effect. This is the season when you normally have peak demand. When we identified sectors such as two-wheelers and consumer durables, banks were told to consider how to stimulate demand there. Towards that, banks are bringing out attractive schemes that they normally come out with in the festival season. If they require any additional capital infusion for that campaign, the government will give it.

What exactly will be the quantum of additional equity that you are planning to infuse into PSBs this fiscal over and above the budgeted R14,000 crore

We will give all the 26 PSBs whatever they require in addition to that R14,000 crore to meet the objective specified. We normally expect a leveraging of around 1:10 (by banks) when we give equity. The idea is to stimulate demand substantially and, thereby, push manufacturing.

Many are criticising this move saying it will lead to more bad loans, besides leading to distortions. Even RBI deputy governor K C Chakrabarty was quoted as saying that it is not prudent to increase consumption by lowering interest rates because if the interest rate goes up, loans will become NPAs. How do you respond to that

The RBI deputy governor was quoted completely out of context. He told me that the answer that he gave was in reference to a theoretical question asked by a student at a function he attended. That, unfortunately, has been taken and portrayed as some kind of criticism of the government policy. It was not.

The RBI has again lowered the marginal standing facility (MSF) by 50 bps to 9% to boost liquidity with banks. But some analysts say even this might not suffice to keep interest rates from going up.

Why should the interest rates go up Who says the loans will be given on a floating interest rate Why cant it be a fixed rate Why are we making this assumption that when interest rates go up, everything will become NPA I am not asking banks to give loans on a floating rate or fixed rate. What I am saying is that if banks come out with a scheme based on the additional capital infusion and give loans at lower interest rates to stimulate demand, why should it lead to higher NPAs This argument is absurd, especially because the level of NPAs is very low in consumer durables and the two-wheeler loan segment. Uninformed criticism is exactly the problem these days.

Is there any definite time-frame for issuance of new bank licences

We will get some idea about who all will get the licence by mid-January. The RBI governor has also said so.

Will there be seven new banks as the finance minister P Chidambaram was quoted as saying

Nobody has said seven. The finance minister has already issued a disclaimer, saying he was completely misquoted. I think he said several (applicants may be given licence), and not seven. That is why we were all very surprised by the news, because even scrutiny (of the applications) is not over. There never was a (an intended) number (of new banks), and there still is no number. It depends entirely on how many applicants are eligible and, at the end of it, how many are found to satisfy all the conditions.

Will those with a micro-finance background stand a better chance given the push for financial inclusion

Nobody has a better chance. You have to satisfy all conditions to meet the first level of scrutiny. After that, they will be looked at far more closely at the second level.

A Parliamentary panel comprising members from political parties, including the ruling Congress, has unanimously said that corporates should not be given a banking licence. What do you have to say to that

The licencing authority is not the government, but

the RBI.

But the panel has asked the government and RBI to roll back the entire process as it allows entry of corporates in the banking sector. Will we see a rollback

The RBI and the government will look at whatever the panel has said. But let me make it very clear that while it will be part of due diligence that the RBI does, you cannot change the rules in the middle of the game. We have to do things with the best of intentions and in an absolutely bona fide manner. No government can function if you are going to be always looking over your shoulder and wondering about 2G (scam) type of situations. You just have to do the right thing and be prepared to stand the scrutiny at a later stage. I dont think we need to worry here.

What is the progress on your proposal for setting up an independent oversight mechanism to supervise the corporate debt restructuring (CDR) cell

That was just a suggestion. It is up to the banks to take it or leave it. The government does nt interfere in the internal management of banks. They are old enough to look after themselves. However, we have given clear indications on how CDR is to be handled, including being strict on willful defaulters. If somebody is messing up something, management change has to be called for. CDR is not something which is akin to buying vegetables where anybody just comes in, takes CDR and walks off. It should not work that way. It has to be very tough.

You will be leaving for the US on Wednesday for an India-US dialogue. It is learnt that the US wants more market access in India in the financial services space and further opening up of the sector. How are you going to handle that and what is India going to ask for in return

Such negotiations are conducted only on the basis of reciprocity. It won't be that one side is always giving and the other side is only taking.

Both the sides don't talk unless they are prepared to give or want something in return for what they are giving. In such an ongoing dialogue, both the countries are open and flexible.

We will discuss all outstanding regulatory and other issues.

These are not conducted in the full glare of publicity. We don't negotiate after putting up a flag stating our intentions.