The next couple of months should see progress on the asset management company-alternative investment fund (AMC-AIF)-led resolution approach under the Sashakt programme with discussions continuing with investors interested in the AMC and as co-stakeholders in the AMC and the AIF, and the term-sheet under preparation, Sunil Mehta, Punjab National Bank’s non-executive chairman, tells Mitali Salian.
by Mitali Salian
With conclusion of the latest monetary policy, focus shifts to policy transmission. Historically, transmission has been slower in a rate cut cycle. In the same vein, RBI has proposed to replace MCLR with external benchmarks. Your view on both?
The transmission, particularly when it comes to softening of the rates, is done in a calibrated manner by the banks because they also have to take into account the risk ratings of the borrowers. And, there is much more an element of the risk-adjusted returns. So, if on a risk-adjusted basis, bankers feel comfortable that transmission has to take place with certain segments or in certain specific corporate customers, I think that is what happens first. The second would be as you sequentially start going down the customers that have high risk ratings, where risk-adjusted returns are lower than what should be their hurdle rates, its quite obvious that they would look at exactly what needs to be done in those credits.
The external benchmarks is a good thing for the RBI to start considering as there is much more texture around those as to the final impact. Anything new that comes up you need to sort of review it more analytically and if that makes more sense, that is the right way to proceed. If we need to look at how external benchmarks will fit into the way the banks are reviewing their pricing of their own assets, and the interest rates, let’s see what comes out and whether it really is helpful or not.
With provisions in the quarter-ended December, the fraud is behind the bank. In terms of processes, compliance and work force, how has the bank come through?
There is a lot that has been done since the crises hit us last year. And the board and the management collectively decided that we need to understand what went wrong and do a root cause analysis. And once we had done the root cause analysis of the issues relating to controls or risk processes, then we were able to articulate well-thought-out strategy of what elements of the existing processes need to be changed.
There is the back-end, the entire control mechanism that is in place, overall risk management architecture that needed to be looked into and the entire audit process – internal and external. And the engagement of the employees and the management in accepting what were the issues and addressing those in a time-bound manner. And we used technology far more effectively. We used external consultants or firms that could assess in-depth, independently rather than our own assessment because sometimes you may not capture it yourself but a fresh pair of eyes looking inwards is much better than eyes inside relooking at the processes internally. That has all been done and now all those processes have been institutionalised. And as we keep moving along, we will keep testing because this is not a one-day we can say that everything is fully tied under. So, we have to constantly upgrade this with market changes. So, from hereon, it is really looking at getting back into a very strong growth momentum.
Under Sashakt programme, banks are attempting resolution in some cases under the Bank-led resolution approach (BLRA). In fact, it has been learnt, Jet Airways loan recast is being undertaken within the scheme. How are you seeing the scheme shaping up?
Now many of them have recognized exposures that they want to put as part of this mechanism. And I think it is a complimentary mechanism that is available to the IBC processes. Proof of concept (Jet Airways) will be available for everyone to see as to how it is working. And then you will find that it obviously opens up a lot more that is coming to play there. So, that is on the BLRA. And I am confident a lot more referrals will be made in next few months.
When banks are signing an agreement or contract, it’s a fairly elaborate agreement. And I have to give credit to all those 34 banks which have signed and NBFCs and institutions because it entails not only internal, board review but obviously their legal review from external legal counsel. And then for the Sashakt committee and the law firm that we were utilising to respond to their queries. IBA was also to set up an oversight committee and now that is in place to make them fully comfortable with the processes. This was a phenomenal task done in a record time.
We have yet to see foreign banks among the signatories of the ICA
Foreign banks have a very small exposure. And since they have to go up the chain for getting this, we recognise that this will take time. On a case-by-case basis, if they want to be part of this, they can always come in and be a sign-up and then go ahead and get the resolutions done wherever they are part of the CoC in cases that are referred to the BLRA.
Another aspect of the Sashakt programme is the AMC/AIF-led resolution approach for assets with exposure exceeding Rs 500 crore. Has the AIF received any interest yet?
Yes. The AMC has been incorporated and is called Sashakt India Asset Management. And now we are in discussions with the investors into the AMC as the co-stakeholders in the AMC itself and the AIF. There are parallel discussions taking place. The term-sheet is under preparation for the AMC and AIF and once it is probably approved by the lawyers, we will share it with all the stakeholders concerned. So far, the interest has been enormous from both looking at the AMC and AIF. Over the next couple of months, we will be able to close all the elements that are outstanding in this, including capitalisation of the AMC. And then, of course, there is a process of fund raising in the AIF itself.
Would you say that there is increased responsiveness to pre-IBC resolution schemes given the delays with resolution under IBC. In fact, we are seeing banks opting for upfront cash on stressed asset sales against taking on SRs in a bid to get out and clean up books quick.
On the bank-led resolution approach, that is definitely the case. We are seeing December operationalisation of the scheme by IBA, there is now lot more interest because this is being managed by the IBA. IBA would, quite sure, they will have all names where at least initial enquiries have been made. And I am reasonably sure that over the next several weeks, you will find more of those names being referred to the IBA.
Any progress on the proposed asset trading platform?
The AMC/AIF work is in progress and in motion and gaining good momentum. We had also indicated in our recommendations that on asset trading platform some more work still had to be done as legal elements had to be resolved because of issues regarding stamp duty.
The ATP, which is a platform for both performing and non-performing assets, provides a very good possibility subject to tweaking in resolution in some of these applicable regulations or laws that are concerned. To move assets from one institution to another – for example if there is a regional bank that is very good in liability generation but it has a limitation in terms of the balance sheet size – then it could aggregate assets that it wants to dispose off to keep within balance sheet parameters that is desirable. And it could be money centre banks that could actually have capacity to pick up those assets. And this could be a digital process, it could be listed, rating agencies would then provide ratings of those assets that are aggregated and there is a very simple documentation that can be put together. There is some work to be done on this. I think, over a period of time. I expect this would be a good addition to the Indian market itself for mobility of assets in a seamless manner.
There had been some speculation over talk about merging PNB with smaller entities?
At the moment, there has been no advice from the government to the bank and to the board of any merger, amalgamation, or consolidation as the case may be. That we will leave for the government to take a call on the matter.
What does the future look like for PNB?
Form here on, it is about implementing the vision of the bank that we have come up with over the next couple of years and it really is focussed on moving into a growth mode from here. The data that bank has accumulated over the years is of huge value. How can we cross sell, upsell because we have got a huge 10-crore customer base, the kind of customers we have added during the Jan Dhan scheme itself.
So, the strengths are enormous. Now it is a question of strategising. We have a very good credit card base with huge potential to grow. Similarly, we have new generation customers coming in, the millenials, how do we create a digital platform that will work for them. The existing customer base that we have, how do we make sure that we can sell them insurance, mutual funds and other products that are required from a point of view of their own savings.
We have a huge number of asset products. We still have a very successful subsidiary with PNB Housing; we have PNB Metlife, PNB Gilts, PNB Investments Services etc. So, we are looking at inducting professionals in some of these subsidiaries and associates.
There is a huge amount of excitement in building PNB that will be more contemporary and engaged. Call it PNB 2.0; I still feel the great times of PNB are on its way. When you emerge from a situation of crises and you want to rebuild the institution, one of the most interesting challenges that encounters everybody in the organisation is how do you re-invent the institution.