Fareed Ahmed, executive director at Punjab & Sind Bank, also says his bank’s capital base remains sound and it will soon seek board approval for raising more funds from the market.
The government’s proposed capital infusion into public-sector banks (PSBs) will help even the small PSBs meet regulatory requirement and lend more to boost economic growth. Fareed Ahmed, executive director at Punjab & Sind Bank, also says his bank’s capital base remains sound and it will soon seek board approval for raising more funds from the market. In an interview to FE’s Banikinkar Pattanayak, Ahmed–who holds a PhD in asset quality management– says the RBI’s revised guidelines on stressed assets (It has set timelines for resolving large NPAs, failing which banks have to mandatorily refer them for insolvency proceedings) will help tackle the bad loan problem in the medium and long term.
Q. Some banks have been hit by the massive fraud at Punjab National Bank, a branch of which issued LoUs fraudulently to jeweller Nirav Modi. Does your bank have any exposure to Modi?
No, we don’t have any credit exposure to Nirav Modi.
Q. The government has announced an unprecedented Rs 2.11-lakh crore recapitalisation of public-sector banks (PSBs) through FY19. Will it work?
The government’s re-capitalization is a welcome move, as the plan addresses regulatory capital requirement of all PSBs and provides a significant amount towards growth capital for increasing lending to boost the economy. The recapitalisation is also accompanied by a strong reform package across six themes.
Recapitalization will help banks to extend fresh credits and to sort out the stressed asset problem to an extent. At the same time, recapitalization is not indiscriminate, as banks themselves must commit performance improvement measures by signing memorandum of understanding with the government. India had used this tool before between FY1986 and FY 2001, wherein the government recapitalized PSBs with a total amount of Rs. 20,446 crore.
Taken together, the recap and reform agenda is sharply focused on strengthening PSBs, increasing lending to MSMEs and making it easier for MSMEs and retail customers to transact while significantly increasing access to banking services.
Q. Around a half of PSBs are under prompt corrective action initiated by the RBI, with lower-than-desired capital adequacy. How good is your bank’s core capital base?
For FY18 and FY19, the minimum common equity tier-1 (CET-1) requirement is 5.5% and minimum tier-I capital requirement is 7%. Our bank’s tier-I capital ratio has always been well above the minimum required level. As of end-December 2017, CET-1 ratio was 8.12% and tier-1 ratio was 9.63% and CRAR, or Capital to Risk (Weighted) Assets Ratio, was 11.16%.
Q. The government has also asked PSBs to raise funds from the markets. Are you planning to tap the market anytime soon?
The public shareholding of our bank as of end-December 2017 was 20.38%, compared with the minimum requirement of 25%. The finance ministry has indicated a capital infusion of Rs 785 crore into our bank. In order to strengthen resources for expansion of credit and improve capital adequacy and maintain the minimum public shareholding requirement, our bank will endeavour to raise capital by way of public issue/right issue/ qualified institutional placement(s)/preferential issue after seeking necessary approvals from the competent authority.
Q. You have done your PhD in asset quality management, an area which has assumed immense importance for banks struggling with massive non-performing assets (NPAs). What are the major causes of bad loans?
The trouble began in 2008 following the global slump. Between 2006 and 2010, the economy had grown at around 8-9%. So, companies borrowed aggressively for expansion. When the slowdown came globally in 2008 and in 2010-11 in India, it played havoc with corporate repayment abilities. Banks have turned cautious since, and by February 2017, loan growth had hit an all-time low of 3.3%.
So slowdown of the global economy, volatility in raw material prices, delay in implementation of projects due to various reasons, and other industry-specific risk factors resulted in the NPAs. Further, an analysis of NPAs suggests 60% of stress is from sectors like steel, power, cement, aviation, shipping, construction and real estate. There had been a trend of aggressive expansion of these sectors during the boom period. Moreover, lending and investment continued to these sectors even after global meltdown on strong perceptions that the global crisis would not impact the Indian economy significantly. This resulted in aggressive expansion of capacities. All projects made projections with the assumption of higher GDP growth. This led to higher accumulation of stressed assets.
As many as 21 listed PSU banks have a combined gross NPAs of Rs 7.3 lakh crore at the end of September 2017 quarter. They grew by more than 27% in the September quarter from a year earlier. Credit growth fell to a record low of 2.8% in FY17. Looking at the above scenario, a lot of positive improvement is required on all aspects.
Q. What is the probability of such bad loans coming down?
With the recapitalization plan, credit off-take is expected to pace up. Further, with introduction of the Insolvency and Bankruptcy Code, the chances of turning around stressed assets have improved substantially. Also, improvement in the ease of doing business and positive signs of global economy will improve asset quality. Secondly, with the RBI’s revised guidelines on “stressed assets”, the problem of bad loans is expected to improve in the medium and long term. With a firm deadline and clear process now in place, resolution plans (RP) cannot be delayed. Now, the Reserve Bank of India (RBI) is empowering banks to come up with revival schemes—that is, either to find a suitable resolution plan or to refer the case to NCLT. This scheme will enable the Bank to identify the stress in an asset and find out suitable measures to protect the economic value of asset in a time bound manner.
Q. Are your NPAs higher in agriculture?
Our Bank’s NPA in the agriculture sector is less than the Industry NPA average. Some of the causes leading to NPA in the sector include, challenges faced by agriculture sector like dependence on monsoon, high input costs, high wastage due to inadequate storage and supply chain infrastructure and sometimes temporary negative impact in anticipation of loan waivers.
Q. The government has fixed digitisation targets for PSBs. What is the target for your bank?
Our target has been set at 12 crore and we are taking all steps to achieve it.
Q. In recent months, the hardening of bond yields has started to impact banks’ profitability. How is your bank affected by it?
After successive fall in bond yields starting from January 2015, rates have hardened from July 2017. The 10-year benchmark yield has moved up to 7.60 per cent in February 2018 from 6.50 per cent as on July 2017, up 110 bps in six months. The large losses emanating out of the quick rise in bond yields, especially in the last six weeks, has resulted in large mark-to-market losses on lenders’ non-HTM (held-to-maturity) investment holdings, though these are notional losses.