Team Panorama, in conversation with Ms. Shubhalakshmi Panse Former Chairperson & Managing Director, Allahabad Bank / Independent Director at IL&FS Financial Services Limited (IFIN)

It’s estimated that accumulated bad loans or stressed assets is close to INR 10 lakh crore. The Government has notified various legislations to resolve the situation, but implementation at the level of competent authorities in the banking sector is just not happening. How to resolve this
The issue of NPA resolution and the Restructured Assets has been in focus for last three to four years. In order to look for a resolution it is necessary to analyse the reasons for these problems which can be summarised as under:

  1. After a fast paced growth of Indian economy, wherein every sector grew at more than double digit growth rate, the economy went through a plethora of challenges such as delayed resolution of critical factors in the Infrastructure segment at the policy level, change in the Government, a very slow and time consuming Legal process, highly leveraged Corporates and a sudden change in policy due to the changed environment.
  2. This naturally had a negative impact on the business environment resulting in stalling of various mega projects in the Road sector, Power sector, Port as well as other related industries.
  3. In the case of Restructured Assets, it was expected that the Borrowers would bring in additional equity when the financial institutions were ready to reduce the rate of interest, extend the repayment period and also take a haircut. However, since most of the Borrowers were already highly leveraged, additional equity could not be brought in, as a result, most of the restructured assets turned into NPA thereby aggravating the NPA problem.
  4. In case of PSBs, most of the CMDs as well as MD & CEOs have had a short tenure at the helm of their organisation resulting in introduction of quick fix solutions and no long term strategy could be introduced.
  5. The Borrowers have been adopting time consuming strategies, thereby delaying the already lengthy legal procedure and hence no legal resolution has been seen in the last many years. In fact, it is seen that Borrowers want the banks to go to the court which earns them respite from the follow-up for recovery and most of them strip away the assets and monetise them and the banker, at the end, is left with the shell company with zero recovery value.

Looking at current liquidity position in the market, do you think there’s scope for lending rates and deposit rates to be reduced with the status quo as far as the overall

We live in a country that has no social security system and most of the senior citizens in the middle class and lower strata of society live off the interest their life long savings earn by way of interest they earn from the deposits kept with the Banks.
Theoretically, in view of current liquidity position, the interest rates on deposits can be reduced further but then one has to also think of the millions of customers whose sole income is interest income and in the past also we have not seen interest rates going below a certain threshold level say 6.5% or so. Hence, in my opinion, we may not see much reduction in the interest rates on deposits and advances from the current level.
The recent step by some banks in reducing the interest rate on Savings deposits by fifty basis points is an indication of the fact stated above. This strategy has allowed the banks to reduce their cost of deposits without reducing the fixed deposit interest rate.

The Indian economy is on the road to recovery, would you say that the worst is over regarding the NPA situation

In my opinion, till we improve our legal system, the NPA problem will be continuing for some more time. Periodical introduction of loan waivers has had a very negative impact on the Repayment culture of the society as a whole and these developments have rather complicated the NPA resolution scenario in our country.
Presently, no new projects are being set up by the industry as a result of which there is hardly any offtake of fresh loan and hence to that extent there will not be fresh accretion of NPAs, but those restructured assets if not nursed to health which requires timely help and monitoring would keep adding fresh NPAs for some more quarters, say two to three quarters more.

Some of the banking experts believe that the non-performing assets (NPA) issue is beyond resolution, hence the financial institutions have to take a haircut. Do you approve the same view

During earlier days, every bank used to have a Rehabilitation vertical to analyse every advance going bad from the viability point of view and if found viable, would nurse the account back to health by reducing the rate of interest, funding the interest in advance by converting the quantum into a term loan with softer terms i.e. rate of interest and repayment period. If necessary, a haircut also was taken with a right to recompense clause in the revival package sanction.
However, with the introduction of SARFEASI Act, the moment an account becomes NPA, on the 91st day, the loan is recalled and recovery action is initiated. In my opinion. NPA resolution is possible, which requires special attention, patience and haircut if the situation demands. In addition to all these strategies, we need a very quick and fast paced legal system which would ensure that a timely resolution happens and Borrowers stop looking at the legal recourse as a way of getting out of the clutches of Bankers and the Financial Institutions through delaying tactics.

How banks are sharing information about difficult accounts to mitigate issues related to credit risk

In case of Consortium accounts, there is an exchange of information at definite periodicity to ensure that all the banks are on the same page. In case of multiple finance, once the account becomes irregular, the Bankers share the information with all the known banks. With the establishment of Credit Bureaus, and with the advent of technology, it has become easier for a banker to get all the information about a borrower and know his indebtedness.
Do you approve that the insolvency and bankruptcy code is going to be a game changer for the banking industry 

In my opinion, the introduction of Insolvency and Bankruptcy code has been a great step and if the legal process moves at the expected pace, it definitely is a game changer provided there are no hindrances to take the case to a logical conclusion.
Experts view that to fix the glitches of the banking sector, it’s necessary to (i) accelerate recoveries from non-performing assets (NPAs), (ii) recapitalise banks to strengthen their ability to expand credit, and (iii) introduces reforms that will increase the efficiency of these banks. What’s your opinion on this issue

There cannot be two opinions about the steps stated in the question. I can only add one and that is- in case of PSBS, the top boss needs to be given a term of minimum five years so that he/ she can take decisions, review the impact, take course correction, if necessary, and show the results expected of him/her.
How do think the asset reconstruction companies (ARCs) can play an important role in solving the problems of non-performing assets (NPAs)

The ARCs can play a very active role in quick resolution of the NPA challenges. Those ARCs that are not merely interested in stripping the assets and monetising them, but want a long term resolution by giving timely help by taking over the loan, Restructure the same, introduce additional funds, if required by way of equity or loan, and ensure the account turns the corner and becomes performing once again, can play a very positive role in resolution of NPAs. RBI while issuing licenses to the new ARCs, need to encourage those ARCs that have deep pockets which will ensure that serious and right players get introduced in the field of ARCs.
What can the banks do to revive credit growth in the economy and boost investments

It is not the Banks that can revive the  economy, but once a very conducive atmosphere is made available by the Government in a level playing field, faster clearances for establishing the business and running it, the Banks will definitely extend the required credit as Banks are in the business of lending and their survival depends on a healthy growth of Lending portfolio which in turn will make the Economy grow at a pace which will ensure that the country remains on an upwardly mobile growth trajectory.

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