In the year’s first earnings seasons,
banks have failed to post extra-ordinary
numbers on the back of increasing non-
performing loans (NPL). The overall
banking system has a gross NPL of 4.5
percent but within that the public sector
banks have a higher percent of almost
5.15 percent. So, the problem is acute for
the banking system, it is very acute for
the public sector banking system.
But this won’t last more than three years,
say Dr Charan Singh, Professor of
economics, IIM Bangalore and Sharad
Sharma, Managing Director, State Bank of
Mysore , as they believe overall growth is
the key solution to such a sad state.
Singh says “If you look at the history of
Indian banking way back in 1993, these
(NPL) were around 19 percent but once
the growth started picking up our NPL,
NPAs started coming down drastically.”
However, with the lack of equity and
muted demand, the problem of iron and
steel dumping have only added to the
issue, says Sharad Sharma, Managing
Director, State Bank of Mysore.
“There are hardly any proposals which
have come in for CDR, all that has got
sweated out and the project loans under
5:25 is going to expand,” Sharma adds.
Singh is of the view that stopping to fund
iron and steel industries would reduce the
capacity and supply which would correct
the price, eventually. A solution to the
ongoing trouble with the steel sector is
“we could raise the import duty and let
some part of the industry die,” he says,
adding, “Our PSU banks probably need
accommodation and different benchmark
at least for a few years.”
Raising additional problem being faced by
the banking sector, Singh says: “Earlier
when the public sector banks were
nationalised they were prominent in
different parts of the country; now all of
them are everywhere and probably they
are facing competition amongst
themselves.”
“So, they need to determine their niche
areas and they need to specialise there
and extend loans there,” he explains.
Below is the edited transcript of Dr Charan
Singh’s and Mr Sharad Sharma’s interview
with CNBC-TV18’s Latha Venkatesh.
Q: Is your sense that growth will
ameliorate the problem often when an
amount of good loans increase the
percent of bad loans decreases on its
own, that was our experience in 2003.
Will we be able to repeat that?
Singh: This is a very pertinent issue. 13
percent is really a very high Non-
Performing Asset (NPA) but I don’t think
there is a cause of worry because if you
look at the history of Indian banking way
back in 1993 we around 19 percent but
once the growth started picking up our
NPL, NPAs started coming down
drastically.
For a very long time we were hovering
around two percent. So my own feeling is
firstly we should not be startled and
worried about it. We have done it in the
past, we can do it again. The only thing
that we need to focus on is growth.
Q: But how much time do you think? The
Reserve Bank’s financial stress
assessment said that it will rise up to
September and probably fall by March,
the gross NPL percent. Are you confident
that within a year i.e. 10 months from
now we should be able to see smaller
ratios at least?
Singh: My gut feeling is that it is related
to growth. Stalled projects were the major
factor which lead to such high NPAs
because of the previous regimes. All
those bottlenecks have been cleared. One
can clearly see the government is moving
ahead. That sounds through change in the
sentiments in the country. Once it starts
translating into growth, I am not very
worried it will happen in next six months
or nine months but I see the positive
trend and I am sure within the next two to
three years we will see a total change in
the NPAs system.
Latha: Three years is a little more than
what the reserve Bank has at least guided
or rather the Financial Stability and
Development Council (FSDC) has guided.
Your gut, you think a year is enough to
bring the ratio down?
Sharma: I would take that with a pinch of
salt because the NPL ratios coming down,
that would be a derivative of the credit
multiplier. Actually the issue is why we
are in this current phase? Is that of
course the government is concerned
about the fiscal deficit part of it, so that
spending, that pump priming sort of thing
is not happening.
Equity is not there in the market and most
of the sectors have been affected by
demand if you look at the major sectors.
There is a problem with iron and steel,
there is dumping which is there and
infrastructure and mining, so I would say
maybe the sentiment may change in the
current year but as far as growth of credit
is concerned, maybe it will get on to next
year when the NPL levels will come down
to…(interrupted)
Latha: Scratch that point further, we
don’t have one NPL number, we now have
NPL number, we have a restructured
asset and we have a refinanced 5:25. This
total will look larger by March you think
because 5:25 is a new baby?
Sharma: There are hardly any proposals
which have come in for CDR, all that has
got sweated out but yes the project loans,
that 5:25 that is going to expand. You
have seen in this quarter itself steel
companies huge debts – Rs
30,000-40,000 crore and they are all
being refinanced, so yes maybe in this
calendar year there will be a little more of
5: 25 and then things will…(interrupted)
Latha: Just to get a little more colour on
steel itself, steel prices if anything, have
fallen in the last four weeks by about
USD 20. The landed price if it was Rs 360
dollars, it has now become USD 340
because of the problems in China and the
impact on commodity prices. So, a
calculation by Credit Suisse indicates that
even the interest outgo of a lot of
companies is about USD 200 per tonne
and the EBIT they make, only the
stressed companies, the EBIT they make
is USD 30-40.
Singh: I did read that study by the Credit
Suisse and I did see the options that they
had listed out. One of the options is the
public sector banks especially Punjab
National Bank and State Bank of India
have a big exposure into the steel
industry and then one of the suggestions
was that we could probably stop funding
these industries and obviously some of
them will die.
Latha: Funding the weaker guy?
Singh : Funding the weaker guy and there
will be less of capacity, less of supply
and therefore the price will find its own
level. This is a much more complicated
issue; I would like to break it into two.
The first is we all know that there is
dumping going on, we know what China is
doing and how much they are subsidizing
steel and that is the problem we are
facing. One factor could be we could
raise the import duty, that is one. The
other is letting some part of the industry
die, now that is where I want to bring in a
new factor and I want to link it back with
the rising public sector banks’ non-
performing assets. Why are the public
sector banks’ non-performing assets
rising?
I have been mulling over this issue for
quite a bit of time now and I would like to
mention here the public sector banks vis-
à-vis the private sector banks are a
different creature. They were first
nationalized in 1955, 1969, and 1980,
taken away from the private sector for a
very specific purpose. The purpose of
course partly was financial inclusion,
partly was to support employment. Now if
we start telling the public sector banks to
withdraw from the steel company, that is
very much against the very salt for which
public sector banks were created.
When the public sector banks were
created, they have served a very important
purpose. I can’t imagine in 2008 crisis if
the public sector banks had not played
the role that they had played, where would
the country have been?
They played a very solid role, so therefore
it is time for India to stand up and say the
Basel norms were made basically for the
private sector banks. Our public sector
banks have served a very important social
role right from inception; they probably
need accommodation and different
benchmark at least for a few years.
Latha: The point is I am not able to
believe that all the NPL problems of the
public sector banks or the higher NPL
problems of the public sector banks are
only because of their social purpose. I am
not taking away from the social purpose
that they must have served but your take
on that?
Sharma: Besides a social purpose you
look at it, you look at the core sector
financing. Where has been the private
sector bank in core sector? They started
off with retail and they are little in
treasury but say how many roads, how
many steel plants they are into and the
second part is you have to keep in mind
that asset has been created; you look at a
steel plant which you are saying that let it
die its course.
We are talking of Rs 50,000 crore –Rs
60,000 crore of investment that has gone
into that asset. Now, for the sake of WTO,
you say you can’t provide production, is
there other option saying that that Rs
50,000 crore of investment runs to the
ground and what happens to the private
sector in the public sector banks?
Q: Would you say that the public sector
banks were coerced or forced into giving
any of the infrastructure loans?
Sharma: I wouldn’t say. As far as the
public sector banks (interrupted..)
Q: It was their commercial decision that
this project would succeed?
Sharma: Exactly. I would say that suasion
was only in respect of the priority sector
financing. So, say that is 40 percent.
Q: Which applies to private and public
sector banks.
Sharma : Which applies to private and
public sector. Also the only thing is focus
where you were allowed to give focus for
that. Whereas I have to do an SME
financing or number financing which the
private sector is not. So, that is not an
issue but we took it as an opportunity.
The economy was also growing. So, it is a
process of adjustment which we are
looking at and becoming a little more
street smart from them.
Q: Do you think the NPL issue can be
resolved by growth and by the normal
course of business or do you think some
surgery is needed. For instance, steel.
Does it resolve itself if you leave it alone?
Sharma: I would say give it three years
time and it will resolve itself.
Q: But how much money, aren’t we
putting good money after bad? You still
think that money is well spent?
Sharma: Our bank has exposure to two or
three of the companies which are
currently into this thing and one or one
and half years back there was no issue.
There was adequate EBITDA. The only
problem has come up because of the
dumping part of it and besides China you
also have Russia. You look at the Rouble.
In the last one year the Rouble has come
down by 50 percent. So, actually that is
creating demand issue.
Q: When the promoters were getting USD
1000 per tonne they were not sharing
their profits with us. Now when the
promoters are not getting USD 1000 they
are getting USD 250 why should the
nation share their losses, why should
they not be allowed to die? Why are you
all so opposed to that argument?
Sharma : No, we are not opposed to it.
There has been a change. If you look at
it, the Sebi has done a change because
now we can take over as we are not
addressing one factor which is also the
reason-the legal enforcement system and
there are no takers. The whole economy
there is not that there are five companies
on the block and there are ten suitors
because it is the other way around. So,
that is also a problem.
Q: Yes, I agree POSCO just wound up its
offices in Bhubaneshwar.
Singh: I am again looking at it from two
different angles. One is the surgery that
you are saying. The public sector banks
right from their inception are a different
motive unlike the profit making private
sector banks. They have so much of
psychology of a social sector that surgery
for them, you have just seen the argument
from State Bank of Mysore saying they
will run them down seems so much
impossible against the very ethos of the
public sector bank.
The other thing that I want to bring to the
front is what about the rating agencies,
what about the concurrent auditors. Where
are those advocates and how about those
chartered accountants who certified all
this. While the bankers out there in the
street lending they were seeking support
from all the support system. Where did
they go wrong and why are they not being
held accountable. This episode should be
used to bring them in and say you are
equally accountable, we are looking for
the heads of the public sector banks, how
about you all.
Q: Any reaction to that?
Sharma: I will let that pass.
Q: Do you think you need extraordinary
solutions or do you think you can just
wait on endlessly, maybe three-four
years?
Sharma : I would say reform the legal
system and we will take care of us.
Singh: My reading is this is an
opportunity. This should be used, we
really need to do many things but surgery
is not that option. Reforms strategically
done so that we don’t rock the boat. We
don’t impact our international ratings.
Q: What would you think should be the
first two or three reforms that the
government should adopt?
Singh: My thoughts are there are some
requirements to be used in public sector
banks and PJ Nayak committee serves a
very good benchmark to start launching
those. The governance reforms are
necessary. One of the factors why public
sector banks don’t perform as well as the
private sector banks is the boards are
very effective in the private sector banks,
they are regularly monitoring it and
everybody is accountable. In the public
sector banks boards are sort of non-
existent, I don’t mean they don’t exist but
how effective they are. The boards need
to be reconstituted.
I also think that the term of the chairman
needs to be prolonged so that he is held
accountable for what he is doing. Right
now we are talking about capital adequacy
and we are thinking of helping some of
the public sector banks. I think just
helping the public sector banks is not the
right way, there has to be certain
yardsticks and benchmarks. The top
management has to be held responsible.
We are flushing tax payers’ money,
providing it to you, perform and have
benchmarks. May be you have annual
benchmarks and tell them you are
accountable for it otherwise your head is
off.
Q: So, even a hire and fire attitude?
Singh: I want to bring in one point which
has been hurting me for very long time.
You must have read it few months back,
all public sector bank employees got a
raise and that was surprising, not at all
related to the efficiency of each of those
public sector banks.
Q: The latest that we have heard from the
public sector banks is that 3 percent of
their profits be set aside as performance
incentives. If that is indeed done and why
should it be 3 percent, it could be even
more. If that is accepted in principle that
there is a performance incentive for the
higher management plus there is a
condition of tenure restrictions if
performance doesn’t come, a combination
like this is a good idea you think?
Sharma: You had an industry wide wage
settlement. Why should it be so? The
point which you raised about 3 percent,
that issue has been flagged by State Bank
of India and the government guidelines
say 1 percent, so let us see what happens
over there. I would say two factors, one is
the lateral recruitment part of it and that
we should have flexibility where the better
banks are – there is an issue, they are
suffering.
The other is the compensation structure,
essentially for the senior management in
public sector banks, why should it be
linked to the government thinking. There
is a case for laterally recruiting people at
the middle level or the senior level but it
is not a substitute for people who have
grown up through the ranks and who are
good enough. If you give them a
compensation structure they will stay on
and they would be ready for this incentive
linked sort of thing and justify that.
Q: You think an incentive linked
compensation structure, performance
linked compensation structure plus the
ability to fire, plus the ability to laterally
hire is something that the management
can sell to public sector banks as a
whole. Are we in that stage, politically is
it possible?
Sharma: I think so, the unions are also
agreeing to that and even now there is
some sort of an incentive structure which
is there to a certain extent. So, it has
been well accepted.
Q: What Mr Sharma speaks about
personnel and about performance and the
quality of board issue that you raised are
centred on one point, that public sector
banks have 51 percent government stake
and they come under the banking
regulation act. If they had 49 percent
stake they could be brought under the
Companies Act in which case independent
directors and the quality of board issue is
resolved and Mrs Bhattacharya\’s and Mr
Sharma\’s plaint that they can recruit
laterally will also be resolved because the
Supreme Courts point was that 51
percent gives it a public character but if it
is 49 percent that problem will perhaps
not arise. So, is that the solution to bring
it down to 49 percent?
Singh: To my mind one has to look very
clearly what is that the government
wants? The public sector bank has a
social sector characteristic. If public
sector banks were not in the forefront Jan
Dhan 16 crore accounts would not have
been opened. If you want only banking
system in metropolitan cities and major
cities make them a private sector
company.
Q: Other point that you make about the
social character of banks does the fisc
allow it? There was a social character to
Greece and where has it landed them.
Can we afford it?
Singh: Greece has been bailed three
times. I want to add one more point, I
think the public sector banks have the
best talent that they took from the market
when these people were recruited. I think
they need to emphasize more on
appropriate training and part of their
training needs to be on major issues
which are now catching up in the world
and those are ethical issues.
PSU banks need to focus on one more
thing, in addition to training is what are
their niche areas. Earlier when the public
sector banks were nationalised they were
prominent in different parts of the
country. Now all of them are everywhere
and probably they are facing competition
amongst themselves. So, they need to
determine their niche areas and they need
to specialise there and extend loans there.
Q: You support social character or would
you think that you are better off being a
commercial organisation?
Sharma: We are okay to hold our own as
a commercial organisation. When I joined
the bank, the compensation structure
which I got was the best which was
available. There was not many private
sector at that point of time, so if you free
up the compensation structure in the
public sector banks also, I think part of
the problem will be solved and lateral
recruitment, if it, comes that’s even better.
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