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Can reforms push enable banks tackle bad loans faster

The health of the Indian banks deteriorated sharply in 2014. Gross bad loans rose from 4.1 percent of total loans in March to 4.5 percent in September and 4.7 percent by December. Likewise, stressed loans – those that are not paid back along with the restructured ones — accounted for 10.1 percent in March and rose to 10.7 percent by September.

But the things may change now. The three key actors — government, corporate India and RBI — have made some seminal moves.

The government over the past 12 months has taken some solid steps to remove hurdles to infrastructure. Road projects are reportedly getting bid out with higher viability gap funding. Mining bans in several states have been lifted; coal output has improved even if the resource has become more expensive. Also, the central government is expected to begin spending on infra and smart cities when the new fiscal kicks in. Gas power plants, the worst-affected, may start to see a third of their capacities utilised. India Inc in the meantime is also cleaning its balance sheet. A couple of cement plants have exchanged hands , some beleaguered energy and shipyard companies have found investors and finally the RBI has made it easier to roll over infrastructure loans through the 5/25 mechanism – which is casting long-term loans into 25-year loans with banks initially financing only the first five years. Now banks may convert their loans into equity at lower prices and thus force out a bad owner still keeping their loans from becoming non-performing loans (NPLs). The RBI has also cut rates twice already.

Are all these stopping the faster pile-up of bad loans or are they making it easier to tackle legacy loans? Eminent bankers, Pradeep Kumar, MD, SBI , Srini Varadarajan, Executive Director, Axis Bank , and Ranjan Dhawan, MD and CEO of Bank of Baroda , discuss on the same.

Below is the transcript of the interview with CNBC-TV18’s Latha Venkatesh

Q: Are you getting a sense that pain in the system is reducing? If you had 10 small and medium-sized enterprises (SMEs ) defaulting last month, is it 9 SMEs this month or for that matter larger companies, is the pain reducing?

Varadarajan: We will have to look at it in two forms. The old stressed assets, the legacy stressed assets which have still to be worked through. This is something which will continue to for the next few quarters and we will see some more pain but incrementally are fresh loans being added to that list? I would think that that is slowing down and that is good news here. On top of all the actions being taken by various stakeholders, fresh incremental stress loans accretion to that is clearly slower.

Q: Are you getting a sense that fresh pain in the system is not getting generated?

Kumar: I would like to endorse what Srini said that the growth for credit is very muted for the last three four quarters and maybe it will continue to be so at least for the next quarter.

Yes, the government, the RBI and if you go by data of our bank especially for the last five quarters, we have seen the slippages coming down but they are still substantial. We are not in a comfort zone still but yes relatively maybe compared to last year the slippages have come down quarter on quarter (QoQ) which perhaps indicates the pain is slowly easing in the system but its still there. The amount of slippages we had in the last quarter show that we are not still in the comfort zone, we are not comfortable and as Srini says yes what has slipped lot of action has to be there to recover those loans. Those recoveries are also happening very slowly because of the legal tangles we are in. The steps that are being taken by RBI whether it is 5/25 or conversion of debt into equity, easing conversion of debt into equity, availability of gas for the power plants will all prevent perhaps more loans becoming non-performing assets (NPAs).

Q: Just to put some numbers to what you were saying, if you were generating about Rs 7,000 crore per quarter in terms of bad loans, do you at least have the confidence that it will fall to Rs 5,000 crore or something in the current and the next quarter?

Kumar: It will be difficult for me to give specific numbers.

Q: Not specific, I am only asking for ballpark and the direction.

A: The direction was coming down I hope because our numbers are still not out, we are still in the quarter so I do hope it will be down but I will not be able to say it with great confidence it will be lower but it is trending lower.

Q: In Bank of Baroda we distinctly saw that after a period of actual stability in bad loans, they jumped up. What is the sense you are getting of the current quarter and the coming quarter, are your branch officers and credit officers telling you that incremental pain is receding?

Dhawan: I believe so. In point of fact in December our figures were fairly bad and I believe that the pain would be there for one or two more quarters but the incremental pain should reduce this quarter. Going forward of course the new dispensation of the RBI comes in wherein all restructured loans are to be treated as non-performing assets (NPA) so we will have to wait and take a call for the first quarter of the next financial year but for this quarter we should be pleasantly surprised on the downward side.


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