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Arundhati Bhattacharya is the Chairman, State Bank of India, one of the biggest banks of the world. Against the backdrop of the critical situation facing the Indian banking industry, her exclusive views are very important for the country. In her interview with BE’s Kishore Kumar Biswas, she has toched upon several critical issues concerning the Bank and suggested some policies which may help the economy.

Q. How do you read the present economic scenario, both domestic and global, from a banker’s point
of view?

A. The long term growth fundamentals of India continue to remain intact. However, in FY18 pickup in growth will only be very gradual due to weak aggregate demand. Also, there could be some disruptions in the short term, once GST is implemented, regarding working capital requirements. Nevertheless, low inflation, good agriculture growth, better external environment viz. oil prices, implementation of GST and declining power shortages are indication towards a bright future. We believe that India’s economy would grow at 7.3% in FY18 and 7.8% in FY19.

Regarding global economy, with persistent structural
problems - such as low productivity, growth and high income inequality - pressures for inward-looking policies are increasing in advanced economies. These threaten global economic integration and the cooperative global economic order that has served the world economy, especially in emerging market and developing economies. The world economy gained speed in Q4 2016 and this momentum is expected to persist. Binding structural impediments continue to hold back a stronger recovery and the balance of risks remains tilted to the downside, especially over the medium term. Nevertheless, global economy is projected to increase by 3.5% in 2017 compared to 3.1% in 2016.

Q. The erstwhile SBI associate Banks’, performance in the last FY was not as good as the SBI’s. Therefore, how confident are you at least to neutralize the balance sheet in the coming quarters after the merger?

A. While the performance of the Associate banks was not good as compared to SBI, it needs to be emphasized that the results of the Associate banks were substantially impacted on account of higher provisioning made voluntarily due to alignment of asset classification status across the State Bank group. This exercise was aimed to insulate the Balance Sheet of the merged entity from unpleasant surprises on the asset quality front after the merger. Even in a worst case scenario, the benefit in the shape of lower provisioning, i.e. by around ` 3000 crore is expected to accrue to the merged entity in the current financial year.  Moreover, reduction in the employee strength through VRS will reduce the recurring staff costs by about `  350 crore annually. Apart from that, common treasury operations as well as a common IT setup and reduction in administrative offices are also expected to yield substantial savings on overheads and higher returns (from unified treasury operations).  Movement of employees from administrative offices to branches will also translate in increase of business and consequently, higher revenues.  However, the gains of a merger can be realized over time. It will not be visible in the first two quarters as it takes time to reorganize and get on top of things.

Q. After the merger, it is known that the age profile of the employees of earlier Associate Banks is tilted towards higher age. Even in the technical and some other required knowledge also they are not at an equal level with those of the SBI. In this case what is your take on human resource policy to make your organization world class?

A. Actually, the age profile of Associate banks was marginally better than that of SBI.

As on 31.03.17, the average age of SBI employees was 44.4 years, while that of Associate banks was 41.89 years. With about 3600 senior employees of ABs having opted for VRS, the age profile of the erstwhile ABs has come down further.

It cannot be generalised that skill / knowledge levels of employees of ABs were not equal to those of SBI employees. Having said that, there is definitely a big difference in the size, scale and variety of products / services available in SBI
vis-à-vis those available with Associate banks.

We have taken up the task of re-skilling and re-orientation of employees of Associate banks through training programmes specially designed for employees of erstwhile ABs, especially those at the middle and senior management levels, through our vast network of Learning Centres and Apex Training Institutes.

Also by ensuring inter-mingling of staff at the operating level at branches, every effort is being made to impart on-the-job training and knowledge of SBI’s product and services to frontline employees of erstwhile ABs.

Q. How do you visualize the prosperity of SBI as one of the biggest banks of the world after merger and attaining strength to absorb any financial shock?

A. State Bank of India merged its five associate banks and Bharatiya Mahila Bank with itself from April 1, 2017. This is the first such large scale consolidation in the Indian Banking industry. With this merger, SBI has entered into the league of top 50 global banks (up from 55th position in 2016, Source: The Banker, July 2016) with a balance sheet size of ` 33 lakh crore, with 24,017 branches and 59,263 ATMs servicing over 42 crore customers. The increased balance sheet size will enable the bank to command better terms in both international and domestic markets. The added branch network, customer base and staff strength will help it expand reach and enable the bank to rationalise resources across the board. The Bank’s endeavour will be to optimize costs by reviewing each and every expenditure head. Also, strategy will be to maximize revenues through the merger synergies, leading to significant cost savings and reduction in cost-to-income ratio. All this will lead to capital augmentation which will help in absorbing any financial shock. Bank’s increased size, in terms of assets, will also give it the requisite muscle to take on new competition from larger banking entities that are likely to be created by consolidation in the banking industry.

Q. A section of observers think that the recent decision of the RBI to tackle the increasing NPAs of the PSBs is interventionist in a way.  Do you consider the phenomenon as overactivism on the part of RBI? Why?

A. As a regulator, RBI, is providing directions to the regulated entities. Regulator is not pushing for a particular resolution tool. They have given many tools for resolving the NPA issue but given the complexities of the resolution plans, in view of difficulty of timely decision making by lenders, RBI has advised to resolve the issue within timelines. Any delay causes deterioration. Though in JLF decisions are taken, implementation is left to individual lenders, which is time consuming. Now RBI has come out saying that the decision agreed by lenders with 60% in value and 50% by number is binding on other lenders and lenders have to be present to advise their option of saying ‘yes’ or ‘no’ on a particular decision rather than abstaining.

To avoid further delay, RBI, under powers vested with it, has directed the lenders to identify and implement the Resolution plan after undertaking the process through Insolvency and Bankruptcy Code. Regulator has directed the Banks to
take some cases to NCLT, prepare a Resolution Plan and implement it with approval of NCLT.  The Ordinance that confers powers to RBI was well thought out. It takes all the stakeholders on board.

It is either you resolve it or if unable to implement the resolution, better to liquidate the company and try to recover the value. This will also put pressure on promoters to expedite the actions to be taken by them and on lenders also. We view this as a direction provided by regulator rather than as an overactivism.

Q. It is said that all measures like debt restructuring scheme, 5/25 scheme, S4A, have failed to improve the asset quality and recover NPAs to the desired extent.  Why have these been so? Would you please share your own experience about this and suggest some changes that can be helpful for the recovery of bad loans of the PSBs?

A. Schemes like Flexible Structuring, popularly called as  5/25 scheme is a successful one as the repayment period is aligned with the cash generation of the asset, keeping economic life of the asset which generates the cash flow into account. The assumptions are validated by Independent Evaluation Committee in which eminent persons are members and they interact with teams which carried out technical study, etc. to ascertain the veracity.

Regarding S4A, the scheme came into existence from June-16 and also it gave 18 months time frame to complete the implementation. In cases, wherever S4A have been initiated, we are proceeding with TEV Study to ascertain sustainable level of debt. The structure of instrument for unsustainable debt, etc is being finalized in those cases.

Further, with the introduction of schemes like SDR/S4A, lenders are becoming equity holders in companies and this exposes lenders to various legal risks which they are not equipped to handle. Legal tussles may come from some employees, small creditors, promoters etc.

A few suggestions from the Bank for further improvement of these schemes are as under:

Flexible Structuring:

l Threshold limit may be reduced from ` 250 cr to ` 100 cr.

l  A definite timeline (say of 90 days) from the date of application may be prescribed for implementation.

l  Lenders may be permitted to reprice the credit facility which is not allowed now.

l As the operational dynamics in a project may change over a period of time, the Resolution Plan may be subjected to review every 5 years and course corrections may be permitted.

l  Lenders may be allowed to smoothen the repayment terms of all debts (including corporate loans and ECBs) so as to align with actual cash flows.

SDR

Waiver to be given for lender shareholders on issues related to compliances of various statutory acts due to majority shareholding.

l  Waiver/extension of 18 month time frame for divestment of stake/stand still clause may be permitted in case to case.

l  LeSuperseding of contract terms which restricts change in shareholding patterns etc. This needs to be made nonoperational as long as the performance of underlying act/ contract is not jeopardized by this change in shareholding/ new promoter, etc.

S4A

l  Allow S4A in those units that may have less than 50% sustainable debt. Today even if a unit has 49%, it is not eligible for S4A.

l  Realignment of repayment terms in alignment with economic life of underlying project asset to be allowed.

l Extension of repayment period and reset of interest rate, if permitted, will help to service more sustainable debt and help lenders to reduce potential haircut/provision on un-sustainable debt portion.

Q. Which types of NPAs, like major NPAs or retail NPAs are more serious in your bank?  Would you please explain some of the sectors where the problem is bigger?

A. Top stressed accounts in corporate sector are the major concern, which needs to be prioritized. Loan accounts in the major industries such as Iron & Steel, Textiles, Infrastructure, Construction and Trading, etc., continue to be under
stress and are still visible during the second half of FY 2016-17. With the government’s huge spending on infrastructure development, demand by these industries is bound to increase. Positive impact of the proposed GST structure is likely to improve the GDP during this fiscal and the good monsoon expectations will further accelerate the growth in the
economy. Also, with the advent of various government initiatives like legal reforms through Insolvency and Bankruptcy Code Act, the stress in these industries is likely to lessen during this fiscal.

Q. It is claimed by the representatives of the government that the economic fundamentals of India have been very strong.  Why is it then that the banking industry, including private banks, is facing a higher and higher NPA crisis?

A. If we look at the GDP data in the new GDP series, growth in FY17 has been slowing, and this trend was visible before the demonetization. Prior to this year, the GDP growth has suffered a weather shock with monsoon failing consecutively in two financial years FY15 and FY16. Thus there is strong negative income effect and this we can read from agriculture focus in the consecutive Budgets. 65% of the consumption demand originates in the rural sector. Hence a part of the NPA problem is the second order effect of the tapering demand. Fundamentals continue to remain intact but exogenous shocks have complicated the macro-management.