S.S. Mundra, Deputy Governor, Reserve Bank of India (RBI), has indicated that banks need to improve risk management and reduce large concentration of loans to a single borrower. He spoke to The Hindu . Excerpts:
The RBI had conducted an asset quality review (AQR). What prompted you to undertake this exercise?
I will ask a counter question. What is the right time to carry an AQR? There were comments made earlier questioning why RBI is not doing something as banks continue to postpone non-performing asset recognition.
At some point, we were at a threshold, and there were two possibilities. One, if the global environment improves and domestic growth rebounds, then some of the issues the banks were facing could have been resolved. But when that did not happen for a prolonged period it was quite obvious that you should be prepared to take the other approach.
RBI termed the AQR a required surgery. But, bankers said when a patient is in ICU, you do not send them to graveyard.
You have to see how we approached this. When a patient is in ICU, medication is not an option. You have to do a surgery. When a doctor suggests surgery, the first human impulse is to avoid it.
So, we have put in place some enabling tools for banks, such as joint lenders’ forum and strategic debt restructuring. Then, we had decided to go for the AQR.
Questions like this will keep on coming whether timing was right etc. But to my mind, it was the most appropriate time.
Was the surgery successful?
We say a surgery is successful, in medical parlance, when the patient survives. No patient has died so in that sense the surgery is successful. But again,
merely surviving a surgery is not what is desired. Post-operative care is also important. Importantly, in many cases, you have to bring in changes to your lifestyle.
It is important now to see that banks change their lifestyle, which includes better risk management, avoiding concentration of risk and increasing diligence. These are essential lifestyle changes that a bank would need to do. They have to ensure that they don’t need to be brought to the operation table once again.
Do you plan to do more such asset quality reviews?
I don’t think so. We never meant AQR to be a frequent or annual exercise. I don’t see any immediate requirement of doing an exercise like this. Having said that, we will continue to watch the developments.
The good thing that has happened due to this is that, it has brought a greater credit discipline in the entire country. Borrowers have realised that they have to meet their liabilities in a responsible fashion and they cannot take the banking system for a ride. Banks have also learnt their lessons, albeit in a hard way.
What is the gross NPA ratio and the stressed asset ratio in the banking system as on 31 December, 2015?
The gross NPA was on end December was 6.24 per cent while total stressed asset (NPA + restructured assets + written-off accounts) was 14.5 per cent.
Investigative agencies have been after the banks. Do you think this could hamper their risk appetite?
This is a matter of some concern. Public awareness is good, but the whole issue has to be understood in its proper perspective. I think the government is also in sync regarding the matter. Any account turning into an NPA does not mean that there is a criminal intent. Loans can turn bad for a variety of reason. When a person turns sick, every second person gives unsolicited advice. And some of them will give you weird alternative therapy. We are passing though a similar phase.
The government is also looking into it, I am hopeful that better understanding would emerge.
After AQR do you think some banks can recover?
Now that banks have made heavy provisions, there are two possibilities. If there is a rebound in the economy, banks will be able to rebalance the portfolio and grow profitably. Then some of the accounts can come out of NPA and the provisions can be written back.
Some banks, where problem is bigger and which don’t have the cushion of higher capital, will face a challenge for some time. In such a scenario, they may have to to conserve the capital and they have to ensure that capital is deployed in the most efficient way.