The banking industry is passing through difficult times amid the spurt in non-performing assets (NPA). It has been more than three years since T.N. Manoharan took over as Non-Executive Chairman of Canara Bank. Mr. Manoharan, who played a key role in the revival of erstwhile Satyam Computers, discusses the way forward for the banking sector in an interview. Edited excerpts :
Is it a good time or bad time to be in the banking industry?
[The] general outlook seems to be that it is not the good time to be in the banking industry. But, I do not think so. I feel challenges come to those who have the ability to handle it. This is the time when leaders, policymakers, regulators and bankers can pull together to bring about all reforms. Anyway, the pain is there. Using this opportunity, I think, we can clean up the whole sector, come out clean and start from the scratch.
What parallels do you draw between the Satyam case and the current NPA situation in banking?
Satyam was a case of financial statements-related fraud, where the figures were fudged and some manipulations happened. Satyam was a peculiar case, which was triggered by the confessions made by the promoter. In the case of NPAs, not all are wilful defaulters … who form a small segment … because of divergence of funds and may be mismanagement. In a majority of cases, which are now referred under the Insolvency and Bankruptcy code (IBC), it is the failure of the business plan or model which led to default, beyond the good intentions to honour the commitments. In any case, it is time the whole NPA issue is sorted out. Even for promoters who are not able to fulfil their commitments, for no fault of theirs maybe, it is time to hand over to the right management and move on.
What do you think is the key reason for the NPA mess?
For a developing economy like India, it is inevitable for the government to lend support for the growth of infrastructure. I think all public sector banks lent to these infrastructure projects. Actually, there is a basic flaw in this. Infrastructure by itself is an industry with a long-gestation period. Therefore, structuring of loans should be for a period of 15-20 years so that it is effectively repaid and debts are serviced.
But, unfortunately, the duration of these loans were 5-10 years. Therefore, hair-cuts have to borne by the lenders. It would have been ideal for special institutions to lend to such projects. Of course, now bonds are coming up to fund these projects now. The government is also anxious to make the issue as a thing of the past and ensure that the pain is not prolonged.
How is the IBC mechanism working? There are apprehensions among businesses...
In the long run, IBC will bring discipline among borrowers. In the short run, there is a fear. This is unavoidable as everything is happening in one go for issues which have got accumulated over the years. Things would settle down.
The RBI has now come out with a plan of pre-IBC resolution, where banks can consider the possibility of resolving the debt without referring the issue to [the] NCLT within the 180-day time. Also, the intention of IBC is resolution and not liquidation. Only when no resolution is found, a firm goes into liquidation.
Given the recent happenings in private banks, do you see the clamour for privatisation has come down?
Clamour for privatisation is not well founded. Public sector banks must stay. When banks were nationalised in 1969-70, it was done for many reasons. More important among them is social cause. Private banks will not reach out to rural India since profitability could be their objective. Public sector banks spend a good amount of time on implementing government schemes and priority sector lending such as affordable housing, education loans etc.
It would be interesting to make a study of the profitability of public sector and private sector banks in the last ten years. If the infrastructure lending of public sector banks is removed from the financials, you will find public sector banks equally robust and profitable. Market share of public sector is still 70%. So, they have to be competitive and it is good to co-exist along with private and foreign banks.
What do you think of consolidation among public sector banks?
I don’t see consolidation happening in the near future. The NPA clean-up is happening and banks are going through the painful process of resolution and recovery. It will take some more time for the banks to stabilise and go for further capital build up. After that stability is reached, which, in my view, will take two years, the government can take a fresh look at the scenario and look at consolidation as an option.
In my view, consolidation of business instead of consolidation of entities would be a much better option. For instance, universal banks can take over corporate lending of all banks and the other banks can focus on retail lending. We have to wait and watch on what view the government takes.
What lessons do you draw from the Satyam revival for turnaround of public sector banks?
Both Satyam and banking are part of the services industry. In spite of the crisis, Satyam survived because of the professionalism of the human resources. Second and third line leadership was very robust and strong. And, therefore, it was easy to turn around and bring it back on track. To give you statistics, in 2010, the average age of a Canara Bank employee was 51 years. In 2015, it came down to 40.5 years. And now, it is 39 years. And I am confident that in the next three years it will go down to 35 years, which is an ideal age. In the private sector, it is around 30. The lesson I picked up after becoming chairman is that there has to be a robust training and periodical orientation in the entire sphere of the banking sector for the upcoming youth in the banking industry. If that can be done, I think, we are in for a bright future.
Public confidence has been shaken due to recent episodes. What would you like to tell the public?
There was a notion among the public that their deposits are not safe due to the proposed bail-in clause in the Financial Resolution and Deposit Insurance (FRDI) Bill. That is not going to be implemented, and deposits are absolutely safe in public sector banks. This has been reassured by the government. The NPA pain is a passing phenomenon, and it is almost at an advanced stage. And, the perils of bad loans are coming under the grip of a resolution mechanism, and they would soon become a thing of the past. The momentum in lending is picking up, and we have posted a profit in the first quarter. So, the trend is visible and obvious.
