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The government last week notified an ordinance to tighten the insolvency rules. Paresh Sukthankar, deputy managing director, HDFC Bank told Sandeep Singh that the amendments in the Insolvency and Bankruptcy Code (IBC) will make it legally possible to keep promoters with bad record out of the process. He also said that while the entire NPA crisis will take some time to come off, there is some concern on the agricultural loan front because of behavioural factors after many state governments announced loan waiver. Edited excepts:
Last week, the government proposed to bring in some changes to IBC through an ordinance. How do you see the development?
As of now there is no blanket ban on promoters coming back. However, the promoters who siphoned money out and have been wilful defaulters have been rightly kept out. I think morally and ethically that is the right thing to do and now it is legally possible to keep them out. Otherwise you would have been faced with a situation where the promoter has essentially (from a governance or integrity perspective) pulled a company into bankruptcy and then gets to benefit from it. So it’s logical. There are a couple of more elements that the ordinance talks about. Such as while selecting a new bidder, or while awarding the bid you can go beyond the pure financials to see what is likely to create more value from a long term perspective. Because handing over the company is way beyond what one can initially pay, it is the way you can manage the company. The bankruptcy code itself is a great reform and creates a good sense of urgency in NPA resolution which was not there. Some of the areas where there was some disconnect has now been addressed.
What is your assessment of the IBC till now?
As a banker it’s definitely a positive. The main thing that makes it superior is the fact that there is a definitive time and that banks have been moving faster and there is a nudge from RBI. All of these are very positive.
When do you see the crisis of bad loans in the banking sector getting resolved?
Having problem loans is a part of the business of lending. This peak of problem loans is partly an accumulation of what happened over the last few years and getting choked because the resolution was not happening at the same pace as their formation. Right now there are two things that are positive — firstly for all the stock that is built-up, you have these resolution mechanisms and the other is that while one may say that there are new NPAs being formed, the inflow of fresh problem loan has come off. While it is tough to say how long we will be in crisis phase but clearly the net accumulation or net level of NPAs is to my mind close to peak and should start coming off. It might take some time for resolution because it is not just accounting and providing. I however think there is still some time before it starts coming off. It is probably going to get flattish for a while and then we will see resolution momentum pick up along with slightly lower pace of new problem-asset generation.
Agriculture was one concern area when state governments started announcing waivers. How big are those concerns now?
It’s a behavioural issue. Traditionally NPA in agriculture has been linked to a problem loan or lack of servicing as a result of a drought year, floods etc. And in most cases there is forebearance given to the farmers- and fairly so – as they won’t be able to service their loans otherwise. Problem starts when the crop has been good and there’s a talk of waiver. This does encourage some borrowers to default. Also, what will one get waiver on typically takes a couple of months to establish, so the safest thing for them is to stop paying. Banks do recognise there are times that these borrowers are affected, and genuinely need relief. But it can have a behavioural impact and that’s when it starts affecting loan portfolio. This is something we had referred to in our June quarter performance in the wake of some such announcements. That’s playing itself out. In some cases there is clarity on who is getting the benefit and how much and hence what portion they will have to pay to the banks. In some cases that effort is still on. So if you ask me if those issues are completely resolved I’d say no, but there is little less ambiguity than before.
How big is the credit growth concern for the banks and do you see any reversal anytime soon?
That’s a big question for the banks. I think the consumption part of the economy is doing fairly good — working capital requirement for businesses, retail loan demand for housing, buying cars or personal loans. The investment cycle and the capex cycle has been slow as the private sector Capex has not really taken off. And therefore, till that happens, will you get a meaningful boost, the answer is: No. The unfortunate part is that in the last one year or so, wherever there was demand, it was shared with mutual funds etc as there was excess liquidity even outside the banking sector. I think the incremental flow of debt money into the mutual funds has slowed because people believe that the interest rates have peaked and household saving into debt has slowed. So the incremental cannibalisation of corporate credit demand to other markets has come off a little bit. Also, this movement was at a time when there was a bigger gap between bank rates and market rates and since then the gap has narrowed. So, now I would say that it’s a matter of demand actually coming back and if that happens then corporate credit demand and more specifically corporate credit growth should start looking up.
Which sectors do you think may see the first movement?
I think it would be across better placed players in most industries who are seeing demand. If you see in the same industry there are players who have hit better capacity utilisations than others. It will also come to sectors where government induced capex is coming back instead of just private sector capex and we are seeing that in road sector etc.
Did Moody’s recent upgrade on sovereign rating come to you as a surprise and how do you see it benefitting us?
Yes, to me personally it came as a surprise. However, a positive surprise is always welcome and it has brought positive impact on sentiments. Capital flows beyond all macro fundamentals is driven to an extent by sentiments and an endorsement of the same is always good. Going beyond the sentiment issue, it will help all those looking to raise debt in the international markets. To be fair, the pricing that was accessed by Indian corporates or banks was already better than what the sovereign rating would have justified. But yes, this would further formalise that. A few basis point movement in pricing is certainly going to be a result of that.
How do you see the interest rate movement in the economy?
I think we are in for a bit of a pause. The trend of lowering interest rates has clearly given a floor to the rates. At the same time, I don’t think that there are factors that would result in direction change. I would think that you are at a level where interest rates are likely to remain in a very narrow range for a while. It is fine, because both deposit and lending rates have come down.
What do you think is the missing link in the economy at present?
I believe that in the short run the changes or improvements that are happening have not been enough to change your sentiment or optimism meaningfully and we believed these were important decisions or reforms which should have had impact. While we all recognise that many of these things take longer to play out but since there is this feeling that these have not brought the change, there is this growing sense if this is one more opportunity lost. So to that extent, I think that there is one section that still feels positive while the other is dejected. The truth is somewhere in between. I think there has been a movement from where we were, it’s not been such a sharp and widespread movement.