Former ICICI Bank chief KV Kamath, who is now the first president of the New Development Bank (NDB) set up by the BRICS countries, says tackling India’s bad loans will require multiple drivers — cut in interest rates, more capital, not letting assets slide and, last but not the least, higher economic growth.
He also said that a national ARC (asset reconstruction company) was an option worth looking at.
These remarks assume significance given that they mark a departure in Kamath’s prescription for bad loan and stressed banks.
Traditionally, he has always maintained that growth is a strong antidote to turn bad loans into good assets. “I am now at a distance,” he told The Indian Express here. “Let me put the context in. Growth becomes a driver at an earlier stage of the problem. Now, we will need multiple drivers.” In other words, the problem is acute.
According to Kamath, India needs a conducive interest rate environment because any drop in interest rates will add to a bank’s reserves. “The banks continue to have large holdings in government bonds. A drop in policy rates will be followed by a very quick move of the gains to the reserves,” he said.
When interest rates drop, the prices of government bonds with higher coupon rates which banks hold as part of their Statutory Liquidity Requirement (SLR) rise sharply. This shows up as higher profits since banks record their value in their books under mark-to-market norms. “This has to happen,” Kamath said.
In the Indian context, the NDB President said, the government and banks must ensure the productive use of assets. “We cannot let them slide. As a developing country, we cannot afford it. Within that, we need to see what kind of hand-holding is required,” Kamath said.
“Then growth. When growth picks up, assets start becoming productive automatically. It will mean higher demand and higher capacity utilisation by industries,” said Kamath, who was named the President of the Shanghai-based development bank last May.
“Finally, banks need capital injection,” the NDB chief said. The government infused Rs 22,915 crore into 13 public sector banks in July 2016 and in September last year, eight banks had received capital infusion of Rs 13,955 crore. “All pumps must be fired simultaneously,” Kamath said.
When asked what he thought of the state-owned ARC, as was being discussed or explored by a section in the government, Kamath said, in 2001-02, when the problem was acute, China relied on the ARC structure. “It’s worth looking at it. But this has to be done within the four corners of moral hazard. We cannot be in a jeopardy as far as moral hazard is concerned,” he said.