Corporates should treat banks as partners, and that will help in solving many problems. MV Tanksale, Chief Executive, Indian Banks' Association, tells Rahul Kamat that with new banks coming in, there will be intense competition - on talent and business - which will help the Indian economy grow at 6-7 per cent, as fresh capital inflows will happen.
The Union Finance Minister has said that banks, not the government, should be held responsible for rising NPAs. How can NPAs be stemmed-especially when it comes to project finance?
I don't think that the Finance Minister has said that banks are responsible for increasing non-performing assets (NPAs). I may not really agree with your statement as the Finance Minister himself has realised that it is because of the various projects, that are stuck at different levels of permission, and because of that bank accounts are getting stressed. It was in last October that he started meeting all the bankers and the corporates together to make sure that each and every project is studied thoroughly and requirements are met operationally.
I don't think that the bankers have been made solely responsible for anything in this service. Majority of the NPAs are from infrastructure, real estate, steel and textiles. It has now been decided that the loans or funds will be released only after considering the necessary permissions like environment, land acquisition, local consent, etc, are in place.
One should know that only public sector banks lend for infrastructure projects; be it power, roads or transport. More than 50 per cent of private sector banks' loan books are built on retail loans. A very small portion of it comes from corporate sector lending.
Do you think that merely conducting meetings will serve any purpose?
I agree with your contention. For that matter, the government has set up the Cabinet Committee on Investment (CCI) and in the last year the Committee has started approving projects on a war footing. Unless there is an initiative, one will not see solutions, and the government is taking proactive measures to circumvent the situations which are responsible for delaying the project awarding and the approval process as well.
Even though the government has set guidelines, banks are still releasing funds without any studies and adding NPAs to their books...
To fund any project or not is solely dependent on the decision of the bank's board. And, one should not blame the respective bank's board members as they are well qualified and know the financial implications better. The bank releases the fund only after all the permissions are in place, so passing such remarks on a bank or its board members is not good for the health of the Indian economy.
However, there are examples where calculations of board members have totally failed because of which even the Reserve Bank of India (RBI) had to issue a warning to banks while releasing funds without proper studies...
I think it is a wrong example to cite, which has been clarified by the IDFC to the Reserve Bank as well as to the government that the project was funded from the securitisation angle. Once the project was completed you look at the concession period on what is the likely collection of the toll and if the toll is liquidised to see if their existing lenders are paid back and the balance amount is available to the promoters for taking future projects. According to me, the calculations were perfectly right and there is nothing wrong in it. The whole episode has been misinterpreted.
But while examining a road project which was funded by a PSU bank, we found that the bank has funded more than what was required. Don't you think it's unusual?
Are you doubting the transaction of a PSU bank? Let me explain. Whenever the National Highways Authority of India (NHAI), any State Road Development Corporation or any public entity floats a road tender, it is based on certain projections and a fixed base price or cost. So, a concessionaire will bid, either on the higher side, or lower side. Now assuming cost escalation, the demand for loan must have been more than what it was earlier. Hence, the funding would have been 10 per cent more than the actual cost. This does not mean that the bank has deliberately granted excess funds to that project. Every bank has its credit and loan policy, and these banks, especially PSUs, do not go beyond their set level while funding any infrastructure project.
Being the representative body of bankers in India, what are your views on the viability of financing the infrastructure sector?
I want to pass this message through your magazine that those corporates who are seeking loans for their big ticket projects should not consider banks just as lenders, but should accept them as partners in their business. The banks can move together as partners. Corporates need to discuss their problems, and there may be a number of cases where banks can come out with better solutions. As far as financial viability is concerned, yes, it is a matter of concern. But funding per se is not a problem. Nationalised banks have significant exposure to the infrastructure space. However, to execute any project, whether it is road or power, banks want all permissions to be in place. Without the necessary permissions from the concerned authorities, how can banks be expected to fund big ticket projects? This is a real challenge.
If all the approvals are in place, developers can manage to achieve financial closure. The country still needs better infrastructure whether it is in transportation, power, or in production. However, the viability of infrastructure is based on what assumption a contractor is projecting.
When a developer signs a public-private partnership (PPP) agreement for 30 years, can they really predict what is going to happen during the period? The answer is no. In the past couple of months, we have seen that several project developers have walked out of projects. The authorities must keep in mind that since there is a slowdown in awarding activities and with developers walking out of the awarded projects, these factors may further exacerbate the situation. Hence, I think the Prime Minister has rightly said that there is a need for separate legislative measures for PPP projects in India.
In the current scenario, which sector do you believe has an edge over others?
It has to be the roads sector, though we have not seen much progress in terms of awarding and completion. Even the target was scaled down to 4,500 km from 9,000 km. But the good part is out of that 4,500 km, around 2,500 km of road projects will be based on engineering, procurement and construction, and remaining on PPP. The reason for the emphasis on the road sector is because as the country need connectivity, road is the only option. According to me, the state governments should also start focusing on developing state roads which will give some sort of relief to the ailing sector. But I am of the opinion that every single road project should be financially viable to sustain. Otherwise, every road contractor will turn his back to the sector.
But the assurance about viability has to come from authorities, who have failed so far.
Nobody has failed, and there is no question of failure. It's just when things do not converge at the right time, things look to be different.
That's rather a diplomatic answer...
Absolutely! And it has to be. The delays in getting approvals and clearances have been one of the major concerns of the infrastructure sector today. This has resulted in cost overruns and an inability to meet the financial commitment by corporates leading to stress with financing banks and institutions. Due to the present situation of the existing projects, the bidding process for new projects has been lackadaisical. At the time of financing the project, the viability is being established keeping in mind timely completion of the project and the expected cash flows.
Which sector is the most difficult to finance and why? What are the glitches in such sectors? How do we over come such glitches for the betterment of the country?
Financing for the power and road sector has become difficult due to delays in coal linkages, getting necessary approvals and general downturn in the economy that has affected these two sectors. The contractors have also become cautious with regard to bidding for new road projects.
There have been delays in getting payments from the NHAI and other government authorities besides delays in land acquisition. In general, the two sectors have become difficult to go for and further exposure is not really warranted. Fast clearances from government authorities, whenever necessary, to clear the vital projects of national importance, setting mining and coal issues, increasing the confidence of investors by assuring safety to their investment in the country and releasing the dues for completed projects will go a long way in providing a fillip to such projects.
Finally, there are some action packed decisions starting this year by the Ministry of Environment and Forests (MoEF) clearing stuck projects as well as Project Monitoring Group resolving issues for nearly Rs 4 lakh crore worth of projects. But despite so much positivity, why are the banks still reluctant to finance projects?
That is a half-baked story, and I don't think that banks are anywhere reluctant to fund projects. If a project is viable with proper assessment and the promoters have clear equity available for participation, which is the most important part, why will banks not lend? Banks do fund the project but if the PSU has certain cap on funding and cannot go beyond a certain level, then corporates should not blame banks for the same. Corporates should understand that all the banks have their credit policies and they have to adhere to those policies.
Are banks still re-thinking on their lending strategies?
Why should they re-think on lending strategies? As I have mentioned, banks just need to adhere to their credit policies and fund projects as per their limits. Now, if the bankers are learning from the past and are applying their risk management tools properly, what is wrong in it?
Apart from infra finance, do we see any inclination from banks towards SME finance? This sector, though it contributes significantly to GDP, gets rough treatment from banks when it comes to financing. When is the scenario likely to change? What is the current exposure of Indian banks to this sector?
You must be aware that the Government of India has said that SMEs should get funding equal to 20 per cent lending from the total loan books of banks, on an annual basis. Also, there should be 10 per cent increase in the number of accounts opened in banks by SME operators. I am very proud to say that the entire banking industry has been successful in giving the growth in 20 per cent. The banks are getting friendly with the SME sector to the extent where now most of the banks have started a separate vertical to support SMEs. But the real challenge for the SME sector is payments as they are very much dependent on corporates, which has cost this sector a lot.
Are you in favour of a uniform strategy for public and private banks towards project financing?
There is no question of uniform strategy because we are in the liberalised era. There has to be collaborated competition. Every bank will have its own different business model to support infrastructure. Some banks may do good business and some banks may not but that does not mean we (public and private banks) should have a mandate for uniformity while funding infrastructure projects.
How are banks taking the decision of the government to include more private banks? It seems a clear case of sabotaging PSUs business?
I think with the added involvement of private players in the banking sector, PSU banks have always gained. Though there are many private banks in the country, the reliability is still on PSU banks. And, certainly, the PSU banks have transformed from being lethargic operators in the initial stages, to the adoption of a corporate culture with the involvement of technologies, and providing at par services against the private banks. The only issue is that private banks are relatively new and so they do not carry the burden of NPAs or other issues, while PSU banks are in this business for the last 60 years.
Do you think that in the near future, the banking industry may have to reduce the banking markets and the size of operation?
I don't think just because of new banking licences, PSU banks need to downsize their operations. At present, if India wants to grow at 7 to 8 per cent, there will be a requirement for capital to support growth, and hence there are requirements for more banks as it will help to create additional capital flow into the market.
How are Indian banks dealing with the biggest challenge of the sector - human talent, since this is a service industry and the raw material is human beings?
You need to look at the young entrants, what are their aspirations, what all they want to be. How quickly do they want promotions, what are their requirements, and how do they really find satisfaction? That is one key challenge that we will have to address.
If you come to the middle management, people have to learn things differently. The entire way credit was understood, done and delivered has to be changed. How do you really get a hang of that, learn from the lessons of the past 5-6 years, implement them and then again ensure that going forward those things don't get repeated?
They should be able to use a number of technology tools; they should be connected not only nationally, but internationally to understand that India is now seen as part of a cluster of nations, whether it be fragile five or the BRICS nations, or South Asian nations. One must understand that when one is doing certain things, you should not only need to keep in mind what your organisation does, or what regulators want, or what the country is facing, but also what is happening in the US and China, because the world is slowly becoming a connected place.
Not only countries, markets are also connected. We need to understand a lot of things; we need to develop a lot of skills. I think this is really a challenge. Because the quality of human beings in an organisation will determine the quality of service and management vision.