Bank of Baroda is positive about the proposed ‘Sashakt’ plan as the earlier structure of an asset restructuring company failed to live up to expectations.
“Which ARC offered me a cash solution? And who has been able to show to us that there indeed is an ability to turn around the asset,” asked PS Jayakumar, chief executive officer of the state-run lender in an interview to BloombergQuint.
The government accepted a suggestion of a bankers’ committee to implement the ‘Sashakt’ scheme that involves setting up an asset management company—part promoted by banks. The AMC will raise an alternative investment fund from banks and other investors, and then act as market maker and also buy bad loans.
Jayakumar is hopeful about the plan as it offers to deal with small businesses and mid-corporates without additional funding. It also brings some amount of expertise to the table for dealing with the bad loan problem that lenders across country are facing, he said.
Watch the full interview here:
Here are edited excerpts from the interview:
In the Sashakt plan, it seems that banks are trying to find a way around the bad loan problem; if not postponing it, then perhaps shifting the resolution to another entity.
Let me try to explain it in this manner. The asset categories need to be defined. The one which is being referred to for the AMC, is a part of the total solution and not the only solution. As far as the NPA problem goes, the resolution is critical, and it need not necessarily be always via insolvency and selling the asset through a liquidation process because that’s usually the most sub-optimal way of dealing with it and is one of the last resorts. So, we are provided with a plan to deal with the SMEs and mid-corporates, and that doesn’t depend upon any additional funding. All that the government is trying to do is make the decision process simpler and faster. That is the approach with respect to the two of them. That two numbers of those two categories will be about 60 percent of the total resolution problem. So, it’s not the case of trying to find a way to put the issue in some other place.
As far as the AIF/AMC model is concerned, we are trying to augment the market capability and make it more vibrant with one more institution. Then the existing set of institutions would also participate and move from an SR structure where payments are made through instruments which have maturity at a future point in time...all of it undefined in a way where settlements can take place in cash and the asset can be put to better use and the preservation of asset will thus have a positive impact. So, it is a reasonably action-oriented approach and is not dependent upon only just one thing to fructify. There are some things which the individual banks have to do and some which we collectively do, while some depend upon the AMC or AIF or the broader solution.
Generally, smaller banks have gone along with lead bank in large decisions. So, what is this intercreditor agreement going to do?
The question that the lead bank always decides is not entirely true. In some instances, the banks which have the smallest exposure have taken the most aggressive position, because they can afford to do so. That is not necessarily true. When it comes to any resolution or any meeting, all the 15-20 banks working on it or sitting together on the same table are discussing the solution. So, we must factor into account that multiplicity of thinking is going around it and just because more people are thinking doesn’t mean that the solution will necessarily be better.
The intercreditor agreement does provide a legal basis whereby the decision can then move to a player who we think is most appropriate at that point to help in the resolution of the problem. Otherwise, there is no legal framework for a bank like ours to formally ask the lead bank to take charge, other than for us to say that we are not going to be the dog in the manger and will go along with whatever you recommend. From that position to a more legal position is what we are trying to accomplish through inter credit agreement and that’s why it is a more formal mechanism. They envisage that we don’t have to go to boards of each of the bank, get approvals for the resolutions and this will be a more efficient way and quicker way of addressing the issue. They also freeze up the time for many of us who have small exposures to focus on other things that are equally important.
Will you be willing to handover the control of your individual NPAs to the lead bank as at different levels you may have different priorities, levels of taking capital and provisions?
It is not a unilateral decision. There is an institutional mechanism over there through an independent steering committee having expertise which is the most critical element. A lot of discussion is around the AMCs/AIFs on how quickly we can get it and if there will be any money. The important element of this is getting the right kind of professionals who can help the asset to be turned around and that probably is a more difficult construct to accomplish and we probably need more people to do it. The essence of what we are saying is that it is not just the lead bank that decides but there is an institutional mechanism to enable them to make the right decision. Part of it is coming from a sounding board or a steering committee that helps them to do it and part of it is coming from the fact that there will be more expertise available either through the AMC/AIF route or via themselves to make the appropriate right decision. So, that is the expectation. We have to see how all of these things work but whatever it is, it is a substantially improved position from where we are today.
AMC/AIF board will be a board of veterans, well known bankers to give it credibility from a governance perspective. How many people are willing to sit on a board of AMCs right now and make those decisions of behalf of banks?
The AMC is not making a decision on behalf of the banks. It is just working together to make sure the assets are put to the right use. As far as the banks are concerned, what write-offs they take, what resolutions they make are unconnected to AMCs. So, the AMCs role could be exciting and there will be enough number of people who will be interested in taking the debt out. So, AMCs are not there in the calculus of what provisions a bank makes, that’s for the bank to decide. The AMC just takes over a situation and tries to have the best possible outcome in the way their asset is being addressed.
Is the Bank of Baroda in a position to contribute if the structure comes into play?
There are extent tools on which each bank could contribute to the AIF. We are willing to take our part of the share subject to board and convincing them. The important thing to emphasize here is that this is not dependent upon banks putting money into the AIF and then AIF having the funds to be able to work out the solution. It is about the fact that banks can invest in AIF and they would do so because they think there is an upside coming from the asset and the way it’s finally resolved. They may want to capture some of the upsides. That is the way to look at it. It is a constructive way of saying that I believe that I could get an upside and then I decide amount of AIF should have participated.
The other thing is we are looking at sector specific AIFs. So, we might participate in one and may not participate in the other. But we have a positive attitude towards AIF and wherever we think the sector could get upside, we will participate within the construct of the existing regulation and guidelines as what we could do. Yes, we would follow the same path as SBI expects that it has to be done in the context of our capital and risk appetite.
Valid questions have been raised on whether the AIF will get enough money or not. These AIF investors expect close to 20 percent INR returns and 13-14 percent dollar returns. For that you need to take haircuts. And if banks have been willing to take those haircuts, private deals with stressed asset funds and ARCs would have already taken place. So, aren’t we back to square one?
Some people can make the statements and they probably have a bunch of arguments to support that statement. The ARC structure, in my view, has not worked out for a couple of reasons. One is, leave aside the settlement part of cash and certain kinds of funding...the alignment of interest doesn’t clearly exist or is instead subdued. The second thing to ask is have ARCs really brought expertise to turnaround the assets or did they just wait around the NCLT outcome and have essentially prefunded a particular asset? Third question to ask is that do AIF really have that kind of institutional money that is reasonable? The point that is being made that the return expectations are high is valid but I assume that to put together a good framework then the return expectation would also consider the framework into account and if that framework is credible and would work, then the return expectations would start moderating to that extent, won’t it?
But those deals could have happened with the stressed asset funds which are in the market. There are currently some 24 ARCs in the market.
Yes, there are more ARCs. I have also dealt with many of those ARCs. Which one has offered me a cash solution? And who has been able to show to us that there indeed is an ability to turnaround the asset? Look at it...they are also waiting for the NCLT to resolve. So, how is it different from where we are, except for some 15 percent money coming in the front, which again you pay for through some fees. These comparisons are quite inappropriate. We are talking about a large number of domestic and institutional funds being there, and there being a very strong structure to make sure that the whole process will work. Also, the process being an open architecture doesn’t prevent the existing ARCs to participate again and bid for the asset. But for the benefit of the ARCs, one of the challenges they have had, and you have to recognise, is that they have never been able to get a substantial part of total debt.
Some sell and some don’t, and they also have the problem of consolidation. That part of the problem is also going to be addressed through the current mechanism. We recognise that there are shortcomings, one from an ARC perspective and their ability to take control of the asset and the other from banks' perspective, about the fairness of the pricing as well as the ability to get cash and we are trying to create something that would kind of moderate between these challenges and come with a solution that would be reasonably optimum in these circumstances.
Provision taking today is more than what it was one year before. To that extent, there is greater degree of flexibility in making decisions.
Why did you feel the need for this now? Is it because the Feb. 12 circular is going to lead to another round of NPAs? So, banks are not confident that this problem is coming to an end and the bottom has been hit. So, they need more structures to be able to deal with it.
From my perspective, today the process of resolution is taking a large amount of time management, from my end and the bank’s end, regardless of whether our exposure is small or large. Therefore, we continue to participate in every consortium meeting, going to board for approval, to discuss things internally...that the issue remains. To the extent, the issue remains is that the ability to have a bandwidth to do other market development activities is, to some extent, definitely compromised.
So, there is an issue around it and we can’t depend on the ARC solution because there is no funding available. The number of assets that are getting sold in the NCLT are at a price point because of the absence of adequate supply of funding money and required set of investors are not probably at price point that they should be sold. These are arguments which you can make – right or wrong. We are addressing it. A large part of issue is also for the perception fact that the resolution that is being provided is a fair one for all the stakeholders. I do think it is good to have a number of professional well managed companies including the ARC/AIF proposed along with the others in market, number of turnaround specialists, fair amount of funding available and a competitive and a market driven process that could get the best outcome for the bank and an opportunity for the bank who think it is upside to participate through contribution and subscription to the AIF. At the end of the day, the Sashakt process is trying to optimise a given position.
What is your view on the whole NPA cycle?
Those issues that don’t get resolved at a particular time, towards the end of August under the current dispensation, have to go to the IBC. Whether we are going to see any further deterioration in our portfolio...I think the more appropriate time for me to speak will be in the third week of this month when second quarter results will be in place and then whatever we say at that point of time, we can back it up with data and whatever we say is more capable of rational validation. So, wait for that outcome to happen.
As far as the NCLT is concerned, if the resolution doesn’t happen within a particular period of time, then they go to NCLT process. If that is going to be the case, then will the AMC/AIF be ready by August and how sure are you to get it and move on? The position is that we do our best to get it there, but this AIF/AMC and other ARCs can also participate in the NCLT process and through that mechanism contribute to the resolution much as it could have been the same or nearly the same as it would had they participated earlier in the NCLT process. There is still some time for us to get our act together.
Does this structure also help in fear of decision making that has crept into public sector banks?
AMC/ARCs are primarily taking over the asset at a price point, the AIF is taking at a price point that is considered to be reasonable and AMC is helping to work through a particular solution. As far as the decision relating to the amount of provisions that have to be taken, that is still being taken care of by the banks. What we are provided for is a better institutional mechanism, it already exists, but a more formalised institutional mechanism which will hopefully address concerns about any flaw in the decisions. In the SBI conference, Piyush Goyal and Arun Jaitley had reassured that what we have seen is some kind of aberration and then they are working towards passing the Act in parliament by which the necessary assumption that every NPA has a criminal activity...that linkage would get changed.
Here is how I view the situation...I have been to London, there has been a bomb blast, some people have been died, I could have been in that spot...that doesn’t mean that I don’t go back to city again. In a similar manner, there is a problem here which doesn’t mean that one stops making decisions. We have to take into account that some outcomes happen unexpectedly and not anticipated, but we don’t respond to it by saying we will not make any decision. As far as our bank is concerned, we continue to look at credit growth and continue making what we think are the appropriate decisions. Maybe we are more careful, or may be our record keeping is better, but those are all part of the process of improvement. At this point, I will not let this fear come in and say that we have to stop doing this. I still think the instances which are unfortunate but still reasonably isolated. I hope the changes in the Act happen and everybody gets a final reassurance around the whole thing.
The other thing which Arun Jaitley talked about the fact that local administration is taking action against the central government would also have constitute some kind of impact on federal structure. All of it is being discussed. I think we will get some resolutions on. We have to keep doing our work in a best possible way.