July 3, 2018

Speaking at 5th SBI Banking & Economics Conclave 2018, in Mumbai

Mr Puri here, we have Rana here, Sunil Mehta, I am saying Mr. Mundra, former Deputy Governor, Ashok Induja Ji, and I can, probably, Nimesh Kampani is there, Arundhati Ji, Ajit Ranadey is there. I could go on and on till the eyes go, but it’s great to be amongst friends from the banking world in Mumbai and I know what kind of trying times all of you are going through, I am a part of that.

Banking in India will never be the same again. It’s something, an eminent lawyer told me on the flight into Mumbai today. And I found he was quite excited about the journey ahead. Of course, being a lawyer I think we have given him a lot of business and professional opportunities, but I think this was a bullet some bold leadership had to bite some day, if we were to reform banking in India.

I have had several occasions to discuss with Mr. Vinod Rai – former CAG, former chief of the Banking Boards Bureau – about how we can evolve as a banking system that is truly sustainable, that is truly forward looking and a banking system that can ensure high ethical standards and availability of credit to genuine borrowers at the right price.

We have both shared positions as independent directors on two boards, first on Bank of Baroda and then on the State Bank of India. I have myself been an entrepreneur who started at a young age, banking at a local branch of a public sector bank and would possibly not have been here today but for the support I got from the public sector banks. But I think banking over the last 30 years has moved from one end of the spectrum to the other, not necessarily in a very glorious fashion.

If I was to look back at my early days, in some sense, as a teenager and then as a budding entrepreneur still in college, banking those days was a lot of personalized banking. Banking in the good old days had a lot of element of promoter credibility. Banking in those days was lot about the feel about the account. I remember Shri Uday Kotak Ji once telling me that those days, there used to be a smell test, where you would have a person from the bank, from the credit appraisal department or from the risk department actually go to the steel market and check, does Piyush Goyal or his company pay their bills on time.

They would go to the cotton market and check what is the outlook for cotton going forward, if we lend money to a cotton trader or a cotton businessman, is that money going to be safe. I remember in those days, through the year, I would get audit queries. There was a statutory auditor of the bank, there was a concurrent auditor in the bank, there was an external auditor in the bank, the RBI officials used to come to audit banks, particularly, the credit portfolio and I don’t know how many more. But throughout the year, I knew that we would get queries about the account and the levels of engagement with borrowers were probably much more than what I find today.

Over the years, I am sure with the growing business volumes, maybe that level of engagement on each account may have reduced, but then we have had advent of technology take over and become the new way in which we do forensic audits, in which we do our original smell test but with using technology, using data mining, using newer tools.

So, probably, gone are the days when an auditor would have to turn every page on your file and one auditor puts a green tick on the top right hand corner, the other auditor to distinguish himself goes on the bottom right hand corner with a new colour. A third auditor goes into another colour with the left hand corner. Maybe those days have changed but have we as a banking system remained abreast with evolving technologies and prepared ourselves to really ensure high ethical standards, high monitoring standards, high accountability of the system. Because after all, we are working with public money, public funding.

And I think in that, in a way, all of us, collectively, have not lived up to the high expectations and standards that were required of banking. After all, we have introduced core banking solutions but probably somewhere along the way we left it half done. And I recall, I don’t know if Vinod Ji remembers when core banking was first coming into the country and that was the time we were on the board. This issue had also come up that each bank setting up their own core banking systems may not necessarily be the best interests of the banking architecture because banks have to talk to each other. The core banking solution of each bank has to talk to each other, has to engage with each other, but somehow that got left out during those early years.

And today we have a situation where one bank in order to attract a business could possibly open a current account of a person who is a defaulter in another bank. Another bank could probably give a loan outside the lending consortium or outside the joint lenders’ forum, putting to risk the entire borrowing of the rest of the banks.

We could have a situation where people have got away with large amounts of loans being disbursed, not necessarily put into the activity or the purpose for which they were disbursed or sanctioned in the very first place. And somehow, in 2014, when we came into government, we had a Hobson’s choice of letting things pass the way they were always done or bringing to fore the real issues and challenges that the banking system faced.

All of us in this room are well aware that the stress was not created in the last two or three or four years. This stress was a carried forward legacy of several years of work that we had done or not done with the amount of diligence or speed of action that was called for. Of course, there will be business failures along the way, we are all doing commercial lending, commercial decisions and there will be genuine business failures. Nobody can deny that. Governments have also failed banking.

After all, if 204 coal blocks got cancelled because of some irregularities in the allocation of coal blocks, I would certainly not say that 204 coal blocks were all irregularly allotted. All of it happened in a brief period wherein three steering committees, I don’t recall, it was the 35th, 36th, 37th or one of those – three steering committees of the Coal Ministry, which fortunately or unfortunately, I have had to handle after 2014. It was only in three meetings that most of these irregularities took place, but the fallout was that 204 coal blocks got cancelled and we put to risk large investments in the power sector, in other sectors, which were dependent on coal coming out of these coal blocks.

And certainly, there have been business failures, which were beyond the control of bankers, beyond the control of the system, but that does not take away from the reality that when we looked at the books in 2014 and we did an assessment over a period of 2014-15, you found large amounts of stressed assets not recognizing the problem but only postponing the problem. And that’s something we have all been party to. The restructuring, again and again of the same accounts, leading to large amounts of liabilities which could not be serviced, which were just being postponed leading to ever-greening where new loans were given just to ensure that the account remains regular.

So, it was more an adjustment, you gave a fresh loan of a Rs. 100 crores, but it never actually got disbursed. It was only used to pay-off the over dues and show the account as regular. And in the process, the liability kept expanding to a point where some of our banks had nearly one-third of the liability, one-third of the loans not earning a single rupee of interest and to stay afloat, the banks had to load that interest on the MSME sector or on the most vulnerable borrowers causing further distress in the system.

After all, the AAA borrowers would not borrow from you if you try to load too much of that burden on the AAA borrowers. And NTPC, for example or a Reliance or a good corporate borrower would go hunting for the best deal that he could get. And I don’t think we had the ability to load his loan with our problems. There was a priority sector lending where you any case had restrictions on the amount you could charge.

So, all that burden was shifted largely to the MSME sector and in that process, you made that sector also vulnerable because of very high interest cost causing distress going forward in their operations. And this paradigm had to change. We had to bring about honest accounting, an honest recognition of the reality, which this government was willing to do, was willing to bite the bullet, was willing to clean-up the inherited legacy and prepare our Indian banking system to become truly an engine of growth, prepare our banking system to recognize the problem, address the problem and go forward with cleaner balance sheets.

I mean, ultimately, when we go to a doctor, you need to know what the problem is before you can solve the problem. I can’t go to the doctor and not tell him that I have got fever six times over in the last one month and expect him to solve my problem. In fact, in our meeting yesterday where we were receiving the report of the Sunil Mehta Committee, Mr Rajneesh Kumar, the Chairman of State Bank of India at one point remarked, and I hope that was not a confidential remark, he remarked that actually it’s very good that we are recognizing the problem upfront and we are trying to resolve it in the defined time frame before it gets into such a bad mess that we cannot resolve it afterwards.

And it reminded me of an old situation that I used to very often on the board of the bank talk about which was that whenever an account went bad, the nimble footed foreign banks would get out of that account recovering whatever best they could, but we in the public sector because of our complicated systems and processes and our effort to keep delaying the problem, we were left holding the can and then ultimately, not able to recover any significant part of our advances.

So, in that sense, these early warning signals really help us to start looking at the account more seriously. Having said that, it’s very important now to also say that there are genuine business failures, which I mentioned earlier, which need to be addressed through resolution. Everything cannot be sent to liquidation and that cannot be the panacea of all problems. And, therefore, this message that there is an option by which you will lose control of your company, this message that you will have to perform well was important, but at the same time, it’s important that we also support good borrowers, credit flow starts into the system.

A genuine case where the problem was beyond the control of the borrower, the bankers sit down together and find a resolution to the problem. And I am delighted that in a very short span of time, the Sunil Mehta Committee along with Rajneesh, along with Venkat, along with Mr. Jai Kumar of Bank of Baroda literally burnt the midnight oil and brought out a framework, which to my mind has been very well received by the marketplace. The five-pronged strategy by which different category of accounts, the small accounts less than Rs. 50 crore, the mid size accounts between 50 and 500 crores, the larger accounts beyond Rs. 500 crores. Each one has been given a new dimension, a new way forward.

And I would urge all the bankers in this room and outside to carefully examine the recommendations of this committee and you will find that it’s a win-win solution for every segment, every stakeholder in the banking system and therefore, a win-win solution for India and the Indian economy. In the past, we had serious problems about one or two bankers having the ability to stall any resolution or stall any way forward when it came to addressing the problems of both the banking system and the borrowing industry.

I remember many times, we have had this discussion at different fora with bankers about the myopic thinking of individual bankers not looking at the larger picture and stalling progress of the banking system. In think they have come out with a very good suggestion that all banks will have to work as a team as one and address this challenge that we have before the public sector banks and some of the private banks also and address them in a time bound fashion.

So, I would urge all the bankers to work as a team, to work together in the best interest of supporting good borrowers, in the best interest of cleaning up the legacy that needed to be sorted out, cases which are beyond redemption go to NCLT and get resolved through the liquidation process through the IBC framework that has already been quite successfully tested now and we hope to see some more resolutions come out in the near future and other cases.

Through a very transparent, non-discretionary method get resolved within the banking system, with a third party screening committee or a third party eminent group ensuring the due process being followed, ensuring the sanctity of the due process that has been suggested by this committee. This will also ensure a check and counter check or check and balance in the system. This will also ensure that people don’t have to worry or be scared while taking bold decisions, because, obviously, when any such decision is taken, there cannot be a 100% template in which such decisions are taken.

But this counter checking by a screening committee will help to ensure that due process is followed and my own experience in four years in government, I have actually experienced what it is like to be in the operating side in any government body or government organization. So, my responsibility as a Minister is as much as any of the bankers sitting here or any of the government officials. But I believe that whenever we have taken decision and we have taken policy driven decisions, whenever the decisions have been within the framework of the law without favour for any individual, but taken for a class of stakeholders, you don’t have to worry about taking those decisions.

One can take very bold and very game changing decisions, when you are conscious of your responsibility to work without fear or favour. And I would urge all the bankers that when you are taking these decisions, if you give speaking orders, if you are clear about why and how you are going about your business of lending, there can never be a problem. It is only when we do not follow the due process or when we are trying to go beyond the norms of prudent banking that the problems come up. And even after that if there is one or two aberration in the system, I think those aberrations will get sorted out through the judicial process. Fortunately in India we have a very robust legal framework, a very strong rule of law that prevails, and some of these aberrations to my mind are very unfortunate, but I think we will have to address these challenges also as we go along.

But I am sure none of you will disagree that if there has been any culpability, if there has been any wrongdoing then they have to be punished also, the nation demands that. The people of India also have faith in our banking system, they have put their money into the banking system on the faith that we will all do our job honestly. And it is for us to redeem that faith, it is for all of us collectively to ensure that we don’t let our people down, don’t let our depositors and other stakeholders down. And that is a twin responsibility – we have to ensure credit to the deserving borrowers so that the wheels of the economy can take off faster, while at the same time ensuring that banks work in an organized and honest fashion and both are twin objectives which can be met.

And I have full confidence in the ability of our public sector bankers to ensure an orderly functioning of the banking system and ensure that what we have achieved in the last three years in terms of preparing the banking system to really work in a very organized fashion and preparing ourselves to work with global standards of banking in India will not go wasted. These efforts will succeed with the cooperation and support of the whole system.

I have in fact yesterday asked Rajneesh ji that all the private bankers also should be a part of this effort that you are suggesting in the committee report that I saw yesterday. Everybody has to work as a team, everybody can benefit from a more orderly system going forward, because end of the day, it’s not about one bank or other, it’s about the entire banking system and it’s about the banking system, which is an important element of the entire nation’s economy. I don’t think any nation can progress without smooth credit flow and I don’t think any nation can progress if the credit flow is not honest.

And it is incumbent on all of us collectively to ensure honest credit flow to the deserving borrowers and to my mind it’s eminently doable, it’s very much in our abilities to deliver on what the people of India expect. We have faced these kind of challenges in the past. We have had occasions in the past when Indian banks have had to face such challenges, high NPAs, difficulties in recovering money. In the old days the general tendency used to be that a small borrower was responsible for repaying money to the bank, but when it came to large borrowers, it used be the responsibility of bankers to recover money from the large borrower.

Fortunately, the rules of the game have changed today. Everybody has become responsible; everybody has started realizing that he has to pay back the bank when he borrows from a bank. And I am not worried that this will kill entrepreneurship, I believe this will strengthen honest entrepreneurship and within this the banking system will also have to devise proper methods to address failures. After all business has an inherent possibility of failure also, if every business was to be a success I think all of us in this room would have been billionaires today. If every business was to be a success, I think there wouldn’t be any equity premium in the system, then debt and equity should have both been available at the same price.

So, very clearly we all understand that entrepreneurship, business, industry, all of it is risk taking and you take different types of risks, you take a certain element of risk you get a lower return, you take a larger risk you get a higher return, all of us work to the ability that we have on risk taking. Some bankers may have ability to take larger risks; others may not even be willing to take that larger risk. Even within our system we would have different risk taking abilities. But very well understood by all of us that there is an element of risk in banking, there is an element of risk in entrepreneurship and business.

We have to price that risk, we have to monitor that risk, we have to ensure accountability of the system if somebody is going beyond powers, beyond what it his domain. We have to engage with the best of class from outside, get industry specialists, get technology specialists to see that our systems become more robust and I am sure all of us, the public sector banks particularly, will live up to the expectations of the people of India. The government is backing the public sector banks completely. Each one of our banks are important to the government, each one of our banks has played a very important role in economic progress, in the growth and development of this country. Each one of our banks continues to play a very important role in reaching banking to the remotest corners of India and we have an important role to play both in the economy and in society.

The other day I was telling one of the senior bankers that we should now look at seeing how we can convert even this problem into an opportunity. I said we have about eight hundred thousand employees, can we think in terms of opening a hundred thousand extension branches of our banks. A hundred thousand extension branches which could be setup at the panchayat office or at the common services centre which are all over the country, which have internet connectivity. There is a place available and provide physical banking to the remotest corners of India, which will actually help you garner a large amount of CASA deposits.

When we are trying to take financial inclusion to every citizen in this country, we can’t have a situation that a villager has to travel 50 kms to go to his branch. While digitalization will play its role, simultaneously, banking going to the doorstep of every citizen will open up opportunities for selling insurance policies, will open opportunities for other businesses related to banking, will help you to create new entrepreneurs in the villages of India.

So, we will have to look beyond our current issues and see how Indian banking can leverage our strengths , take banking to the remotest corners of India, and to my mind, we could actually get a huge leg up far beyond any additional cost given that we already have 800,000 employees in the banking system, we can actually leverage our strength and become the engine not only of growth for a certain section of India, but we can become an engine of growth for the remotest corners of Indian, for the villages of India.

And as former President Abdul Kalam ji had said, “we could make the villages literally get all the benefits of the cities and ensure that these villages become the future engines of growth of India.”

I wish all of you well in your work, I wish this conference great success, this is the fifth in a series that the State Bank started and I am sure that the deliberations that you will have over the next two days will certainly help us as policymakers and will help all of you as bankers come up with even better solutions going forward, come up with even better ideas, how we can serve the nation, how we can serve the people of India better. My best wishes to all of you.

Thank you.


Q: Thank you and ever since you have taken up, we have seen the speed in decision making. One question I have which comes commonly when we travel abroad, we have addressed the decision making and sorting out banking as we go along. But the big question on capital infusion continues to be at large and the worry is about India’s rating, because that could get meter down as we start making provisions, any thoughts on that sir?

A: Well, the Government of India will provide whatever capital it takes to ensure the orderly management and running of all of our PSU banks. I can assure all of you and the nation through this program that the Government of India will ensure adequate capital for the successful operation of all the banks. Having said that, I think some of the suggestions that the Sunil Mehta committee came up with, they had also done some analysis of the capital requirement and we are working in tandem with the team to see what needs to be done and we will absolutely provide whatever capital is required. I have also discussed with them about ways in which some of the non-core assets can be quickly cashed.

So, I understand that the public sector systems may take some time till these assets can be sold or through a transparent mechanism can be converted into capital for the banks. But we are working to see if we could look at an intermediate solution for that also. Capital will not be a problem for any of these banks. Of course, they need not keep adding burden onto the system and adding more NPAs, so that capital requirement just keeps going up and up. But I think the Reserve Bank has set very robust standards now, good amount of benchmarks, which are probably in many cases better than the best in the world. So our norms of NPA, our norms of capital requirement, liquidity requirement, in many cases are better than the best in the world. Liquidity coverage ratio for example, India has amongst the highest anywhere in the world. So we have got a very robust system in place which will help these banks not only perform well but make available low cost capital, particularly to the small scale and the medium industry.

Q: Sir, I am Arun Dehakar, Chartered Accountant from Mumbai. About this recent happenings in banking sector, you are saying the law and order machinery has overstepped into banking, that’s what many people say, particularly, the Reserve Bank Governor said that we don’t have enough powers to control the PSUs. And the machinery which doesn’t have expertise in banking has exceeded the powers, so what is your opinion about this thing?

A: Well, if there are any instances where, I said that earlier also if there are aberrations I am sure the legal system is good enough to sort it out. As regards the Reserve Bank of India’s powers we have also been examining it in the Government of India and that’s an issue that we will sit with the Reserve Bank and we will sort out, government has an open mind on this issue.

Q: Minister Goyal, thank you for a very excellent and forceful speech. You always give straight answers so I am going to ask you a little tricky question…….. which maintains veto control, so would you consider this 33% option?

A: There is absolutely no proposal at present to reduce the shareholding of the government below 51%. It will continue to be Public Sector Banks with 51% holding in all the 20 banks which are under the Banking Regulation Act and there is no proposal at present to change that.

Q: Sir, the set of measures that have been announced now, I think are excellent to actually take out the distress that has surfaced, but there is also another set which is important to ensure that this set of problems doesn’t recur. For instance, under the previous dispensation there used to sort of interference from various quarters, I think creating the checks and balances to ensure that such interferences does not happen is something that is important and PJ Naik Committee for instance of which I had the privilege of being part of, had put some recommendations. I would love to hear your thoughts on putting some of those processes in place.

A: Well, I think this is an issue that many of the older bankers here, some who have retired Jankivallab ji, Mundra ji, Arundhati, they will recall Prime Minister Modi in his first year itself had addressed the bankers at the Gayansangam in Pune and one of the earliest decision as a root cause analysis, and I have very often talk that this government works on principles, root cause analysis is one of our primary principle whatever problem comes up. I have just had to go to the unfortunate site where there was a railway road over bridge which fell. My whole focus was what do we do to ensure that this doesn’t happen anywhere else in the country. So we actually literally discussed the design of that road over bridge, we discussed how the cables in that created the stress which possibly lead to it, we discussed whether even the trees in the surrounding area which had come up and their roots could have caused a problem or a weakening of the foundation of the cantilevered ROP.

So our job has always been based on root cause analysis. Prime Minister Modi jolly well realizes that our public sector banks have suffered political interference in the past and that has been the pain of PSU banking in India. He announced in Pune and in the last four years we have religiously and scrupulously ensured that there is no political interference, either in appointments, either in loan sanction, either in settlement of dues, either in any activity related to the banking.

In fact, we pride ourselves in that that no Minister of the Government of India interferes in the decisions and operations. Even I told the Sunil Mehta Committee that ensure that the government doesn’t interfere and create a problem for the banks. So I am delighted that they have ensured complete, government remaining completely out of the entire process and it will be entirely a bank led solution process. So I assure all of you, you will have full autonomy  but ladies and gentlemen, with great power comes great responsibility. And I do hope all of you recognize that this kind of autonomy is not to be misused but to be used for efficient and effective working of the banking systems and in the similar note I appeal to all the Chartered Accountants also that you have power over the whole system, you are auditing the banks, you are auditing your customers, you are actually the persons responsible to ensure an orderly functioning of the financial sector of the entire economy and I wish all my chartered accountant brothers and sisters would take this up as a responsibility that we all have to fulfil, to ensure that the nation moves in the path of honesty and integrity, that the nation and our banking system work in a fashion that we can all be very proud of.

Q: Honorable Minister, Mr Rajnish Kumar, this has been extremely motivational because there is a very articulate plan on the twin balance sheet problem which the government inherited and that has precipitated over the last four years because this was inherited by the government. And yesterday was red letter day because it gave very many directions on how to solve the problems, so the recognition process in the economy is intact, I think the remedial actions are underway. The resolution to follow and there is recovery there after the four hours, the important thing which I will ask you is India is short of capital, how do we bring that capital collectively, I am also responsible for that, to bring the capital into India, to remedy these assets. There are only two sources, as in Life Insurances Corporations and the Mutual Funds and the external sources are where we will need your help to come and we will come along with you to go and do the marketing, and you know the fund raising. Because we will need a lot of capital and there is a lot of value sir, like you said yesterday very brilliantly so on CNBC that there was fantastic value on these assets. So we have to raise a lot of capital through the AIM and the AIF mode, that’s my question sir?

A: Absolutely, you are right Rana, undoubtedly, many of these assets have been value, who amongst us had ever imagined a Bhushan Steel giving you almost a 100% of your money back, who had imagined that the cement plant will give you probably over and above 100%, which got resolved through NCLT and then there will be certain bad eggs where we may also lose some money. But that’s in the nature of business of banking, in the nature of entrepreneurship that you will have some bad cases, you will have some good cases, you will have some very good cases. I think we should move on in life and clearly capital will be required but I can assure you capital is available in large amounts, large volumes.

Frankly, this is what the world was waiting to see, the world wants to see an honest India. The world wanted to see a leader, a decisive leader who is willing to focus on integrity of systems, who is willing to ensure that our reputation in the world is of an honest nation. And today actually, we can hold our head with pride and go around the world; look at the response we will get when we say we come from India. Today, India is looked at as an emerging power which is unparalleled. I don’t remember in the last, at least in my forty odd years of my memory that I remember India ever had this kind of recognition and pole position of power, influencing world decisions.

I personally, am witness to some of the finest moments particularly, let’s say when we were finalizing the Paris Accord at COP21, what kind of response, you were there also, what kind of response the Prime Minister was getting, the beeline to get even ten minutes with the Prime Minister, the super powers of the world telling India and our delegation that we were going to be the deciding factor for the success of Paris. So today in my mind, we should move out of that mindset of weakness, we have to go from a position of strength, we are running a good economy, our macro economy is strong, the fiscal deficit is coming down regularly and I assure you this year there will be absolutely no slippage of fiscal deficit, fiscal deficit will be maintained and we will continue in our next term of five years to reduce and do better.

I am not being presumptuous or arrogant. I have confidence in the people of India and their understating that they will vote Prime Minister Modi back to give us good government for another five years. And I am confident that this strengthening of the macro economy, this ensuring that we have low interest rates, we have low inflation, the current account deficit has by and large been low save and except the last quarter where oil prices affected it a little bit, but we are still half of what we inherited even in the last quarter.

So in every respect, the India economy is strong, Indian reputation is strong, Indian credibility of leadership and our businesspersons is strong. Money is available; I have never found money to be a deterrent when it comes to doing good or doing development. It is we who have to go out, present our case well; money will not be a problem. In fact, I think even domestically and internationally people are waiting to participate in the great India story.

Thank you so much Mr Goyal.

Next Speech

July 3, 2018 Briefing Media at Andheri, in Mumbai

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