August 24, 2018

Speaking at CEPR: India Banking Conclave, in New Delhi

Satishji, we have with us also Ashwini Mahajanji, an old colleague Mr Nayar, is Sanjay still around or has he left? A lot of good friends I see; Vinod Jain, a lot of colleagues with whom we have worked over so many years. And I am delighted that probably for the first time, we have all assembled here to look at Indian banking with an Indian prism. Of late, I think it’s become very fashionable to bring an international perspective to every issue. And whenever we are deliberating Indian banking, the way forward, what happened in the past, what we need to do for the future, we somehow want to clone whatever we believe was done by other countries and, probably, either help to resolve the crisis. I personally believe, on many occasions, only helped to increase the problems.

But looking at the Indian context and the context in which Indian banks have worked, continue to work, will work in the future, one will have to devise more Indian and indigenous approach to the future of Indian banking. I don’t think anywhere else in the world we have a banking system where government is the owner, promoter or acquirer of large part of the banking set up, until very recently, probably, almost the entire banking set up. And the banks are required or mandated to play such an important role to spur economic development and also to help lift people out of poverty.

I don’t think there may be any other comparable example where just like our public sector banks, and until a few years ago, our development financial institutions, actually promoting industry to meet the needs of India’s growth, to meet the needs of India’s consumption, actually supporting farmers in such a big way so that agriculture gets the boost that it got over the last many decades, focusing its energies to ensure that tiny small, medium enterprises get timely finance, running many programmes, programmes like the DRI – the Differentiated Rate of Interest schemes where small loans, micro loans can be available to the poorest of the poor at very affordable cost, and hopefully keeping them from the clutches of moneylenders.

I also don’t think there are any similar parallels we have in the past or from any international experience where banks keep nearly three and a half percent I think now as a cash reserve ratio with the central bank, earning no money, have about 22-23% mandated liquidity ratios for giving confidence to depositors that their money is safe and invested in government bonds, which indirectly also help to support India’s economic growth through investments made by the government.

So, in some sense, India has a very unique banking system. And while doing all of this, the government banks have to compete not only with nimble-footed private sector banks, but also with branches or often offices set up by foreign banks. In fact, until a few years ago I don’t think even the rules of the game were same for both. And in this context, when we look back at the great role Indian banks have performed in the growing economy of India, I think sometimes we tend to belittle their importance and the challenges within which many of these banks have performed.

Of course, one cannot deny that a lot of wrong practices also crept into the system, as happens wherever governments play a very active role in day-to-day management of any organisation. We are all very familiar with the interference that public sector banks have had to suffer until 2014, where we are given to understand loans used to be decided and sanctioned based on phone calls coming in, probably from Delhi or wherever else.

We are all very familiar with the kind of political pressures that were exerted, both in the appointment of managements of these banks, and then subsequently in the operations of these banks. Of course, not all banks fell prey to that and therefore you have instances of some banks outshining or performing much better than the other banks.

And this is not a malaise that is only in the public sector banks, we have enough problems that are coming to surface also in the private sector banks. So, one can’t single out the government banks alone, as if they were the only people who faltered in upholding the integrity of banking institutions.

One must also not lose sight of the fact that a lot of the problems were because of a) the inability of the banks, and b) the lack of political resolve that was required to sort out these problems for almost a decade. And I would like to share with you the example of one bank to explain to you how if you bite the bullet and resolve a problem in time, you can actually turn the tide and change the future of Indian banks. And I will draw from an experience of the past to explain why the Modi government in the last 4 years has actually come down with a heavy hand on trying to resolve the problems of the Indian banking sector.

Those of you who are associated with banking over the last 20 years may recall the kind of problems Indian Bank had in the late 90s, early 2000-2001 period. Indian Bank was one of the worst performing banks at that point of time. And why I recall it is because in 1999, the then Finance Minister wanted to appoint me on one of the banks and his office suggested that I join the board of Indian Bank.

I didn’t care which bank they appoint me on and I would have probably been on the board of Indian Bank at that point of time. And sometimes, now when I look back at the story, I wish I had joined that bank I would have learnt a lot, if I had actually joined that bank board. Subsequently, for whatever reasons, I was appointed on the board of Bank of Baroda, and probably missed out on an opportunity to learn what happened in that period in Indian Bank.

If Nayar sahib remembers, there was Ms Ranjana Kumar, I think? She was the Chairman and Managing Director of Indian Bank. And the then NDA-1 government of late Prime Minister and a person whom many in this room and me particularly not only adored but learned a lot from, Atal Bihari Vajpayeeji, had announced that we will completely focus on resolving the problems of Indian Bank, and we will not allow the problems to continue or we will not just push the problems into the future. We will not just evergreen the problem, but actually find a permanent solution to the Indian bank problem.

And I remember the three or four years of stress that Indian bank went through, but they bit the bullet. They had the resolve to solve the problem for which every possible step that was necessary to solve the problem was taken during that period. It was three or four years of serious hardship. The bank’s every parameter went down the tube. The government had to put in a lot of capital during that period in Indian Bank.

But over three or four or five years, they resolved the NPA problems, they resolved the human resource problems, the HR problems in the organisation. They set up good risk management practices, credit appraisal systems were strengthened. There was zero political interference in the working of the public sector banks during that period.

And Indian Bank became such a strong entity that through the decade 2004-14, while most other banks faltered in their lending practices, faltered in their ability to recognize the problems that they were facing, did not truly reflect the stress on their balance sheet, in the books of account, but the continued to show huge profits, continued to expand their credit book almost by three times in this decade. In fact, not even in this decade, in the period 2008-14, six-year period, they almost tripled their balance sheets on the back of indiscriminate huge lending in years as high as 30% growth in the loan book in some of the banks. Allowed layering of several levels so that literally with zero equity or nominal equity, people leveraged …. to subsidiary, to subsidiary to another subsidiary, and with three or four or 2-5% equity, you almost saw 20x leverage.

Stresses came in the banking system during that period and newer and newer devices were formed to restructure accounts, to evergreen accounts: you had all sorts of books being coloured, large profits being shown, dividends being paid. But the reality being hidden under the carpet. But during this period, because Indian Bank had gone through the stress and the clean-up operation, they were able to withstand any political pressure of this period and continue to maintain the integrity of that institution.

And you actually saw that while the NDA-2 under Prime Minister Modi and Honorable Finance Minister Shri Arun Jaitelyji decided to clean-up the banking system, Indian Bank stood strong and did not have to go through the stress and the pain points that most other public sector banks, including State Bank of India and its subsidiaries and its associate banks had to go through, but Indian Bank came out with a shining performance during the last four years also. Thanks to the good work that was done in NDA-1, thanks to the robust practices that were set up in that bank, in that period.

I am giving this example only for the participants of this Conclave to reflect on why this government has taken it upon itself to resolve the woes of the banking system, despite the fact that this did cause a stress. After all, you have so much criticism being made about the rising NPAs, the banks are not showing profits, therefore, you don’t get the dividends. The government has had to put in huge amounts of capital; nearly 1.47 lakh crores has already been put in so far, another 65,000 crores of which 13,000 we put in earlier in July and maybe another 50,000 during the course of the year.

But we are willing to take all of this burden on ourselves, because we do believe that it is a necessary step, a step which should have been taken maybe 10 or 15 years ago. But, someday, the reality had to be brought to fore. In fact, I was doing some analysis and I remember in 2014, while the NPA amounts or percentages were about 2.78 lakh crores, the stressed accounts were another 6 or 7 lakh crores. And most of those stressed accounts were truly NPAs, but in the garb of restructuring or revalidating those loans, changing the rules of the game, in the form or the other, they were recognized as a stressed account but not as an NPA.

There were another 2 or 3 lakh crore rupees worth of accounts, which continuously were evergreen, so your loan installments and interest fall due, you take a fresh loan. In fact, you don’t even get a disbursement in your account. Fresh loan is given and straight adjusted into the repayment of the old loan, only ballooning the overall exposure of the bank. In fact, it looks good. Your credit has also gone up, knowing full well that there are no assets to back up this security.

And then these stressed accounts, stressed plus NPA of 8 lakh crores, because they are a stressed account you keep adding interest at exorbitant rates, the penal interest rate. So, the 6 lakh crore or whatever of stressed accounts become 7 lakh crore in year one, 8.1 lakh crores in year 2, 9.3 lakh crores in year 3, and over the four years that stress also keeps …. and becoming larger and larger.

Then there was another problem of an account which kept evergreening from one bank to the other, so before it became NPA in bank number 1, bank number 4 would give a fresh loan, so bank number 1 looks sorted out, 4 gets an added credit exposure, so looks good, my credit is growing. I become eligible for good bonuses, and that’s a regular account. After some time, bank number 2 seems to be faltering, so you find a bank number 6 to give you another loan, you save yourself. But sometimes when bank number 3 you falter, there is no bank number 7 system and then the stress starts building up. But you are still NPA in bank number 3, 1 and 2 are still looking clean, 4, 5, 6, 7 are looking clean, so the NPA structure only recognizes the bank number 3 exposure as an NPA. 1, 2, 4, 5, 6, 7 – all are regular accounts, those bankers are not worried about what’s going wrong with bank 3 or with that company.

And large amounts of NPAs were hidden NPAs in this form. Actually, I can go on and on and I am wondering what I am doing. I am actually exposing the Indian banks. I am showing the mirror to what happened during his whole period. I am still not taking away the fact that they did a lot of good work, maybe on the agriculture sector, in supporting MSMEs. There was a lot of good work also happening. But somehow, at that appropriate time when they should have caught the bull by the horns and started resolving the problems, they let the problems only grow.

You will all appreciate that when an account comes into trouble, and sometimes the trouble could be for genuine reasons. And if there was a genuine reason where one could clearly see a roadmap ahead and you restructure or you resolve, I think it makes good imminent sense. But when you do it a second and third and fourth time, you can clearly see there is no asset backing, it’s an unsustainable debt that you are creating by gloating up the loan book. That’s where the problem really starts becoming very serious.

And if at that point of time, one were to look at a change of management, one were to look at resolving the asset rather than restructuring or postponing the problem, you could actually get very good values and probably the bank may not have had to take such a big hit. Because after all, there was some equity in the system. So, if at the first stage, let’s say you had a loan with a 2:1 debt equity ratio and there was Rs 30 out of Rs 100 as a equity in the loan book, against the loan that was given and it went into some problem, maybe the coal block got cancelled, maybe environment clearance didn’t come in time because you didn’t have access to the Environment Minister and didn’t have an email coming in from his boss or her boss either allowing the environment clearance or allowing you to perform your duties honestly.

And, for genuine reasons the project got delayed and you needed to restructure and maybe the loan to equity ratio instead of 70:30 would have become 80:20 at some point of time, you could still live with that problem and give it a chance if the problem was genuine and that was what the banker’s job was. But going forward, if you saw that this environment clearance is just not going to come or the management has been cheating or gaming the system. And some of those cases now are coming to light, people have started going to jail for their misdemeanors. Probably, for the first time in India’s history, large loan borrowers are required to start repaying the banks.

Earlier, it was thought small borrowers like you and me, when we take a loan we have to repay the bank. For large borrowers, there was no liability to repay, it was the banker’s problem to recover the loan. Borrower never felt obligated to repay the loan. It must be the first time in history in the last four years that refineries and steel plants and large tracts of land had to be actually sold, assets are being attached and people are running away from the country.

But if at that 80:20 stage also you resolved the loan, instead of postponing the problem, there was a good chance bank would have recovered the amount or had a very small hit. But when you let it postpone and gradually the equity got wiped out, loan book kept ballooning, assets backing that loan kept depleting, you landed up in a situation where ladies and gentlemen, just to set the record straight, it used to take about four and a half to five years to resolve a loan account. I am talking of prior to 2014, at an average, the time to resolve a bad account was between four and a half to five years. The average recovery prior to 2014 was under 26%. The cost to recover this was nearly 9% of the loan amount.

And after the Insolvency and Bankruptcy Code and all the steps that we have taken and the strict monitoring of bad loans, I am delighted to share with you that in the first 32 accounts that have got resolved the recovery has been upward of 55%. The cost of recovery is down to less than 1%, and usually the recovery happens within a space of one or one and a quarter year, 12 to 15 months. That’s the change that has happened.

And I do believe, just like the Indian Bank story which I shared with you, the fact that the Modi government has taken it upon itself with a series of measures. It’s not only the Insolvency and Bankruptcy Code, it’s the tightening on black money, demonetization, the capturing of all data under GST, the Benami Properties Act being operationalized, the Economic Fugitive Offenders Act being passed in the parliament only in this session and earlier the ordinance. All of these put together a creating an ecosystem where it will pay to be honest, where there will be a premium on honesty.

And I think that honesty in the banking system is what we were always hoping and desirous of, a combination of a sympathetic year to genuine problems and a strong iron-willed hand to resolve misdemeanors and irregularities. That is the combination that will truly take Indian banking out of the problems of the past, strengthen the processes of banking, strengthen the processes of the managements of these banks, bring more robust credit appraisal, better and better risk assessment into their working, transparent systems of selection of managements, without political interference, a serious focus on integrity of institutions.

I think all of these are the hallmarks of the efforts of the last 4 years, and I am very-very confident that with the support of all of you concerned participants or stakeholders of the banking system we will certainly in this effort to clean up the banking system emerge successful and leave behind a legacy, similar to the Indian Bank legacy, of strong, vibrant, service-oriented and honest banking.

Thank you.


Question and Answer

  1. मिस्टर गोयल, मैं बीडीएल बैंक में डायरेक्टर हूँ जिसका ऐय्यर जी भी ज़िक्र कर रहे थे इसमें …. बहुत अच्छी मिली है सिर्फ यही है कि जो 7-8 साल की जो मैनेजमेंट हमारी रही है, 2009 से उसका बहुत बड़ा योगदान है इस एनपीए को बढ़ने नहीं देने के लिए, मतलब reckless lending नहीं की और बहुत prudently काम किया| और मेरे ख्याल से यह जो मैनेजमेंट वाला जो कांसेप्ट है यह आपको बाकी सब बैंकों में भी उसी टाइप के prudent managers appoint करने चाहिए|
  2. यह 8-8.5 लाख करोड़ जो एनपीए अकाउंट है इतना मीडिया में हाइप हो रखा है और जो बसिकली बड़े एकाउंट्स हैं चाहे वह माल्या का हो, नीरव मोदी का हो, there could be a team और हमारे पास हैं देश में लोग, 20-25 लोग बैठकर के हम दो जने यहाँ ही बैठे हैं आगे में, उस देश की प्रगति को आगे करे, instead of उसका discussion महीनों तक चलता रहे|
  3. Q. Good evening sir, my name is Gopal Iyer. I am an ex-banker. Very quick question, given the environment that we have for the Indian banking system, given the government depends on the banks to channelize savings for its various fiscal programmes, the fact that you have mandated lending in the banks, what are the kind of reforms that the current government is planning to do to actually put the…. NPA resolution is clearly one, but what are the other reforms, for example, reforms in the underlying sectors to make sure revenues for the banks…?
  4. Thank you very much Minister Goyal, I am Rahul Sharma from Genesis… sir I just wanted your thoughts on the intersection of technology in banking, and the last session that we have had. And what is it that you see both in terms of a regulatory framework as well as the area where the government will focus on?
  5. Mr Piyush Goyal, I am Sunil Mago, a chartered accountant turned advocate. मोदी गवर्नमेंट आने के बाद देश में बहुत कुछ बदला है और बहुत कुछ बदलेगा, लेकिन जो चीज़ जैसे अभी आप कह रहे थे कि मैनेजमेंट तो लेकिन अभी भी जो चीज़ें नहीं बदलीं वह यह हैं कि अभी भी directors की appointment without political intervention नहीं होती, इसको अभी अगर आप बदलेंगे तो right people will be at the right place.
  6. Actually, your government has done so many reforms, but I want to say one thing instead of recovering and like, we have to try to recover NPAs instead of converting them into CDR (Corporate Debt Restructuring). That should be closed I want to say.
  7. Myself Dr. Anurag Mittal from Guru Nanak Institute of Management, Punjabi Bagh. My query is what measures can be taken for the improvement in the work culture in the public sector bank with reference to making the staff more customer-friendly and to make the customer grievances department more effectively, because it’s a part of the accountability and governance also.

Honorable Minister: Thank you. Of course, विजय जी और आपका तो, I think I can take it as a piece of advice. But what Mr Gopal Iyer asked, I think reforms will be at different levels. One would be within the banking system, for example, the appointment of Chairman and Managing Directors or CEOs. The government has completely disassociated itself, and to some extent what Sunilji was also saying, from the appointment of Bank Chairman and CEOs, and we have the banking board’s bureau, which interviews all the eligible candidates. That also has been fine tuned to the extent that 3 or 4 teams interview each person, give markings, markings are aggregated and accordingly a list of eligible candidates in order of their performance in the interview process.

So no individual, no set of individuals, but 4 or 3 groups of individuals interviewing each candidate, so you have substantively insulated the process from interference or from any one or two persons kind of favouring one or the other. And, by and large, unless something is found to the contrary through the investigation process when these names are being cleared from various agencies, from the Reserve Bank of India and all. By and large, the process is completely non-discretionary.

Similarly, I can say with pride and with confidence that in four years, not a single phone call would have gone from any politician or bureaucrat in government handling the department of financial services or any of that to any banker in the case of loans or write-offs or settlements, or restructuring or any of that. We have completely given them autonomy to work.

In some cases, a lot of people tell me that maybe you have given too much autonomy and, therefore, they are not taking decisions. But we believe that that is a short-term phenomena which will get over once they get the confidence that their decisions will not be subject to political interference, they will start taking more conscious decisions, better and better set of managements will come in. Banks are being encouraged, as the gentlemen young man Rahul asked there, to bring in technology in a better way. Banks are encouraged to engage with FinTech wherever possible, use digital technologies to expand their footprint to the remotest corners of the country.

So I think regulation and autonomy, both are being brought in to an extent where a private bank, a foreign bank and a public sector bank will all be able to work on an equal footing with the same level of autonomy, risk management practices, loan appraisal practices, credit appraisal, all of that hopefully will start getting more robust. Through the interplay, the top five banks we are trying to look for private sector bankers to come in. We had a good experiment with Bank of Baroda, by and large, Jaykumar there brought in a flavor of private sector, and within the constraints of public sector showed how we can run a bank efficiently.

In government, we are trying to look at faster approvals, we are looking at decisions being taken which are transparent and don’t have the risk of getting struck down in the future. So, take the case of coal block allotments, 204 coal blocks getting allotted suddenly caused the distress to the whole economy and largely to the banking system. But, after all, the auction process and all has been put in place, bankers don’t have to fear that in the future it can get cancelled. Environment approvals which used to take two years in the past or sometimes longer and there were extraneous considerations, now it’s a completely transparent website-announced, processed procedure. Everything is through speaking orders, and in a time-bound fashion you are sure to either get an approval or if it’s not a good project or it damages the environment, you won’t get the approval. You can’t manage to get an approval.

So bankers feel safer that if they lend to such a project, there’s no risk that it could get cancelled going forward, in the future. So, it’s a combination of several steps, within the banking system and within government, all of which towards good governance. And I believe that is the only way we can change the future of not only banking, but the mindset of the nation. And I personally believe, since most of us in this room, except for a few, are in an age group where we have kind of crossed our 50s, I believe it is incumbent on all of us to put our heads and effort together to leave behind for the next generation, all the children in this room should never ever have to question the legacy that we leave behind. They should be proud of what we are going to leave for them.

Sunilji, by and large, the process of appointing directors has been streamlined a lot. There are a few appointments which are made through the political establishment, but one must bear in mind that politicians are also elected by the people of India and you can’t paint all politicians with the same brush, then we would not be cleaning up the banks today, we would have also been doing phone banking. So I think you can trust that politicians also can do a good job, after all, they are running the country, they are cleaning up the system. But, having said that, even the appointees, any of these appointees have to go through a rigorous checking mechanism. And sometimes there is a lot of compliant that it takes too long to appoint anybody these days, but that’s because we have set up checks and counter-checks to ensure that whoever is appointed is really worth, is worth the salt or worth, his capabilities truly deserve to be recognized by that appointment.

And one must also bear in mind, and I will give you an example. I remember when I was on the board of State Bank of India, a gentleman came on the board who couldn’t even talk, who actually initially we all felt what the hell is he going to do in the bank’s board, what contribution is he going to do? But as we worked together, I thought his contribution was superb, because he came from a section of society whose voice would otherwise never be heard on that board. So I think it’s important that we have people from different sections of society who also speak the voice of the people for whom these banks are running. And, therefore, I would believe that some such appointments are really good for ensuring a balance and bankers don’t become too clinical in their approach and do not, as I began my address with, forget the Indian context in which banks have to run – the poor of India, the MSMEs of India, the tiny industries, the arts men and craftsmen of India, the farmers of India for whom also we have an obligation to perform.

As regards recovering NPA instead of CDR, madam, that is history. Although CDR and all of them are now finished, it’s only you have to work well, as I said before, if you have still an ability to turn around the company, the management is good, banks have a limited period in which they have to take that decision. In the earlier period, bankers could never come together and take decisions which was also a cause for a lot of the stress. So three banks believe that it’s an account which can do well. One person could actually … the entire resolution and cause huge further losses to everybody, those things we have hopefully been able to address in a small measure through the inter-bank creditor arrangement that recently has been executed by all the banks. Because we believe, as they say in hindi, Panchon ki ray should prevail. One man cannot be a veto to the whole system. I mean, otherwise no decisions will ever be taken in life.

So, we are hopeful that all of these measures will help to, wherever it’s absolutely in the interest of the nation that a resolution should be done we should do it, otherwise it goes through the NPA process or resolution. It’s only when there is a clear cut force majeure or a management which can turn around the company, there’s still enough asset backing, there is business potential, the business plan is good…. many exceptional cases wherever bankers have been given the right and for which also we have tried to work together with the bankers that there would be independent bodies, which would assess that the process and procedure followed is transparent and honest and no political or other influence can affect the system.

And very clearly, the last point that was raised about work culture – we surely need to improve the work culture, make it more service oriented. We have had a very bad experience in, and again I say, it’s not for all the 800,000 employees of the PSU banks. And it’s not only about PSU, I think a lot also went wrong in the private banks during the demonetization period, and many of us in this room probably have experienced a lot of irregularities that came to light during the demonetization period where bankers, in some sense, also did not do their duties diligently.

So, we clearly have to work more on HR, better HR practices, better training, better commitment to the job, bring in more systems for integrity and honesty in the working of the banking sector. But it’s a process which is not a switch on, switch off. It’s a process that happens over a period of time. As they say, the top determines how the thing is going to percolate down.

As one taxi driver had once told somebody, the taxi driver charged some Rs 8-10 extra, so maybe the bill was Rs 90 and he asked for Rs 100. And a conscientious citizen or a conscientious traveler said but the meter is showing 90, why are you asking for Rs 100? And the taxi driver said, ‘साहब 10 रुपये ही तो ज्यादा मांगे हैं, कोई कोयले की खदान थोड़े ही ले ली आपसे’|

So if the top is clean, I think a lot of it will percolate down to make this nation, a nation recognized for its integrity and honesty around the world, that is the effort we are trying to do, that is the leadership that Prime Minister Modi and Mr Jaitley are giving to this country.

Thank you.


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