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Haircut key to easing NPA woes: KV Kamath, New Development Bank

If you resolve between 50 to 100 cases number of projects and you have resolved probably 60% to 70% of the systemic problem which will allow you to breathe again.

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Last Updated: Mar 31, 2017, 11.48 AM IST
Haircut key to easing NPA woes: KV Kamath
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KV Kamath, New Development Bank talks to ET Now about NPAs biggest hurdle to growth and much more. Edited excerpts:

KV Kamath: The first major step and that we have to give full credit to the Reserve bank was taken by the Reserve Bank in initiating the excise to recognise what is NPA so that has been recognised. That is a big step because from there you can go to the next step, which is the resolution of the NPA.

I think, that is where I was hearten to see the statement of the Honourable Finance Minister saying that he would now push resolutions. You need to push resolution because with the provisioning done. We are ready for resolution so we should get to that stage of resolution so that you know that you can now put the asset back to productive use I think that itself eases the systemic pain and the burden so I would fully support this urgency in terms of getting resolution done.

ET Now: You are right in giving credit to the RBI, which almost waged a war against non-performing assets and then came demonetisation. Many people thought that banks de-focus from what they were really doing. Do you believe NPA resolution has been delayed on account of demonetisation?
KV Kamath:
No, the reason is that the resolution process if at all it is delayed is a decision making process of the bank and structure has now been put in place where there will be an outside set of people who would also look at and have a oversight on this process.

The demonetisation process has not derailed it because recognition is going on through October right up to December. In the meantime, the banks have been busy doing the workouts. It is not, as if, they have not done their workouts. It is now basically to look at the workout and take a call what is left and the good news to me is it is not a very large number of cases. You probably resolve between 50 to 100 cases number of projects and you have resolved probably 60% to 70% of the systemic problem which will allow you to breathe again.

ET Now: What can be the innovative out of box ideas that one could look at because I am going to come to who will foot the bill and all of that in just a bit but there is an oversight committee the government hopes to empower it even more who is going to take haircut. Those kind of decisions are very tricky decisions.
KV Kamath:
It is not that complex. The hair cut has to be basically taken by two parties. There are only two parties to this deal, the promoter and the bank. I think, there has to be haircut on both sides otherwise it is not workable.

ET Now: But is not that is where the resistance.
KV Kamath:
This is not something new. We have done this in 2001-2002. There is enough experience in some parts of the system as to how it works so the haircut can be taken only by two parties and there are only two equations - here equity and debt and part of the equation is that loans will have to be written off, part of it is loans will have to be converted to equity. The sponsor has to take a haircut and that is where you do it.

After that the asset is ready to be put into productive use. Whether you allow the asset to sit with the sponsor or take it out and sell it is a separate issue. The first issue is not getting resolved as to what is the extent of the haircut, what makes it productive, what does it put, what makes it being put back into economic use is not determined.

ET Now: Are people afraid of taking the decision because it is discretionary at the end of day subjective?
KV Kamath:
I do not want to get down to that path because that is something that the Indian banking system has to answer as to why is that decision has been taken.

ET Now: It does lead to the other part of the debate that while NPA resolution is alright and it will perhaps spur growth and will crowded investments until unless NPAs are not resolved. The other part of the debate is who should foot the bill. Yes, banks and promoter should take haircuts but if the government were to get involved the whole infusion of funds who ends up footing the bill is the other moral question that raises?
KV Kamath:
If the banks have taken a 30% haircut already through provisioning because that part of it is done. You can still convert part of that loan into equity. They should do that and then I think you have got you are prepared for the next step.

Otherwise, we are only discussing in theory because thereafter as a question with all this done what is the extent of capital that is required in the banks so that has to be determined. There are numbers there 250,000 crore I see a number but once you do this you will really know what is the extent and how could that be met but let us do the first part. Get the asset back to use and then you look at the banks in a completely different context is to me the first step.

ET Now: A lot of people are part of the public discourses a bad bank. Do you believe that is a part of the solution to the problem that we are talk about or do you believe that perhaps postponing the problem?
KV Kamath:
No, we are not postponing anything. The first step has to be taken, you know what is the haircut to required and by whom to what extent to make that asset viable that decision has to be taken. If that decision is not taken whether you take the asset off the book to a bad bank or keep it in the existing bank is theoretical because the first decision is not taken.

Now you want to go to the second step of putting it in a bad bank, it's an excellent decision if you tell me that let us say 7 lakh crore is a bad assets in the system and let us say the value of that is 500,000 crore do you have a bad bank with that much funding capacity to take this asset off the books otherwise it is of no purpose so that is where the real challenge is.

ET Now: What do you believe will aid or enable a speedy decisions on whose going to take how much haircut?
KV Kamath:
This is a very simple thing. The key today is entirely with the banks, they are in a position of strengthen, they should take the call.

ET Now: But there are the ones who are not making that call.
KV Kamath:
They have to take the call and there shareholders have to ask questions as to why are they not taking the call, they are answerable. They are answerable to their boards, they are answerable to their shareholders.

ET Now: This overseeing committee that is supposed to be constituted of two people who are overseeing things from the outside. Do you believe it needs to be empowered with perhaps some legislative push or some legal push of sorts?
KV Kamath:
No, my own…

ET Now: To just to ring-fenced the decision making.
KV Kamath:
What I understood was that that structure itself was had started moving before there was it was again the whole thing stalled in terms of banks coming up to proposals but again I see it at a distance so I am not preview to exactly what is happening. All I can say is the first step in identification was done, resolution is now the key and that is not being done, there used to be a time bound programme right act has to be read, there are boards which are responsible, there are shareholders who certainly can ask for accountability.

If you do that, I think, you get to the next step much easier and this idea of having an oversight committee I think is an excellent idea because that relieves some of the difficulties that might be there in the system. But nothing prevents you from doing the base case workout. Can you not put a time frame that in the next 90 days? We need to have base case worked out for all the stressed assets and then in the interim look at how the next step is taken.

ET Now: Instead of looking at restructuring of individual projects or individual cases because most of these cases that are stuck perhaps belong to one sector or the other. The laggards are perhaps power and largely infrastructure. Should the government, not as a policy measure, look at restructuring packages for sectors instead of just assets of projects?
KV Kamath:
It honestly should not make a difference because you will have to look at each case whether whichever sector it is on a case to case basis, it cannot be an all in one solution. The extent of haircut cannot be uniform. Even when you look at what was done in 2001-2002 individual cases within a sector had completely different structures but they all went through under one package.

The ground rules were specified by the Reserve Bank and I do not think there is and that is absolutely appropriate the ground rules are set by the Reserve Bank. What are the ground rules that if you take a haircut there are consequences, if you give a concession there are consequences those should be very clearly articulated by the Central Bank and within that ambit how much you want to give is a decision that you take based on what restores asset to health.

ET Now: Do you believe though the scenario or how the landscape of Indian banking is perhaps ideal and paves the way for consolidation in the Indian banking space, we are already talking about Kotak Mahindra looking at Axis, the SUUTI stake they very openly said that they are willing to evaluate I am just talking about private sector right now?
KV Kamath:
Indian banking clearly needs larger banks so there is scope for consolidation. You need to clearly see that when you do that and whether it is a public sector or the private sector, it only adds to the health and to the competitiveness of the sector.

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