Anand Sinha, the custodian of the India banking system as deputy governor at the Reserve Bank of India, has just laid out the road map to make Indian banks safer with the so-called Basel III norms.
But, there is a lot more happening at the central bank. In an interview with ET, Sinha reveals what the central bank is doing on soaring bad loans, private ownership of banks and preparedness for a European crisis. Edited excerpts:
Can you say that money will be safe in the system with Basel III? And why impose this on state-owned banks, too, when they have a natural backstop?
Obviously, Basel III is intended to make your money safer. The regulation in force prior to the crisis had flaws. It had a conceptual flaw, which made everybody believe that if the individual institutions are strong, the financial system would be strong. Under the earlier dispensation, the equity component was very little. When the crisis broke out, other forms of capital could not absorb losses.
Several countries would be facing revenue issues. Despite this, strengthening of the banking system is seen as extremely important. If we are saying that because most of our banks are government-owned and, therefore, we need not have these capital requirements, to my mind, that is not a correct argument.
The basic tenet of prudential regulation is that it should be ownership neutral. That is the philosophy we have practised in this country. An implicit backstop was there for the private banks in the West, too - the too-big-to-fail syndrome.
But for public sector banks?
What if a tail risk crystallises? The amount of capital required becomes much larger than we would require under normal regulations. The government may have to step in, thus unsettling the fiscal position.
That is exactly what has happened during the crisis. The fiscal positions of many governments have become weak largely because of providing fiscal stimulus or shoring up the capital of their banking system. So it is much better to work in a disciplined and prudent way rather than to rely on backstops.
With the proposed changes in voting right to 26%, would promoters be permitted to hold 26% in banks?
No. Twenty-six percent is the voting right restriction, it does not mean that the ownership automatically can be 26%. If you have seen our new bank draft guidelines, we have said that promoters can go up to 15% and others can go up to 10%. I am not implying that just because voting right is 26%, we will raise ownership to 26%.
In the draft, there is a mention of promoters being able to hold 15%. Would this apply to existing promoters?
We have not taken a call on that. I am sure the demand will come. Today, generally, we don't allow holdings, including that of promoters, of over 10% though there are slabs for 10% to 30% and for 30% and above. Those enabling clauses are there, but, in general, we are not comfortable with anybody holding a chunk more than 10%.
What are the principles on which higher holding is permitted?
Broadly speaking, for example, if there is a financial institution that is well diversified, has sound health and sound reputation, we could allow a higher holding to this financial institution in a bank.
Would you pitch for a higher holding in certain cases, exceptions?
I would not like to comment on specific cases. I would state the principle that this process is on in every bank where the shareholding is higher than what we have permitted or are prepared to allow. We ask for a road map but for various reasons, the timeline may vary. We don't believe in discriminatory regulations.
Is the bad loans problem waiting to explode?
Today, the NPAs have risen and the amount of restructuring has gone up very substantially. These are all facts. When both the global and Indian economies are under stress, there is bound to be a rise in NPAs.
If there are pockets where credit underwriting and monitoring system is not up to the mark, that needs to be tightened. The December figure of gross NPAs is around 2.97%, which is reasonable given the stress.
However, I would not say that we should not worry. But, worrying is one thing and panicking is something else. If we are thinking that it is going to be a large systemic issue, that is not true.
If we were to consider the restructured assets in the system, the NPA number doubles.
It is true NPAs and restructured assets taken together represent the stress in the system. But whether they should be called NPAs in an economic sense is a matter of interpretation. From anecdotal evidence that we have, about 15 % of the restructured accounts become NPAs. Your real NPAs are those 15% or 20%.
Is the stress as high as during the 2008 crisis?
It is difficult for me to measure. I would say at that point in time, we looked at the stress factor in the asset quality across the economy as a whole. Today, it is more sector specific. The action we took in 2008 was a pre-emptive action. But, today, it is not a case of sudden surprise. We look at the current situation more in terms of sector-specific stress from the perspective of asset quality.
What if there's a full-blown crisis in Europe?
One thing that is very important in all these situations is the level of confidence. Those were the days when after the Lehman failure, confidence had gone down very considerably. If a full-blown crisis happens here, we will have to face it and make all efforts to come out of it. But, if you are asking me if I can spell a detailed programme or a contingency plan, I would like to say that this is an ongoing effort.
What is Indian banks' exposure to shaky sovereign papers?
Very little. That's the plus point. If you look at our overseas presence, of the 37 branches that we have in the eurozone area, 30 are in the UK, three in Belgium and two each in France and Germany. All three subsidiaries are in the UK. So, we are not really into PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) in terms of our presence in the eurozone.
Are banks seeking line of foreign currency credit like in 2008?
The fact that we have not done anything like that now should mean that the situation is not that stressful. At that stage, the situation had become very stringent. Several measures had to be taken, which inspired confidence. RBI saying that we would meet your liquidity requirements, that itself solved many problems.
But, there is a lot more happening at the central bank. In an interview with ET, Sinha reveals what the central bank is doing on soaring bad loans, private ownership of banks and preparedness for a European crisis. Edited excerpts:
Can you say that money will be safe in the system with Basel III? And why impose this on state-owned banks, too, when they have a natural backstop?
Obviously, Basel III is intended to make your money safer. The regulation in force prior to the crisis had flaws. It had a conceptual flaw, which made everybody believe that if the individual institutions are strong, the financial system would be strong. Under the earlier dispensation, the equity component was very little. When the crisis broke out, other forms of capital could not absorb losses.
Several countries would be facing revenue issues. Despite this, strengthening of the banking system is seen as extremely important. If we are saying that because most of our banks are government-owned and, therefore, we need not have these capital requirements, to my mind, that is not a correct argument.
The basic tenet of prudential regulation is that it should be ownership neutral. That is the philosophy we have practised in this country. An implicit backstop was there for the private banks in the West, too - the too-big-to-fail syndrome.
But for public sector banks?
What if a tail risk crystallises? The amount of capital required becomes much larger than we would require under normal regulations. The government may have to step in, thus unsettling the fiscal position.
That is exactly what has happened during the crisis. The fiscal positions of many governments have become weak largely because of providing fiscal stimulus or shoring up the capital of their banking system. So it is much better to work in a disciplined and prudent way rather than to rely on backstops.
With the proposed changes in voting right to 26%, would promoters be permitted to hold 26% in banks?
No. Twenty-six percent is the voting right restriction, it does not mean that the ownership automatically can be 26%. If you have seen our new bank draft guidelines, we have said that promoters can go up to 15% and others can go up to 10%. I am not implying that just because voting right is 26%, we will raise ownership to 26%.
In the draft, there is a mention of promoters being able to hold 15%. Would this apply to existing promoters?
We have not taken a call on that. I am sure the demand will come. Today, generally, we don't allow holdings, including that of promoters, of over 10% though there are slabs for 10% to 30% and for 30% and above. Those enabling clauses are there, but, in general, we are not comfortable with anybody holding a chunk more than 10%.
What are the principles on which higher holding is permitted?
Broadly speaking, for example, if there is a financial institution that is well diversified, has sound health and sound reputation, we could allow a higher holding to this financial institution in a bank.
Would you pitch for a higher holding in certain cases, exceptions?
I would not like to comment on specific cases. I would state the principle that this process is on in every bank where the shareholding is higher than what we have permitted or are prepared to allow. We ask for a road map but for various reasons, the timeline may vary. We don't believe in discriminatory regulations.
Is the bad loans problem waiting to explode?
Today, the NPAs have risen and the amount of restructuring has gone up very substantially. These are all facts. When both the global and Indian economies are under stress, there is bound to be a rise in NPAs.
If there are pockets where credit underwriting and monitoring system is not up to the mark, that needs to be tightened. The December figure of gross NPAs is around 2.97%, which is reasonable given the stress.
However, I would not say that we should not worry. But, worrying is one thing and panicking is something else. If we are thinking that it is going to be a large systemic issue, that is not true.
If we were to consider the restructured assets in the system, the NPA number doubles.
It is true NPAs and restructured assets taken together represent the stress in the system. But whether they should be called NPAs in an economic sense is a matter of interpretation. From anecdotal evidence that we have, about 15 % of the restructured accounts become NPAs. Your real NPAs are those 15% or 20%.
Is the stress as high as during the 2008 crisis?
It is difficult for me to measure. I would say at that point in time, we looked at the stress factor in the asset quality across the economy as a whole. Today, it is more sector specific. The action we took in 2008 was a pre-emptive action. But, today, it is not a case of sudden surprise. We look at the current situation more in terms of sector-specific stress from the perspective of asset quality.
What if there's a full-blown crisis in Europe?
One thing that is very important in all these situations is the level of confidence. Those were the days when after the Lehman failure, confidence had gone down very considerably. If a full-blown crisis happens here, we will have to face it and make all efforts to come out of it. But, if you are asking me if I can spell a detailed programme or a contingency plan, I would like to say that this is an ongoing effort.
What is Indian banks' exposure to shaky sovereign papers?
Very little. That's the plus point. If you look at our overseas presence, of the 37 branches that we have in the eurozone area, 30 are in the UK, three in Belgium and two each in France and Germany. All three subsidiaries are in the UK. So, we are not really into PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) in terms of our presence in the eurozone.
Are banks seeking line of foreign currency credit like in 2008?
The fact that we have not done anything like that now should mean that the situation is not that stressful. At that stage, the situation had become very stringent. Several measures had to be taken, which inspired confidence. RBI saying that we would meet your liquidity requirements, that itself solved many problems.
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