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New Asset Restructuring Companies on The Anvil

By GovernanceToday
In Financial Inclusion
November 4, 2014
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Gurdial Singh Sandhu, a rajasthan cadre IAS officer of 1980 batch, took over the charge as banking secretary earlier this year. In the past two years, the position had become one of the most challenging as banks have been grappling with asset quality issues due to over leveraged sectors like power, infrastructure, gems and jewellery which are among others getting badly hit by their worst downturn in a decade. Sandhu is currently busy with looking for new ways to infuse capital into public sector banks as new capital adequacy norms for banks are set to kick in , even as he engages in regular discussions with bankers to sort out a large pile of non-performing loans dragging the system. He is also looking to kick-start consolidation process in state-owned banks to improve efficiencies within this fiscal, while the ministry is drafting norms for longer tenures for senior executives in the PSBs. Sandhu has taken a lot in his plate in his short tenure; be it the challenge of the ambitious financial inclusion promoted by the new PM or the issue of new bank license. He explains some of the plans in this interview. Edited excerpts:

SandhuWhat is the progress in Prime Minister backed financial inclusion programme, Jan-Dhan Yojana ?
We have got a very good start. As on 7th October , 5.52 crore accounts have been opened and a deposit of Rs 4,268 crore have been mobilised under PMJDY.

What is the status of the direct infusion into Public Sector Bank (PSBs) ?
We are going to the Cabinet soon, within a month. The consulting process has started and the proposal would go to the Cabinet. Earlier the government had said that it has to have 58 per cent stake in PSBs, but now we are cutting stake in PSBs to 52 per cent because only then will banks have space to raise additional capital. So, we are going to provide banks with that space and would bring down the government share in these banks. For the same, we are taking a broad mandate from the Cabinet in reducing government’s shareholding. This is not through typical dis-investment here private share holding in these banks is going up through capital raising programme. Capital infusion takes place from time to time.We feel there should be some onus on the bank management also, to see that the capital is well utilised and there is healthy return on the capital.

There were talks about sale of some non-core assets by PSBs. Any progress there ?
There could be some sale of non-core assets of these banks. The banks have investments in credit ratings agencies, insurance sector and few other areas as well. They can exit from those businesses whenever they get good valuation. The timeline would be decided by the banks themselves and the ministry will not set timelines for sale of non-core assets.

The related things are also the consolidation of some of the banks and competing with each other. The scarce capital that some of the banks have will be spent better if there is a consolidation. That exercise is also on. All of the consolidation cannot happen in one go, something should happen this year too.

Are you prescribing any norms for capital conservation ?
We are prescribing some norms on tackling asset quali ty issues, return on capital, etc. These norms will help in conserving capital. Norms for the asset quality improvement and better use of capital would be issued by the ministry. We have to make these accountable, Corporate governance banks and longer stable tenures for executives of PSBs would be a part of this for better performance. Not giving  longer tenures to executives has been cited as one of the reasons for lacklustre performance of banks. By the end of the year the norms would be issued.

There were also talks about merging state-run banks but there has been no progress so far ?

We have appointed some of the experts to look into the merging of PSBs. SBI Caps are looking into that. First they will do an initial study, give us a broad picture, and then they will do a detail study. We want to begin the process this year and continue in the years to come. Report from SBI Caps; we hope to get the in the next few months. SBI and some of associate banks are planning to merge. SBI is also working out internally in merging with one of its associates by the end the fiscal, so as to kickstart the process. There may be merger of an associate bank with SBI this fiscal. Apart from this, other banks are also being considered. UBI could be one of the possibilities.

When could the guidelines for payment banking come ?
RBI had issued some draft guidelines earlier. So based on those feedbacks, we are in the process of finalising those guidelines. So once the guidelines are issued, they would be inviting applications. I think India Post can also be a part of this, as I don’t think they have the capacity at the moment to become a universal bank. I don’t know when the fresh guidelines will come but they should come as early as possible.

There were also talks about forming a national asset management company to buy distressed assets from banks. Any progress there ?
There were no proposals but some suggestions.But we are not going ahead with that plan now. Instead, we will create some new Asset Restructuring Companies and strengthen existing ones with more capital. If that happens,it may serve the purpose. RBI is going to come with guidelines on it this year. They will invite NBFCs and ARCS with better capital, today they are not capitalised properly and with the small capital they are unable to take up the challenge of bad debts. So, we want large ARCS. We will not set up a single company as then, where will the funds come from for that. If the government has to give funds then it does not serve the purpose. Funds have to come from other places and more private sector.