‘RBI fiat on loan revamp for 1-day payment delay right’

The Reserve Bank of India’s (RBI) circular directing banks to start restructuring loans even if there was a day’s delay in repayment has received the backing of R. Seshasayee, chairman, IndusInd Bank.

“I fully endorse the need for the circular,” said Mr. Seshasayee while delivering a speech here on ‘Toning up the banking system’ organised by the The Triplicane Cultural Academy and The Kasturi Srinivasan Library.

“The culture of saying ‘okay’ for 10 days delay needs to change,” he said.

He particularly emphasised on the need for “valuing your own signature.”

There has been criticism about the circular issued on February 12, with some banks stating that it was too stringent and impractical. Recently, RBI Deputy Governor N.S. Vishwanathan had strongly defended the circular.

He said even among well-run corporates, there was a tendency to delay payments and rush things only during the last quarter and last week of financial year ending March 31. “It is like spending 25 days of your 30-day study holidays watching cricket and then preparing for exams in the last five days. There needs be a strong cultural change and people need to change to the habit of paying one day in advance,” he said.

He said that tackling the problem of non-performing assets (NPAs) was the key. “NPA[s] is at 10-11% of the total banking assets with public sector accounting for a higher share. We have the fifth largest percentage of NPAs in the world.”

NPA resolution

However, he noted, the first step in resolving the NPA problem is to detect and acknowledge the problem. “There, I think, we have come to global standards. Between what was done in 2016 and 2018 February, there is no shying away from accepting that you got a problem. Nothing more needs to be done on that front.” Mr. Seshasayee said the second aspect in NPA resolution was treating the sickness.

“With [the] emergence of the Insolvency and Bankruptcy Code, India is on par with global standards in this aspect.”

One of the missing pieces in the exercise was the ability to manage a bad asset and extract the best value from it, he said.

In that aspect, China had done well in bringing down the NPAs from 30% to single digit, mainly because of the management bandwidth to extract value from a bad asset, he pointed out.

Privatisation of PSBs

Mr. Seshasayee noted that there had been growing consensus on the privatisation of public sector banks in the current context. “One of the issues has been the current ownership structure [government-owned] limits their ability to take risks and hiring management-level talent. In the current set up, there is no reward for risk-taking and you are punished if your decision goes wrong.”

Nevertheless, he felt the balance sheets of public sector banks should be cleaned up and they should be prepared for competition before being privatised. “This is what former U.K. Prime Minister Margaret Thatcher did before going in for privatisation of public sector units,” he said.

Mr. Seshasayee said it was not correct to entirely blame the regulator for NPAs and bank frauds. “Not all NPAs happen due to frauds. Some are due to genuine entrepreneurship failures and aspects which are not under control like environmental issues and problems related to land acquisition. However, the banks’ ability to assess risk needs to be strengthened.”

He also urged called for the RBI to push banks towards adopting technologies such as like blockchain and artificial intelligence which may cut reduce the the chances of frauds and also help in better risk assessment. to mitigate the risk of frauds.

Another aspect that the RBI needed to ensure was to put in place the instruments which strengthened the governance in banks, Mr. Seshasayee added.