A difficult environment like now is time to take fewer risks

When times are tough, it's time to soften up. But while banks need to be supportive to the industry in difficult times, they are not geared up to involve themselves at a pre-project stage, says RK Dubey, Chairman and Managing Director, Canara Bank, in an interview with Shashidhar Nanjundaiah.

Canara Bank, the Bangalore-based public sector lender plans to achieve a milestone of 5,000 branches from existing 3,770 branches over next two years. The Bank aims to reach an aggregate business of more than Rs 7 lakh crore, with deposit growth of 15-17 percent and advances growth of 16-18 percent during the current fiscal (2013-14).

Do you see an increased interest among Indian companies in overseas ventures?
Let's start with the question of the hour-about the rupee value. Can you shed some light on how this will impact our domestic infrastructure sector?

The present day crisis of rupee will have an impact on infrastructure, because the regular increase in the final cost and price of goods and services, petrol and diesel will have a cascading effect. Some exporters might feel comfortable for the time being, but that this will be short-lived. So, for infrastructure to maintain its growth path, it is essential that rupee is under control. At the moment there seems to be a free fall of the currency where we don't seem to know what will happen to it next. There needs to be better control, regulation by the RBI and the government.

What measures do you suggest?
The measures need to be taken by the government. RBI has been taking quite a few measures, some of which have turned to be okay for some time. For example, gold import was brought in control, and inflation was brought under control. Now both have gone haywire. The government has to plan for funding the balance of payment. Unless this is done in the larger interest, the trade gap will widen.

The government is also indulging in a lot of knee-jerk reaction, which in the long run may or may not be useful. RBI's policy announcement was regarded as temporary measures-they were expected to be withdrawn in a calibrated manner-but it doesn't look that way anymore. When the situation is not coming under control, they may continue for some time.

The bond market has gone out of hand, so the entire market has become topsy turvy. We felt 3-4 years ago that the world or European economic crisis has not affected our country, but now it looks as though we had some resilience for a few years, but now we are equally affected.

How does all this affect your lending?
The cost of our borrowing has gone up, and our cost of fund is going up. All retail loans will become costlier-as will other loans-as sentiment of invest¡ment is affected not only for FIIs alone, but even for the Indian industries.

Are you planning any interest rate measures?
At the moment, no. But if the things continue, we will have to plan accordingly. If short-term deposit rates were increased by a small degree, the deposit inflow has stopped, or it is going to those banks with higher deposit rates, the [deposit] movement will be towards them. RBI has tightened the liquidity, and rightly so.

Now, in that situation, if we have to lend even to our existing clients, then we will need to have funds, and if we don't get them easily from the market, then we will have to borrow at high cost.

On that issue, infrastructure sector has been going through a, let's just say, a crunch period. Would you say the honeymoon period is over?
It has been affected in a big way. If you recall, in the last six months, Finance Minister Mr P Chidambaram started a review of the stalled projects for the first time, and identified more than 230-odd stalled projects worth Rs 10 lakh crore. That was a very sound move. It is important first you revive that already-existing projects that have achieved financial closure and money has been put in by the promoter and by banks. If they are not taken to their logical conclusion, further lending will be affected.

There was a problem of power distribution companies (discoms), but the government intervened and helped out by bailing out the banks. So that position is now under control.

Airlines, too, are largely under control at the moment, although Air India has been in problem, Jet Airways continues to have issues, and Kingfisher is out. Some of the airlines are doing very well.

Lately, roads, power and ports, which have been doing well and where money has been flowing easily, are affected. The government has been asking us the question why we financed [projects] when clearances were not in place. Right question, but if we want all clearances in place before financing, there is a problem [of delays] from concerned departments-environment, forest, railways, state government, etc. Additionally, not all land may have been acquired. Let us hope the new Land Acquisition Bill brings about some changes.

As a result, the non-performing assets (NPAs) are suddenly a big concern, while only two years back bankers seemed happy with asset performance…
You're right. All leading banks' NPAs had come down to between 1 per cent and 1.5 per cent. They have now shot up to 3.5 percent on average, but some banks' NPAs have crossed even 6 per cent. Central Bank of India's has crossed 6 per cent, SBI's has crossed 5 per cent, and PNB's hovers around 5 per cent, while those of Bank of India, Bank of Baroda and Canara Bank are around 3 per cent.

NPAs are increasing because with the problems in the economy, the money cycle has at least slowed down-I won't say stopped. When the money cycle slows down, recovery is difficult, so naturally, restructuring is happening in a big way.

Do you think restructuring is good for the project, but not so good for banks?
Internationally, restructuring is considered NPA. Here in India, the government has now announced that they have tightened the rules of restructuring, and that after 2015, all restructured assets will be treated as NPA.

So restructuring is good for the projects, since at least they get some bailing out. Not so with the banks. Initially we have to provide for around 2.5 per cent, but now the provision has been doubled (at 5 per cent). That puts pressure by excess provisioning, and our income has been taken away for provisioning only to look after these restructured assets. There has been slippage out of restructured assets also. In the of Canara Bank, there is 7.8-7.9 per cent of restructured books, out of which 10 per cent NPA has slipped. We have a restructured book of around Rs 18,000 crore, with a Rs 2,000 crore slippage.

Are you concerned about such slippages even after restructuring?
There is no readymade solution for these things, and it is a difficult moment in the Indian economy. We will have to live with it, with trial and error, make amendments, make changes … only time is a big healer. Governance is also an issue at the moment. Important legislations like the pension reforms, GST and other Bills are not going through because the government does not have the numbers in the Parliament. So even though the Prime Minister and the Finance Minister have good intentions, reforms have stopped.

What is more concerning is that the future doesn't look very bright either, because if the forecast is right, we may end up with a hung Parliament.

Let me ask you a philosophical question. In times of difficulty like this, what does the bank do? Is it a time to consolidate? Perhaps a good time to get your books in order?
I would say this is the time for us to do more due diligence before lending, take less risk. in the normal times, you sometimes take a risk and there is a good chance it will go through. Now is not that kind of time. We should be very careful in what we are doing-careful about the costs while accepting deposits and while lending.

So high cost consciousness, quality of asset, involvement of every employee, effort for recovery. That said, only clamping down controls won't help in the long run: We also need a compassionate heart and be supportive to the industry in times of distress.

While being little more careful in lending, are there some measures that you would like to see at the implementation or project stage? For example, should a bank be involved in a project ahead of time?
Public sector banks cannot be really involved; we are not development finance institutions (DFIs). Earlier, DFIs were involved, but ultimately they also turned to the universal bank. We are basically a commercial bank-we lend to agriculture, MSME, MFI, NBFC, infrastructure lending, and now the government expects us to do financial inclusion. Private sector and foreign banks have no such obligation. While there is a need for us to be involved in project technicalities down the line, at the moment we are not prepared for it.

How has Canara Bank's experience been in your infrastructure lending portfolio?
We have around 30 per cent lending to infrastructure, and our portfolio spans across the domains-ports, power, roads, airlines, and so on. Now, when deposit mobilisation is affected and the risk is increased, I would prefer to do retail lending, where risk is not to the same extent. In this slowdown, the young population is buying more houses and vehicles in less expensive segments [and therefore it can be a self-correcting mechanism for us]. Additionally, agriculture industry has the one industry that has not been affected by this slowdown. MSME is a good sector too. No doubt, these sectors also have NPAs but scope, stemming from a buoyant entrepreneurship, exists.

Are group and sector limits coming in the way too?
No, they are not; we have adequate arrangement to keep balance between the portfolio and the sector.

If our loan book was going on faster, then the 30 per cent quantum would have gone up. Now it is a bit slow, but we are still doing. All our existing clients like GMR, GVK and Tata are still getting funding as required. The only thing is that our pricing is affected.

Some of the larger players seem to be pulling out of projects and using that as a recourse for more loans. Has that been your experience?
Yes, for some corporates, it may happen, but we have not seen such cases happening with us, so maybe we don't have that exposure. Some people like make hay while the sun shines, they make hay when it doesn't. So it depends on the company I suppose.

Power sector has gone through a churning process, after the government intervened last November. Until then, you had the problem of having to lend to the power sector regardless of the health of the discom. Have things changed since then? Have discoms made the effort to audit themselves and shown better discipline?
There is a perceptible improvement in discoms' functioning, and there is a perceptible of change in the attitude of state governments like UP, Haryana, Bihar, Tamil Nadu, Rajasthan, etc. There is more seriousness to improve the efficiency and increase the tariffs. Elections took place earlier also, but compulsion is making them improve their functioning and governance.

What compulsion is that-financial compulsion?
Yes! If the government doesn't have resources, then it has to depend on the bank, and if that dependency in turn means the government has to fall in line with our discipline. So they are. We have been issued bonds by them, which carry SLR rates and all. So things are better.