Seasonal Magazine recently met Vinod Rai, Chairman of Bank Board Bureau and ex-CAG of India, for this exclusive interview:
The latest to be shocked by one of Vinod Rai’s audit reports is erstwhile Travancore Royal Family, based at Thiruvananthapuram, Kerala. Adithya Varma, speaking for the former rulers of Travancore, has termed as “unbelievable” Rai’s audit report on Sree Padmanabha Swamy Shrine which found not only abnormal increase in expenditure but Rs. 186 crore worth of gold missing from the temple’s famed collection.
This is not the first time Vinod Rai’s reports have been found as “unbelievable” by those at the receiving end. Remember Andimuthu Raja, and those who flocked to support him initially in Congress, DMK, and UPA, when the 2G Scam was unraveled by the then CAG?
You can debate on the extent or quantum of each scam unearthed by Vinod Rai, which even the courts have done, but it is difficult to argue that there was no scam, when Rai says he smelt a scam.
Neither can you debate with the effectiveness of Vinod Rai’s reports. If in doubt, one can ask anyone ranging from Sonia Gandhi to Narendra Modi, and anyone in between. It is an open secret that, if not were for Rai’s reports and its aftermath, neither would Congress been reduced to double-digits in Lok Sabha and neither would Modi’s rise to power been this much impressive.
However, in his latest role as Chairman of the newly constituted Bank Board Bureau (BBB), Vinod Rai is not in a combative mood. Still, he has his hands full with unenviable tasks like cleaning up the NPA mess in PSU banks, creating a professional succession plan for Chairmen & MDs of these banks, and thirdly, to execute the daunting task of merging various PSU banks to create fewer and bigger banks that can withstand shocks better.
The ex-CAG’s focus on the big picture rather than small issues when it comes to corruption, was out in the open when he frankly disclosed that many bureaucrats including himself have been trying to match official schedules with personal schedules so that unaffordable personal travel costs are managed.
While this has raised a storm in the media, and the jury is still out on whether Rai’s stand is ethical, the BBB Chairman has stood his ground, saying that such things happen because government servants have little perks, and that over-scrutinizing such personal travel bills of officers are pointless, especially when so much large-scale corruption is there in the system.
In his new role, the Chief of BBB is working continually with the Finance Ministry, Reserve Bank of India, PSU Bank Managements, Central Vigilance Commission, and Central Bureau of Investigation to ensure that the future of our PSU banks is secure.
Seasonal Magazine recently caught up with Vinod Rai to have his views about various factors affecting the economy, as well as about his initiatives at Bank Board Bureau:
There are some core tasks before the Bank Board Bureau including the PSU bank mergers, the institutionalizing of the top appointments, and the NPA crisis. Which among these would be your top priority now, and why?
Our top priority today is to ensure that the lending activities of banks, which means to give credit, starts as quickly as possible. The balance sheets of banks are very stressed, there are a lot of NPAs, and there is also a shortage of capital with the banks. Therefore, it is very essential for us to clean-up the balance sheets of the banks, which means that with the stressed assets that they have, they either do recovery, settle or resolve them, or restructure them so that they are no longer NPAs but they start earning some revenue for these companies because of which they can also plough it back into their business and some they will give to the banks. So, the first priority is to ensure that the lending activity starts and the bank assets and balance sheets get cleaned up.
Creating a structure for the top appointments in banks, come next?
Yes, that is the second major task. What we are trying to do is to ensure that all the appointments, whether it is the Chairman, MD, ED, or other top officials, are done in a timely fashion. Few months before the vacancy arises, we start the interaction process so that by the time vacancy happens, we have already got approval of government and can ensure that every vacancy is filled up timely.
What are the specific steps that the Bureau is taking to speeding up the top appointments at various PSU banks?
What we are doing is that we are trying to ensure that we create a good reservoir, that a good list of professionals is ready with us, which means we are looking for professionals capable of credit appraisal, risk management, HR capabilities, and IT. These are the 4 things on which we are putting a lot of stress and we also have a list of experts who are available and willing to join Boards of public sector banks. Secondly, there are some experts at the managerial level also whom we are encouraging the banks to hire through a lateral mode. These experts are available in the market on a contractual basis and at market salaries. Banks may be able to hire them for 3 years or 6 years, whatever it may be. In fact, now we have increased it up to 10 years. The order for this has already been issued by the RBI.
Consolidation or merger of PSU banks is only the third priority?
Yes, but I am saying it is the third not because it is not important, but because today the most important objective has to be cleaning up the bank balance sheets. Today, if we task the banks with consolidation too, it will be very difficult for them to manage both. So, what we are trying to do is, the consolidation work we will do separately by focusing on which are the best complementing banks for consolidation, but we won’t do the actual consolidation in this financial year because we will be concentrating on the balance sheets of the banks. Maybe in April next year, we will come forward with consolidation plans because by then our work would be done in terms of knowing which are the merging banks, and which would be the bank which would merge the other bank into it, and we will find out the best fit, 4-5 mergers, whatever we have to do, we will do. Meanwhile, the easiest of course was for the SBI and its associates for which we have already initiated the process and by 31st March that will be complete. So basically it means that by next year, it would become just one bank.
Is the government, the RBI, and the Bureau already on the same page about how to tackle the NPA crisis, or is there more ironing out to be done for a consensus?
The good thing about setting up of the BBB was that the government was very cooperative with us and I remember on the first day when the BBB took charge - it was the 8th of April - the MoS Finance and the Governor of RBI both had come to the BBB office in Mumbai to kick off the activities and have discussions with BBB members to ensure that everybody is on the same page, same wavelength, so that then the work would start in full swing. With the guidance of the Governor and the Minister, we started the work and now we are working in full coordination.
What are the broad steps that you recommend to tide over the current NPA crisis?
The first thing we are doing with regard to NPA crisis is that we are telling the bank managements to look into the accounts that are stressed. Now, accounts under stress would depend on those under difficulty because of downturns in the economy, because of statutory approvals getting delayed, crisis in the commodity market etc, which are factors beyond their control. Also, exports had died down and there was no demand. So, we are trying to ask them to restructure these accounts so that at least the production activities can start and if those genuine accounts still require some more working capital, we are willing to stretch and provide the same. The other type is where we suspect some mala fide and collusive action has taken place, those are the ones for which we will be getting a detailed investigation done to ensure that in the future, such actions, either on the lender’s or the borrower’s part, or both, doesn’t happen.
You mean to say that strict message has gone to the concerned bank authorities to ensure compliance?
Yes, strict message has gone, RBI has issued guidelines, we have had meetings of all the CEOs of the banks, the CVC and Director, CBI. So, everybody is on the same page and the idea is to not to do any witch-hunting, but only to ensure that mala fide activity doesn’t take place in the future.
Since you have a deeper look into the NPA problem now, is it something of greater impact than you had imagined before taking up this assignment?
Not really. Before, I took up this assignment, I think the RBI had done a good job in trying to recognize the quantum of NPA issues and the steps that they had done under the Asset Quality Review, and the SMA-I and SMA-II kind of schemes they had, so I think the worst of the recognition of bad assets had already taken place. So, now I think the worst is over and only some small accounts which may be pending somewhere - who have been hit by later developments – remain to be recognized, but the majority has been unearthed. Recently the SBI results came out, they have done very good, they have shown profits, and it is a clear indication that the worst is over.
But their provisions are up…
They have provisioned, but they have shown profits, the market appreciated that, SBI stock has gone up, which are all indications of the fact that the market also accepts that the bulk of the recognition has taken place and that the worst is over.
Why are PSU bank mergers essential, or is consolidation just an attractive proposal, but not an inevitable one? What time frame are you seeing for this task?
No, for banks today, it has become very essential. Conventional banking is now giving way to banking through IT, technology etc. Banking is also going digital or mobile too. Now for small banks to be able to spend a lot on such development activities, to spend a lot on setting up an IT framework, it becomes very difficult and expensive. So, it is best to ensure banks consolidate so that consolidated development funds are used to build world-class infrastructure in these areas. Also, conventional banking used to be branch banking. Now, there are more Points of Sales, hand-held devices, ATMs are giving way to hand-held devices which representatives can carry on their two-wheelers. So, for the villager from rural areas, for whom it is very difficult to go all the way to a branch, will soon have the facility of ‘home-level banking’, in a way, the branch itself is reaching out to them. So, for these kinds of activities, if there are 30 small banks and everybody starts spending on that, their cost-to-income ratio will become very high and they will not be very competitive also. Hence it is very important to consolidate and maybe create 6 or 10 large banks which have a reserve of funds, which can be utilized for these kinds of activities to ensure that banking gets digitized and the bank can reach the doorstep of the client. That’s why consolidation becomes important.
The Government and the RBI are apparently not agreeing on whether RBI reserves should be used to recapitalize PSU banks. What is your take on this regard?
I believe that RBI reserves are always kept for a rainy day or a crisis situation. So, once we take out the reserves and capitalize the bank with it, that money is lost. Today the situation is that the government has provided enough in the budget, at least for the time being, and if the Government has to go into a rights issue of the banks, its capitalization money plus the money which minority shareholders will be able to put for the 25,000 crores that the Government puts in, another 15,000 to 20,000 crores can be raised from the market. And I think that for the time being it will be enough because we require only that much of capital with the banks as the lending process needs. Today, the demand for credit is also low. And I sincerely feel that for demand to pick up it will take about 3-4 months’ time and by that time, banks would have sufficient capital to be able to meet the emerging demand. Next year maybe more capitalization will happen.
Statutory norms, like Basel norms can be met?
No, the Basel norms are being met, that is not a problem. Regulatory problems these PSU banks don’t have. Only thing is whether they have got enough capital to start the lending process.
Do you think the RBI Governor has cut the interest rate up to a level where it would have been possible for him?
It is very difficult for us to sit in judgement about what the ideal rate should be. There is always a healthy tension between the Government that always wants to push for growth and the monetary authority which is looking after controlling inflation. So, it is a tightrope walking. Hence for us to sit in judgement, on what were the facts before the RBI when they took a decision on what the rates should be, is very difficult. Maybe, 50 basis points difference here and there was possible. But the RBI was more worried about whether inflation was under check and there was also the downturn. If the inflation would have gone unchecked, then it would have gone to make bigger problems. So it is really difficult for us to sit in judgement about what the rate should have been.
You are right there. But how do you think the sentiments have been affected? Why has the credit intake gone down? Don’t you think it is the duty of the people at the regulatory and government level to ensure better sentiments?
Of course, but you see, sentiment is affected not only by the rate. It is affected by the downturns in the economy also. So, yes, maybe at a point of time, if the RBI would have given us a bit of impetus or push with favorable rates, the sentiment would have become better. But it would be difficult to rule on that today.
But in the previous NDA regime, the interest rates had come down to a very attractive level and there was a lot of activity and positivity, so everybody was expecting the same now…
But that was boom time in the world too. The global economy was doing very well. But at the same time, it can also be argued that because of those activities and high lending, these problems have occurred. But one can never tell, you see. It may also have been because of the world recession post 2008. What happened was there was a huge amount of lending, which was justified, and it was mainly for infrastructure. Unfortunately, infrastructure projects have a very long gestation period. But more importantly, what happened was statutory approvals for infrastructure projects, like the land acquisition, power, environment clearances in tribal areas, those kind of things got very delayed. If you remember, hundreds of approvals were pending in the Environment Ministry and all those kinds of clogs were there. So once a project gets delayed, there are cost overruns, and they don’t generate revenue, due to which they can’t meet interest liabilities. So, that had a cascading effect.
Do you think that there is room for faster and deeper interest rate cuts by RBI as of now?
That would be very difficult for me to say, but of course interest rate has to support the revival of the economy. It is essential for interest rates of the RBI to be ahead of the curve than be behind the curve. However, it is a question of timing. That can be best assessed by economists who are studying the markets every day.
As Dr. Raghuram Rajan is all set to leave within weeks, how do you like to think of his legacy at RBI and on the monetary management of the economy?
Dr. Rajan will be leaving behind a very good legacy, there is no doubt about that. His expertise and knowledge have come in very handy at a time when the Indian financial institutions were very stressed. He put in place systems, which helped in recognizing the problems that we were in and his knowledge was useful to ensure that we could revive the economy in time. Of course, anybody can argue about the steps that he had taken; people have views about everything these days and I can’t say whose view is correct, but I believe he has done a stellar job and will leave behind a good legacy.
Is there a mandate for the Bureau over the private sector banks and NBFCs. How is it different from your core mandate over PSU banks?
Technically, in a strict sense, we don’t have mandate over private sector banks or the NBFCs. The NBFCs are certainly not within our fold. We have to look into the appointments and strategic lending of only public sector banks. But what happens invariably is when we look into resolution of assets, lot of these are joint lending, where both private and public sector banks are involved. So, when you strategize over a particular resolution obviously it affects all the lenders and some of them may be private sector banks.
You enjoy expertise in both the IAS or administrative sector, especially on the financial admin side, and later you also handled the audit side as CAG very powerfully. How are those insights helping you in formulating better policies for the banking sector?
I have been lucky that the government has given me the opportunity to work in these sectors where I have gained some expertise and having a background in economics, I was able to apply myself. The audit exposure has given me an idea of how there should be an oversight on the lending process of banks. Every bank has an audit committee that is compulsorily mandated. The audit committee must comprise of chartered accountants who are well trained in commercial lending process. So, we are trying to strengthen that aspect of the audit process, that is the external audit which is post the event, and the other is we are trying to ensure that the banks have a good concurrent internal audit process, which leads to good financial control. Then, of course, the important part is the HR Management. In the public sector, the complaint is usually that the salaries are not like in the private sector. So what we are trying to do is trying to structure or create innovative methods by which we can introduce performance-based incentives to public sector managers. So we are looking at ESOPs, bonus programs, other performance-linked incentives where if they perform well, we are able to compensate them better.
After taking up this assignment, what are your main concerns regarding our PSU banks? Is it about their poor competitiveness or is it about the corrupt practices or about poor vision?
The public sector banks lend about 70-72% of the lending or credit of the country. In the worst of times even the public sector banks have done a stellar job, absolutely remarkable job. Public sector banks are the ones who have been able to ensure long tenor lending to infrastructure sector like syndication, take out financing etc. In India, infrastructure is still very poor. Unless, we shore up our infrastructure and ensure physical infrastructure is good, maybe roads, power, airports, whatever it may be, the rest of the economy won’t be supported. That is where public sector banks have played a tremendous role. But unfortunately in these times because of the downturns in the economy, they have come under stress. I think what we need to do is to ensure the intake of professional expertise and that I think is one of our priorities – to professionalize the management and the boards of the PSBs. And I am sure the will be able to bounce back in about a year or two to the higher levels that they had performed earlier.
Are you denying that lack of professionalism, lack of vision, as well as corruption are existing in PSU banks?
No, those issues are there. And some of these problems aren’t negligible either, they are major issues. But these PSU banks have inherent strengths as the foundations are very strong. All we need to do is professionalize the management and the Board, then they will be able to pull themselves back.
Your most prestigious stint was as the CAG, and how do you assess the performance of this institution since then?
I think the CAG is doing a very good job because we have been able to professionalize that institution by ensuring that the auditors get the best training available anywhere in the world. The modern-day governments are becoming experts so we have to ensure that our auditors also have that expertise. We started a process about 10 years back, wherein our auditors were trained in the best institutions. At least 60-70 people go to the US, Singapore etc for specialized training. We also send them to the Middle East where they do audit of oil exploration firms so as to gain technical knowledge. They go to Germany to learn about space and atomic research, thermo-nuclear plants etc. Also, one feather in the cap for CAG India is that we were selected in 2011 to audit the International Atomic Energy Agency, which is highly technical but since we had professional capability we were selected over lots of other developed countries and we are going to be auditing it for 6 years. The IAEA is a very prestigious agency and the compensation we receive for the work is also very rewarding.
Now that the much awaited GST Bill is cleared, what are the major hidden challenges that you are foreseeing in its execution? Is it about reaching a consensus on the optimal GST rate, is it about containing the inflation, or is it about execution risks like missed deadlines?
The big challenge is of course to reach the optimal GST rate because it can’t be too high to discourage production and at the same time the rate can’t be too low to lose revenue. That is why the council of finance ministers of states and the central finance ministry has been setup because we have to drive an optimal rate which is well balanced between the consuming states and the producing state. So whether it is a Gujarat or Tamilnadu - which are producing states - and UP or Bihar - which are consuming states, it helps both sides. So, I sincerely feel that it will not be inflationary, but the first big challenge will be to ensure that the IT network is in position and secondly, about 50,000 tax officials are trained before the GST system is rolled out. Because once the implementation starts, we can’t afford to have glitches. At every stage, there is a set-off of the taxes that you have already paid. If that link breaks, then the set-off will not take place and that can keep adding to the tax which will become very high.
Starting off with district administration to getting to handle some of the topmost administrative posts in states and Centre and to handling the top audit function and now the Bank Board Bureau, you have been blessed with unparalleled exposure about India's challenges. What philosophy and what strategies would you like seeing implemented by the country's political, administrative, and business leaders for India to be a developed nation?
As I said in the beginning, I have been very lucky. In my early years of my service, which was mostly with the Kerala Government, I found them to be very supportive which gave me opportunities to do those jobs where I could do my best. What I would like to see in the administration going forward is a very positive approach, meaning whatever happens, we must be able to resolve the problem. Every challenge has to have a response and every response must be a positive one.
Do you also mean to say that we shouldn’t be risk averse?
Exactly, I agree with you 100% on this point. We have to calibrate risk, make an assessment of the risk and take a calculated action. Unless you take those risks, you can’t be at par with competition. The world is becoming very competitive and to be able to be competitive ourselves, we have to ensure that we are ahead of everybody else. Secondly, the states and Centre need to work in a cohesive fashion. Both the governments are spending lots of money, but the work is actually done at the state level and district level and here the state administrations have to be totally charged and energized to ensure that the delivery process is smooth and there is no leakage from it. Unfortunately, we have suffered from leakages, but the good thing that the government has done is, whether it was AADHAR, direct benefits transfer or now going forward, they are implementing KYC and other schemes, the systems have been put in place. So, the scope for leakage is less. Only thing is that we have to put our shoulders together and ensure that cohesiveness comes about because a lot is at stake in inaccessible rural areas whether it is public health, rural employment, primary education etc – these are the areas where the district and states have to bring about good development.
The latest to be shocked by one of Vinod Rai’s audit reports is erstwhile Travancore Royal Family, based at Thiruvananthapuram, Kerala. Adithya Varma, speaking for the former rulers of Travancore, has termed as “unbelievable” Rai’s audit report on Sree Padmanabha Swamy Shrine which found not only abnormal increase in expenditure but Rs. 186 crore worth of gold missing from the temple’s famed collection.
This is not the first time Vinod Rai’s reports have been found as “unbelievable” by those at the receiving end. Remember Andimuthu Raja, and those who flocked to support him initially in Congress, DMK, and UPA, when the 2G Scam was unraveled by the then CAG?
You can debate on the extent or quantum of each scam unearthed by Vinod Rai, which even the courts have done, but it is difficult to argue that there was no scam, when Rai says he smelt a scam.
Neither can you debate with the effectiveness of Vinod Rai’s reports. If in doubt, one can ask anyone ranging from Sonia Gandhi to Narendra Modi, and anyone in between. It is an open secret that, if not were for Rai’s reports and its aftermath, neither would Congress been reduced to double-digits in Lok Sabha and neither would Modi’s rise to power been this much impressive.
However, in his latest role as Chairman of the newly constituted Bank Board Bureau (BBB), Vinod Rai is not in a combative mood. Still, he has his hands full with unenviable tasks like cleaning up the NPA mess in PSU banks, creating a professional succession plan for Chairmen & MDs of these banks, and thirdly, to execute the daunting task of merging various PSU banks to create fewer and bigger banks that can withstand shocks better.
The ex-CAG’s focus on the big picture rather than small issues when it comes to corruption, was out in the open when he frankly disclosed that many bureaucrats including himself have been trying to match official schedules with personal schedules so that unaffordable personal travel costs are managed.
While this has raised a storm in the media, and the jury is still out on whether Rai’s stand is ethical, the BBB Chairman has stood his ground, saying that such things happen because government servants have little perks, and that over-scrutinizing such personal travel bills of officers are pointless, especially when so much large-scale corruption is there in the system.
In his new role, the Chief of BBB is working continually with the Finance Ministry, Reserve Bank of India, PSU Bank Managements, Central Vigilance Commission, and Central Bureau of Investigation to ensure that the future of our PSU banks is secure.
Seasonal Magazine recently caught up with Vinod Rai to have his views about various factors affecting the economy, as well as about his initiatives at Bank Board Bureau:
There are some core tasks before the Bank Board Bureau including the PSU bank mergers, the institutionalizing of the top appointments, and the NPA crisis. Which among these would be your top priority now, and why?
Our top priority today is to ensure that the lending activities of banks, which means to give credit, starts as quickly as possible. The balance sheets of banks are very stressed, there are a lot of NPAs, and there is also a shortage of capital with the banks. Therefore, it is very essential for us to clean-up the balance sheets of the banks, which means that with the stressed assets that they have, they either do recovery, settle or resolve them, or restructure them so that they are no longer NPAs but they start earning some revenue for these companies because of which they can also plough it back into their business and some they will give to the banks. So, the first priority is to ensure that the lending activity starts and the bank assets and balance sheets get cleaned up.
Creating a structure for the top appointments in banks, come next?
Yes, that is the second major task. What we are trying to do is to ensure that all the appointments, whether it is the Chairman, MD, ED, or other top officials, are done in a timely fashion. Few months before the vacancy arises, we start the interaction process so that by the time vacancy happens, we have already got approval of government and can ensure that every vacancy is filled up timely.
What are the specific steps that the Bureau is taking to speeding up the top appointments at various PSU banks?
What we are doing is that we are trying to ensure that we create a good reservoir, that a good list of professionals is ready with us, which means we are looking for professionals capable of credit appraisal, risk management, HR capabilities, and IT. These are the 4 things on which we are putting a lot of stress and we also have a list of experts who are available and willing to join Boards of public sector banks. Secondly, there are some experts at the managerial level also whom we are encouraging the banks to hire through a lateral mode. These experts are available in the market on a contractual basis and at market salaries. Banks may be able to hire them for 3 years or 6 years, whatever it may be. In fact, now we have increased it up to 10 years. The order for this has already been issued by the RBI.
Consolidation or merger of PSU banks is only the third priority?
Yes, but I am saying it is the third not because it is not important, but because today the most important objective has to be cleaning up the bank balance sheets. Today, if we task the banks with consolidation too, it will be very difficult for them to manage both. So, what we are trying to do is, the consolidation work we will do separately by focusing on which are the best complementing banks for consolidation, but we won’t do the actual consolidation in this financial year because we will be concentrating on the balance sheets of the banks. Maybe in April next year, we will come forward with consolidation plans because by then our work would be done in terms of knowing which are the merging banks, and which would be the bank which would merge the other bank into it, and we will find out the best fit, 4-5 mergers, whatever we have to do, we will do. Meanwhile, the easiest of course was for the SBI and its associates for which we have already initiated the process and by 31st March that will be complete. So basically it means that by next year, it would become just one bank.
Is the government, the RBI, and the Bureau already on the same page about how to tackle the NPA crisis, or is there more ironing out to be done for a consensus?
The good thing about setting up of the BBB was that the government was very cooperative with us and I remember on the first day when the BBB took charge - it was the 8th of April - the MoS Finance and the Governor of RBI both had come to the BBB office in Mumbai to kick off the activities and have discussions with BBB members to ensure that everybody is on the same page, same wavelength, so that then the work would start in full swing. With the guidance of the Governor and the Minister, we started the work and now we are working in full coordination.
What are the broad steps that you recommend to tide over the current NPA crisis?
The first thing we are doing with regard to NPA crisis is that we are telling the bank managements to look into the accounts that are stressed. Now, accounts under stress would depend on those under difficulty because of downturns in the economy, because of statutory approvals getting delayed, crisis in the commodity market etc, which are factors beyond their control. Also, exports had died down and there was no demand. So, we are trying to ask them to restructure these accounts so that at least the production activities can start and if those genuine accounts still require some more working capital, we are willing to stretch and provide the same. The other type is where we suspect some mala fide and collusive action has taken place, those are the ones for which we will be getting a detailed investigation done to ensure that in the future, such actions, either on the lender’s or the borrower’s part, or both, doesn’t happen.
You mean to say that strict message has gone to the concerned bank authorities to ensure compliance?
Yes, strict message has gone, RBI has issued guidelines, we have had meetings of all the CEOs of the banks, the CVC and Director, CBI. So, everybody is on the same page and the idea is to not to do any witch-hunting, but only to ensure that mala fide activity doesn’t take place in the future.
Since you have a deeper look into the NPA problem now, is it something of greater impact than you had imagined before taking up this assignment?
Not really. Before, I took up this assignment, I think the RBI had done a good job in trying to recognize the quantum of NPA issues and the steps that they had done under the Asset Quality Review, and the SMA-I and SMA-II kind of schemes they had, so I think the worst of the recognition of bad assets had already taken place. So, now I think the worst is over and only some small accounts which may be pending somewhere - who have been hit by later developments – remain to be recognized, but the majority has been unearthed. Recently the SBI results came out, they have done very good, they have shown profits, and it is a clear indication that the worst is over.
But their provisions are up…
They have provisioned, but they have shown profits, the market appreciated that, SBI stock has gone up, which are all indications of the fact that the market also accepts that the bulk of the recognition has taken place and that the worst is over.
Why are PSU bank mergers essential, or is consolidation just an attractive proposal, but not an inevitable one? What time frame are you seeing for this task?
No, for banks today, it has become very essential. Conventional banking is now giving way to banking through IT, technology etc. Banking is also going digital or mobile too. Now for small banks to be able to spend a lot on such development activities, to spend a lot on setting up an IT framework, it becomes very difficult and expensive. So, it is best to ensure banks consolidate so that consolidated development funds are used to build world-class infrastructure in these areas. Also, conventional banking used to be branch banking. Now, there are more Points of Sales, hand-held devices, ATMs are giving way to hand-held devices which representatives can carry on their two-wheelers. So, for the villager from rural areas, for whom it is very difficult to go all the way to a branch, will soon have the facility of ‘home-level banking’, in a way, the branch itself is reaching out to them. So, for these kinds of activities, if there are 30 small banks and everybody starts spending on that, their cost-to-income ratio will become very high and they will not be very competitive also. Hence it is very important to consolidate and maybe create 6 or 10 large banks which have a reserve of funds, which can be utilized for these kinds of activities to ensure that banking gets digitized and the bank can reach the doorstep of the client. That’s why consolidation becomes important.
The Government and the RBI are apparently not agreeing on whether RBI reserves should be used to recapitalize PSU banks. What is your take on this regard?
I believe that RBI reserves are always kept for a rainy day or a crisis situation. So, once we take out the reserves and capitalize the bank with it, that money is lost. Today the situation is that the government has provided enough in the budget, at least for the time being, and if the Government has to go into a rights issue of the banks, its capitalization money plus the money which minority shareholders will be able to put for the 25,000 crores that the Government puts in, another 15,000 to 20,000 crores can be raised from the market. And I think that for the time being it will be enough because we require only that much of capital with the banks as the lending process needs. Today, the demand for credit is also low. And I sincerely feel that for demand to pick up it will take about 3-4 months’ time and by that time, banks would have sufficient capital to be able to meet the emerging demand. Next year maybe more capitalization will happen.
Statutory norms, like Basel norms can be met?
No, the Basel norms are being met, that is not a problem. Regulatory problems these PSU banks don’t have. Only thing is whether they have got enough capital to start the lending process.
Do you think the RBI Governor has cut the interest rate up to a level where it would have been possible for him?
It is very difficult for us to sit in judgement about what the ideal rate should be. There is always a healthy tension between the Government that always wants to push for growth and the monetary authority which is looking after controlling inflation. So, it is a tightrope walking. Hence for us to sit in judgement, on what were the facts before the RBI when they took a decision on what the rates should be, is very difficult. Maybe, 50 basis points difference here and there was possible. But the RBI was more worried about whether inflation was under check and there was also the downturn. If the inflation would have gone unchecked, then it would have gone to make bigger problems. So it is really difficult for us to sit in judgement about what the rate should have been.
You are right there. But how do you think the sentiments have been affected? Why has the credit intake gone down? Don’t you think it is the duty of the people at the regulatory and government level to ensure better sentiments?
Of course, but you see, sentiment is affected not only by the rate. It is affected by the downturns in the economy also. So, yes, maybe at a point of time, if the RBI would have given us a bit of impetus or push with favorable rates, the sentiment would have become better. But it would be difficult to rule on that today.
But in the previous NDA regime, the interest rates had come down to a very attractive level and there was a lot of activity and positivity, so everybody was expecting the same now…
But that was boom time in the world too. The global economy was doing very well. But at the same time, it can also be argued that because of those activities and high lending, these problems have occurred. But one can never tell, you see. It may also have been because of the world recession post 2008. What happened was there was a huge amount of lending, which was justified, and it was mainly for infrastructure. Unfortunately, infrastructure projects have a very long gestation period. But more importantly, what happened was statutory approvals for infrastructure projects, like the land acquisition, power, environment clearances in tribal areas, those kind of things got very delayed. If you remember, hundreds of approvals were pending in the Environment Ministry and all those kinds of clogs were there. So once a project gets delayed, there are cost overruns, and they don’t generate revenue, due to which they can’t meet interest liabilities. So, that had a cascading effect.
Do you think that there is room for faster and deeper interest rate cuts by RBI as of now?
That would be very difficult for me to say, but of course interest rate has to support the revival of the economy. It is essential for interest rates of the RBI to be ahead of the curve than be behind the curve. However, it is a question of timing. That can be best assessed by economists who are studying the markets every day.
As Dr. Raghuram Rajan is all set to leave within weeks, how do you like to think of his legacy at RBI and on the monetary management of the economy?
Dr. Rajan will be leaving behind a very good legacy, there is no doubt about that. His expertise and knowledge have come in very handy at a time when the Indian financial institutions were very stressed. He put in place systems, which helped in recognizing the problems that we were in and his knowledge was useful to ensure that we could revive the economy in time. Of course, anybody can argue about the steps that he had taken; people have views about everything these days and I can’t say whose view is correct, but I believe he has done a stellar job and will leave behind a good legacy.
Is there a mandate for the Bureau over the private sector banks and NBFCs. How is it different from your core mandate over PSU banks?
Technically, in a strict sense, we don’t have mandate over private sector banks or the NBFCs. The NBFCs are certainly not within our fold. We have to look into the appointments and strategic lending of only public sector banks. But what happens invariably is when we look into resolution of assets, lot of these are joint lending, where both private and public sector banks are involved. So, when you strategize over a particular resolution obviously it affects all the lenders and some of them may be private sector banks.
You enjoy expertise in both the IAS or administrative sector, especially on the financial admin side, and later you also handled the audit side as CAG very powerfully. How are those insights helping you in formulating better policies for the banking sector?
I have been lucky that the government has given me the opportunity to work in these sectors where I have gained some expertise and having a background in economics, I was able to apply myself. The audit exposure has given me an idea of how there should be an oversight on the lending process of banks. Every bank has an audit committee that is compulsorily mandated. The audit committee must comprise of chartered accountants who are well trained in commercial lending process. So, we are trying to strengthen that aspect of the audit process, that is the external audit which is post the event, and the other is we are trying to ensure that the banks have a good concurrent internal audit process, which leads to good financial control. Then, of course, the important part is the HR Management. In the public sector, the complaint is usually that the salaries are not like in the private sector. So what we are trying to do is trying to structure or create innovative methods by which we can introduce performance-based incentives to public sector managers. So we are looking at ESOPs, bonus programs, other performance-linked incentives where if they perform well, we are able to compensate them better.
After taking up this assignment, what are your main concerns regarding our PSU banks? Is it about their poor competitiveness or is it about the corrupt practices or about poor vision?
The public sector banks lend about 70-72% of the lending or credit of the country. In the worst of times even the public sector banks have done a stellar job, absolutely remarkable job. Public sector banks are the ones who have been able to ensure long tenor lending to infrastructure sector like syndication, take out financing etc. In India, infrastructure is still very poor. Unless, we shore up our infrastructure and ensure physical infrastructure is good, maybe roads, power, airports, whatever it may be, the rest of the economy won’t be supported. That is where public sector banks have played a tremendous role. But unfortunately in these times because of the downturns in the economy, they have come under stress. I think what we need to do is to ensure the intake of professional expertise and that I think is one of our priorities – to professionalize the management and the boards of the PSBs. And I am sure the will be able to bounce back in about a year or two to the higher levels that they had performed earlier.
Are you denying that lack of professionalism, lack of vision, as well as corruption are existing in PSU banks?
No, those issues are there. And some of these problems aren’t negligible either, they are major issues. But these PSU banks have inherent strengths as the foundations are very strong. All we need to do is professionalize the management and the Board, then they will be able to pull themselves back.
Your most prestigious stint was as the CAG, and how do you assess the performance of this institution since then?
I think the CAG is doing a very good job because we have been able to professionalize that institution by ensuring that the auditors get the best training available anywhere in the world. The modern-day governments are becoming experts so we have to ensure that our auditors also have that expertise. We started a process about 10 years back, wherein our auditors were trained in the best institutions. At least 60-70 people go to the US, Singapore etc for specialized training. We also send them to the Middle East where they do audit of oil exploration firms so as to gain technical knowledge. They go to Germany to learn about space and atomic research, thermo-nuclear plants etc. Also, one feather in the cap for CAG India is that we were selected in 2011 to audit the International Atomic Energy Agency, which is highly technical but since we had professional capability we were selected over lots of other developed countries and we are going to be auditing it for 6 years. The IAEA is a very prestigious agency and the compensation we receive for the work is also very rewarding.
Now that the much awaited GST Bill is cleared, what are the major hidden challenges that you are foreseeing in its execution? Is it about reaching a consensus on the optimal GST rate, is it about containing the inflation, or is it about execution risks like missed deadlines?
The big challenge is of course to reach the optimal GST rate because it can’t be too high to discourage production and at the same time the rate can’t be too low to lose revenue. That is why the council of finance ministers of states and the central finance ministry has been setup because we have to drive an optimal rate which is well balanced between the consuming states and the producing state. So whether it is a Gujarat or Tamilnadu - which are producing states - and UP or Bihar - which are consuming states, it helps both sides. So, I sincerely feel that it will not be inflationary, but the first big challenge will be to ensure that the IT network is in position and secondly, about 50,000 tax officials are trained before the GST system is rolled out. Because once the implementation starts, we can’t afford to have glitches. At every stage, there is a set-off of the taxes that you have already paid. If that link breaks, then the set-off will not take place and that can keep adding to the tax which will become very high.
Starting off with district administration to getting to handle some of the topmost administrative posts in states and Centre and to handling the top audit function and now the Bank Board Bureau, you have been blessed with unparalleled exposure about India's challenges. What philosophy and what strategies would you like seeing implemented by the country's political, administrative, and business leaders for India to be a developed nation?
As I said in the beginning, I have been very lucky. In my early years of my service, which was mostly with the Kerala Government, I found them to be very supportive which gave me opportunities to do those jobs where I could do my best. What I would like to see in the administration going forward is a very positive approach, meaning whatever happens, we must be able to resolve the problem. Every challenge has to have a response and every response must be a positive one.
Do you also mean to say that we shouldn’t be risk averse?
Exactly, I agree with you 100% on this point. We have to calibrate risk, make an assessment of the risk and take a calculated action. Unless you take those risks, you can’t be at par with competition. The world is becoming very competitive and to be able to be competitive ourselves, we have to ensure that we are ahead of everybody else. Secondly, the states and Centre need to work in a cohesive fashion. Both the governments are spending lots of money, but the work is actually done at the state level and district level and here the state administrations have to be totally charged and energized to ensure that the delivery process is smooth and there is no leakage from it. Unfortunately, we have suffered from leakages, but the good thing that the government has done is, whether it was AADHAR, direct benefits transfer or now going forward, they are implementing KYC and other schemes, the systems have been put in place. So, the scope for leakage is less. Only thing is that we have to put our shoulders together and ensure that cohesiveness comes about because a lot is at stake in inaccessible rural areas whether it is public health, rural employment, primary education etc – these are the areas where the district and states have to bring about good development.
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