‘Rajan’s exit doesn’t mean banks can hide bad loans’

The worst is over, says Vinod Rai, about public sector banks’ bad loans. The first chairman of the Bank Board Bureau, which the Modi government created in March to deal with consolidation of banks and their top level appointments, says the process started with the State Bank of India’s merger with some of its associates will resume in six to eight months, once the bad loan picture is clearer. And he will make sure no jobs are lost. Excerpts:

The State Bank of India’s merger with some of its associate banks is going through. What next?

SBI was a low-hanging fruit. Banks are engaged with stressed assets, so to make them consolidate right now may not be advisable. That’s a decision we have taken. We would rather have the stressed-assets issue resolved, and then slowly get into consolidation. It may take six to eight months.

The Reserve Bank of India has said the bad loan situation will get worse before it gets better.

I believe the worst is behind us. Some more might emerge, but not very large. We are done with creation of bad loans as well as with recognising them. So I think the worst is over.

There is a perception that Raghuram Rajan’s exit from the Reserve Bank will take the spotlight off bad loans.

I don’t think so. Transparency has become dominant. The public sector banks themselves, a body like ours, and the media have started asking the right questions. These things will come out in the public domain. I don’t think you can brush them under the carpet anymore. You can try to camouflage the [bad loans in your] balance sheets for six months, a quarter, two quarters, but then it has to burst into your face.

Rajan has said that a three-year term for the RBI governor is too short.

It’s always good to have longer tenures. We are also looking at ensuring five-year terms for bank MDs, so that there is continuity. The CAG has a six-year term, the CVC four years. We are also looking to ensure that PSU bank MDs are appointed at the age of 54 or 55, so they get a longer tenure. So I am not saying five years or four.

What would be an optimum number of state-owned banks to have, after consolidation?

That’s very difficult to say, though six is a number that is talked about. We definitely don’t want 27 to 28 banks. But it’s not easy to make public sector banks disappear. For example, regional issues will come up. We have to see banks can be merged. Some may have a branch network in the south, some in the north. In certain case, it may be good to merge two banks with a lot of branches in, say, Mumbai. We will have to see how they complement each other. It’s easier to merge banks that are headquartered in the same region.

But why make the SBI, already the biggest, even bigger through consolidation?

Consolidation does not necessarily mean that you tie up two small banks with a large one. In fact I would not advise that right now. The large banks today are also vulnerable in terms of balance sheets and health.

How will regional issues play a role?

In the case of public sector banks, you can’t overlook the regional issues. A realistic stand has to be taken. In a merger, the joint balance sheets will have to be evaluated.

Project Indradhanush, announced last year, was to rope in private sector talent at the top positions in state-owned banks.

What the government announced earlier was that six of the larger banks will be considered for recruitment from the private sector. But we don’t have vacancies in the large banks, and we cannot send somebody home. So we are looking at taking non-executive chairmen, or maybe non-executive directors, from the private sector, but not a chairman and managing director. There is no vacancy for CMDs.

The top slot in the SBI will also fall vacant soon. Why not open it to the private sector?

For the SBI’s top job, we will not be looking at anybody from the outside. The talent within the SBI is very good. There is no need to look out. The SBI’s recruitment, training, skill sets, upgrading of skills are very good.

Is a ‘bad bank’ on the cards, which will house all the bad loans?

I won’t say whether it is on the cards or off the cards. We need to see what has been our experience with the ARCs (asset reconstruction companies, which the bad bank is meant to be). We have 14 ARCs. How many issues have they been able to resolve? So suddenly to set up one more and transfer all the bad assets into it... Do we have the appetite, capital, or skills? We are still debating.

How will the recapitalisation amount for banks be decided?

Recapitalising would be like a black hole, it will disappear. So we want them to clean up their balance sheets and then recapitalise them. We may also go in for rights issues. Many banks are trading below their book values. The shareholders may be interested in buying more shares, which will come cheap, and in a year or two the banks’ market value will go up with recapitalisation.

How will you address the issues relating to pay packages?

In a public sector setup, the fixed part is the major part and it is very difficult for us to tamper with the fixed part. But we are looking at ways to increase the variable part, maybe through ESOPs, bonuses, or more performance-linked incentives. Maybe some other perks can be offered. In a few months, we will come out with something on this.

How will you handle the opposition from the unions in consolidating banks?

Why should the unions be against it? Some of the smaller banks are weak and you need to recapitalise them every year. Where is the money? It is in the interest of the unions to have large and strong banks.