I agree that there are two or three stress areas in the system which we need to watch out for. One, is this question about liquidity particularly with the NBFCs and the inherent mismatch in their asset and liability, which is something that the system will have to address. The dependence of NBFCs on public finance is a cause of worry quite clearly. They should include both banking as well as funds raised from the markets.
The second, is going forward, I certainly see some amount of distress or some amount of improvement in NPA recovery. Gradually, the NCLT and IBC are settling down. We will see more and more resolutions coming in. I suppose from the economy point of view also. if the monsoon is good and if we find that inflation on account of oil prices tamed, then I suppose the financial sector should do well both in terms of gradual recovery and also in terms of proper lending because quality of lending will gradually improve when the demand for funds from the borrowers will start rising.
Next one or two quarters will deal with control in the financial services industry. There is the issue of consolidation of banks. Already consolidation of three public sector banks has been announced. There is a talk of three more public sector banks getting consolidated. So all said and done. it is going to be an eventful next six months, but at the same time, if the men perform, they will outshine the boys quite clearly.
We are talking about further consolidation. Have you also looked at possible combinations? Kotak has said that there are three solutions – raising equity, consolidation and mortality. Which are the banks and NBFCs would fall into these specific categories?
In the BFSI space, two things are being discussed at the moment. One is the consolidation within the banking sector itself and that is going to be largely a public sector kind of play. There are two interesting cases. We already saw in IDFC Capital First merger. An NBFC got merged with a bank and then there is another one in the offing where regulatory approval is being sought — the Indiabulls, Lakshmi Vilas BankNSE 4.98 % merger plan.
I suppose one thing is becoming very clear. The kind of connect that NBFCs possess with the borrowers and particularly the NBFCs who have been able to manage their asset-liability in terms of having portfolios of manageable durations. They would aspire to work with a) banks, if they do not have speculative business like real estate or things like those, then the regulator might allow some kind of consolidation in that particular area. b)Equity is the other area. If you analyse the equity raised by private sector banking, it is still in a pause situation. But going forward, once the balance sheets improves with some recovery from the NCLT, IBC process, they will be ready to raise further equity.
The amount of capital that the government has put in over the last six to seven quarters, does give some leeway to the public sector banks to raise some more capital from the market. That was the original plan. If you go back to the original plan of Rs 211,000 crore of capital to be raised, it did include Rs 54,000 crore of capital to be raised by public sector banks from the market. To that extent, some leeway may be available to some public sector banks.
Of the remaining NBFCs, those which are performing well is one category but the others will neither be able to raise more capital because they are still a concern nor will they be able to raise more funds from the public system. That is something to watch as we go along.
What is the level of concern now? Whether the liquidity crunch is anticipated more on the back of a clean-up versus any more surprises because we have seen the reaction to Yes BankNSE 1.90 %. Do you feel the worst is over?
No, I do not think so. Looking at the regulator RBI and the kind of independence it enjoys in regulating both the private sector and the public sector banking, those questions remain and I suppose they will continue till there is some clarity or the government or the legislature step in.
But from the liquidity point of view, there are two important things going forward. One is we will have to keep a close watch on the oil prices as a nation, as an economy because it could really create disruptions quite clearly and not just in the economy but also in the banking system because then the regulator will have to keep the liquidity floating in the system. That is one concern that believe is there.
Second, the entire issue about the new NCLT process. We are waiting for the regulator to come out with a new set of regulations. With the February 12 circular being withdrawn — at least some parts — but the parts associated with NCLT, IBC processes may have to be redesigned. We are eagerly waiting for the regulator to come out with some progressive regulations which will really enable the banking system to recover fast.
There was nothing particularly wrong with the IBC, NCLT process. Going back to S4A or SDR or whatever could have its own challenges. In the earlier system, a lot of decision making was given to banks and they were not in a position to make those decisions for fear of investigation at a later date being passed on to the resolution professionals and to the COC and also to the IBC process. Now what may happen is with 12th February circular being withdrawn and while new processes and new regulations in this space are awaited, public sector banking where there are a large number of borrowers and a large number of COC members, it is going to be a little difficult. It is to be seen, between the regulator and the policy markers, how fast they can resolve this particular issue.