‘There is a lack of professionalism in the rating of borrowers’

Union Bank of India’s Chairman and Managing Director, Mr D. Sarkar, has a formidable memory as his colleagues have found over the years and as this paper’s correspondents found recently. He was able to recall two earlier occasions when we met some years ago, including the precise details of those conversations.

Fifty-eight-year old Mr D. Sarkar has been at the helm of Union Bank since April. He is a chartered accountant and also a Certified Associate of the Indian Institute of Banking and Finance. He began his career in Bank of Baroda, and rose to the position of a General Manager before being appointed as Executive Director of Allahabad Bank in December 2009.

Mr Sarkar’s expertise in treasury and credit management will come handy for Union Bank now.

The banking sector has been under pressure with rising non-performing assets through the last year. Mr Sarkar gives his views on some of these issues in this interview. Excerpts:

On the NPA situation

Some of the big accounts are under stress. NPAs are certainly a cause of concern. We have reduced rates for SMEs, as in some cases the rate of interest appears to be quite high. This is because the accounts are not rated and the internal rating also differs with each bank.

In some cases, the balance-sheet of the SME is not strong while some have less internal capacity. There is a lack of professionalism in the rating of the borrowers. Therefore, firstly, some sort of counselling is required. Secondly, supervision cost is also high. Therefore, banks must screen the borrowers properly.

The slippage ratio is more than 2 per cent, which is partly due to the economic slowdown. The working capital cycle is also affected due to delay in the projects and this is one of the reasons for the increased slippage ratio.

Therefore, timely restructuring must be done, margins must be increased by 15-20 per cent, there must be proper monitoring, and corporates and bankers must have due diligence. Money being diverted is very much prevalent in the market. Therefore, asset created thereby must be captured.

As for system-generated NPAs, there is slackness in supervision. The demand notice is not always being sent on time. It is generally sent at the end of the quarter. Also, NPAs must be taken on a real-time basis.

Generally, even when the loan amount is recovered and goes unrecorded or is not revised, it stays as loan outstanding. The percentage of NPAs may go up in this quarter but the small- and mid-size accounts are improving.

Exposure to troubled sectors

Our exposure to the power sector is Rs 18,980 crore. Of this, the exposure to State electricity boards (SEBs) is Rs 10,567 crore. We have restructured loans to the UP SEB in this quarter (exposure of Rs 1,300 crore).

The Government is trying to look into some sort of structured restructuring. This means a common type of restructuring where banks will have to take up 50 per cent liability in the form of guarantee or bonds. It is a good move.

After this restructuring, all these SEBs and distribution companies will certainly be more responsible as they have to take the pains to collect the funds to pay off the debts which were not the case earlier.

Is listing distribution companies a solution?

I think it is difficult to come to the market through public issue now. Even in the case of banks, the last public issue was in 2010. So, it is not a good idea.

But as we have limitations to fund such companies, the only option the distribution companies have is raising equity — which can be done by the entrepreneurs themselves or the government bringing in funds.

The other way is through the private equity which is also difficult, so the option that remains is to go public. But before going public, a lot of due diligence and market expectations must be met.

On short-term loans

Credit growth still looks sluggish. Short-term loan must compensate for the core growth, but this is not yielding enough. If this is done properly, it can add about 25-50 basis points in the overall yields.

In June, many companies expected to raise short-term funds to pay off the loans, but they could not. And if the short-term funding is not need-based, then it is certain that funds will be diverted to a purpose other than what they were raised for.

This has happened in some sectors such as real estate and construction. So, we now look at the whole picture. For instance, for a group with 15 companies, I will take the total of all assets and total liabilities, check secured loans, see if they have over-borrowed or under-borrowed and then sanction their loans.

On best rates for borrowers coming through multiple banking arrangements?

Even in consortium it is possible. Earlier, when rates of interest were very high, bankers were very practical. So, there is not a wide difference in the rates offered by each public sector bank. And one bank cannot supply all the funding.

Multiple banking is a way of price discovery, but it sometimes goes the other way. Corporates don’t share information about where and how much they have borrowed earlier. Corporate governance in the corporate world must be increased. Otherwise, who is going to save the banks?

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