Money & Banking

Central Bank to reduce bad loans by focussing on sale to ARCs: Pallav Mohapatra

K Ram Kumar / Surabhi Mumbai | Updated on November 06, 2019

Central Bank of India has hit a purple patch in the last couple of quarters after posting 13 quarters of losses on the trot. Pallav Mohapatra, MD and CEO, says the bank is grinding down its bad loans portfolio by focussing more on sale to asset reconstruction companies (ARCs). The public sector bank is employing the ‘Swiss Challenge’ method for such sales, so that it can realise better price through counter bids for stressed assets. Now that Central Bank has turned the corner, Mohapatra, in an interaction with BusinessLine, said the bank, which is currently under the Reserve Bank of India’s prompt corrective action, could rake in a net profit of ₹1,000 crore in FY2020 and ₹2,000 crore in FY2021. Excerpts

How did your bank turn the corner?

In the last one year, we undertook transformational measures. We focussed on reducing the stress through resolution and recovery process. So, we came out with an objective one-time settlement (OTS) scheme for stressed assets up to ₹10 crore. There was another scheme (for larger stressed assets) based on the net present value (NPV), which explored the five options for recovery/ resolution – National Company Law Tribunal (NCLT), sale to ARCs, OTS, SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act) action, and Debts Recovery Tribunal. So, we were able to get some good recovery.

We focussed more on sale to ARC under the Swiss Challenge method. Why this is better than an open auction is that there is already a binding offer by one investor who is working through an ARC, and then we put that under Swiss Challenge for the counter-bid. Through this process, in March, we were able to sell four assets – Bhushan Power and Steel, Alok Industries, Jayaswal Neco and Bombay Rayon – which were in NCLT, and we got an uptick on the NPV. So, the recovery position in the fourth quarter of last was quiet significant. Even in the first quarter we sold a road project, also under the Swiss Challenge method. In the second quarter, we were in discussions with the investors. So, some sale will be fructifying this month itself, and in the third quarter we will again see a good amount coming in.

The other thing that we did is to engage with resolution firms on a success-based incentive for getting resolution or recovery.

How did you manage to contain slippages?

The system that we have put in place is that from the beginning of the first month of the quarter, every week those accounts that are in the special mention account (SMA) category (accounts showing signs of incipient stress), where the interest is falling due, we send this (information) to the field so that they can start recovery. So, by focussing on SMAs, we are trying to control fresh slippages. So, our slippage ratio in this quarter has come below 1 per cent. And even on the credit cost, since adequate provision has already been made and additional slippages is low, the credit cost is also coming down. Now, to prevent the accounts from slipping, we have strengthened our appraisal and risk parameters. What we strongly believe now is that instead of earning a high spread on low quality (exposure), it is better to earn a lower spread on better quality.

Can you sustain the profitability?

Yes. We have a provision coverage ratio of 77 per cent. If we are able to do resolution or recovery in the stressed asset cases, to that extent there will be a write-back of the provisions. We will get that amount in the profit-and-loss account. When we are building up quality in the loan book, slippage should be contained. And in the second half our loan book will grow (in the first half there was a de-growth) because our pricing is one of the lowest in the market, even as we are maintaining quality. For example, in the case of home loans, the pricing is 8 per cent for the low-risk customer. No bank in the industry gives home loans at 8 per cent. We do not charge processing fee up to March 31. A home buyer taking a loan looks at two things – pricing and turnaround time. We did a bit a restructuring so that the turnaround time also improves.

Your non-performing asset level still seems to be higher?

Both gross NPA and net NPA have not come down and are almost flattish. This is basically because of the denominator as the loan book has shrunk. If the loan book would have been at the level of September 2018, the GNPA percentage would have come down to at least 16 per cent and net NPA below 7 per cent...By the end of FY2020, GNPA will be around 15 per cent and net NPA below 6 per cent.

How has credit growth been?

The total loan growth, including corporate, will be about 8 to 9 per cent (for FY2020). But we are looking at RAM, or the retail, agriculture and MSME segment, to grow at about 12 to 13 per cent. Corporate book will grow by about 5 per cent. In the corporate segment, the demand is only from very few sectors such as roads in infrastructure under the hybrid annuity model (HAM). The second is city gas (distribution) projects, and the third is non-banking finance companies (NBFCs).

What is your capital-raising plan?

In this financial year, we raised about ₹213 crore through the employee stock purchase scheme, and ₹500 crore in the the second quarter under the Tier II bond. For Tier I capital, we are trying to raise around ₹500 crore to ₹1,000 crore through the qualified institutions placement (QIP) route.

How big will your bank’s balance-sheet be in the next couple of years?

The bank will remain of national importance. In two to three years’ time, if we look at the balance-sheet size, at a compounded annual growth rate of, say, 10 per cent, it may reach about ₹7-lakh crore to ₹8-lakh crore. As of today we are at ₹4.7-lakh crore. I hope that next year by 2020-21, we should try to get a full-year net profit of ₹2,000 crore. It could be at ₹1,000 crore this year.

Published on November 06, 2019

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