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'Let's change our model of financing'

R K Dubey took over as Canara Bank chairman early this year bang in the middle of a slowdown. But a few months into his stewardship, his bank made bold to drop its lending rate to 9.95 per cent because of ‘better efficiencies’ while others hung on to rates of 10 per cent and 10.25 per cent. In this interview, he talks about the challenges before banks and before the country, financial inclusion, leveraging technology, new banking licences and of course, the toast of the financial markets, Raghuram Rajan, the new governor of the Reserve Bank of India. Edited excerpts:

In the context of the overall financial and economic situation how does a large PSU bank look at things? What are the challenges right now?
The economy is passing through some tough times. There are issues with every sector because of inflation or regulation. The cost of loans is high. Though wholesale inflation entered some sort of a comfort zone, consumer inflation remained high. Suddenly the rupee became volatile. So, yes, it’s a challenging situation. The RBI (under D Subbarao) took some measures to improve the situation but they did not work, in fact, some of them proved counterproductive. The global economic scenario is also not very good. There is a hint of improvement in the US and UK but that is not enough to lift the sentiment. The announcement by the US Federal Reserve on quantitative easing a few months ago had a very damaging effect all over the world. But some good things happened in the last few days [the interview was conducted on 7 September – Ed]. Raghuram Rajan, the new RBI governor, has brought some freshness to the apex bank as was evident in his inaugural speech. He looks to be non-traditional, non-conventional and his first-day announcements are music to the ear. From the day he took over, there has been no slide in the rupee. The rupee was going on 70 against the dollar but it has stabilized at 65 as on today (7 September). The government also took steps to restore parity with the dollar by raising the rupee swap deal with Japan to $50 billion and creating a $100 billion cushion with BRIC countries. The other measures announced by the new governor – freedom for banks to set up branches, issuance of consumer index public bonds, the committees set up for new bank licences, corporate credit restructuring and financial inclusion – all look very promising. They suggest that Rajan is focussed and knows what he wants to do in the short term. His speech covered all the important issues but the most important part was what he said about communication. His communication was most effective, what he said, the way he said it…

Yes, he got through to even laypersons. It was for the first time that we understood the speech of a RBI governor.
You are very right. Even D Subbarao laid a lot of emphasis on communication. He was communicating much more than his predecessors. He instituted some systems, brought in the quarterly meetings, transparency etc. He was communicating constantly but he could not get through. Perhaps people did not understand his communication or perhaps he couldn’t articulate to the extent necessary. Sometimes, expectations are too high. Whatever good you do, you still fall short. Banks and markets felt Subbarao should do more. It did not happen so even though he was communicating constantly, it did not work. But Rajan’s first communication was so effective that it served more than the desired purpose. He covered a lot of areas. He came across like he was prepared and he had a plan and delivered it confidently and with conviction. We need bold persons to tackle the present situation. Bold doesn’t mean that you risks. A bold person takes unconventional steps with the conviction that they will work and he does a lot of planning and implements them effectively. That is a bold person. In fact, Rajan made an important statement when he said that there are risks in taking these actions, but the risks of inaction are far greater.
Take lending, for example.
Sometimes, a very good person who we think will repay loans becomes NPA (non-productive asset) very soon. And sometimes just the opposite happens – you are very reluctant to give somebody a loan, you are not confident about the person, you reluctantly grant the loan but he becomes a very good asset. In fact, we take calculated risks. You learn from mistakes and become mature and your risk-taking and judgement of people becomes better and better. I am talking after 35 years of experience in the field. Ten years ago, I was not what I am today. I am more mature now after working at several places. Rajan may not be an experienced banker but he is an engineer from IIT Delhi. He has got analytical ability. This is very important. He is also an MBA from IIMA. He went to MIT and then taught economics at the Booth School of Business. He worked abroad and gained valuable insights into the global monetary scenarios. He boldly forecast the 2008 financial crisis when nobody even smelled it. His horizon is so wide. No wonder his first day first show was so good.

But a promising inaugural speech by a young new RBI governor can deliver only so much, there is so much more that needs to be done to get us out of the economy hole we are in….
The first thing we needed was a proper sentiment in the market which was missing. Sentiment had become so weak that whatever was being done by the finance ministry or the RBI to lift the mood was not being accepted by the markets. Somehow this sentiment has been lifted. There’s no easy explanation to why this has happened, but things are shaping up and the rupee will settle down at 60 [it was at 63.38 at the time of going to press on 11 September – Ed]. Earlier it seemed like the RBI and the government were not in sync on many issues. Rajan is coming in as the advisor to finance ministry so he can appreciate the other side’s point. That must have been on his mind when he made those announcements in his inaugural speech. If the finance minister and RBI governor gel well, things can change. Now that the sentiment has turned and the gloom seems to be lifting, I think all other issues will fall into place one by one. We have seen that already happening in a number of crucial bills – except insurance and goods and services tax (GST) – that parliament passed in the last few days (of the monsoon session). These were bills that were stuck for so many years. The prime minister called the opposition over to seek their support to pass the bills and things started to move. That has lifted the sentiment some more.
All these things suggest that reforms are back on track. The Food Security Bill and the Land Acquisition Bill are very important pieces of legislation. Enough has been said about the Food Bill so I will talk about the Land Bill. You cannot say it is pro-industry because it is not easy to get consent of 80 per cent land owners and pay four times the market price. But now there is a clear way forward. The earlier bill was more than hundred years old and very opaque. Now you have to pay more money. If you have the capacity to pay more, you can go ahead. That clarity is there. It shows that confidence is returning. There is nothing drastically wrong with our economy or our banks. Yes, our NPAs have gone up for sure but ten years ago our NPAs were like this only. It is with prudential norms coming in that we all improved, we went to core banking systems, implemented technology solutions and brought in transparency. As a result of all this we could bring the NPAs down to 2 per cent from 11 per cent. Now there is a scare in the economy, the realisation cycle has become weak and money is not getting to people. And because the sentiment was bad, they were also not investing in the country, once these things improve, as they now look set to, our recoveries will improve. I’m future-positive.

The new land acquisition bill will push projects costs up substantially. Do you think banks will be able to fund projects?
You are asking about infrastructure. Infrastructure funding is one of our challenges. IFCI, ICICI, HDFC and IDBI are no longer the PFIs (private finance initiatives, which were set up specifically to finance infrastructure projects). Commercial banks were practically funding all infrastructure projects. But we didn’t have long-term funding capabilities, we were doing short-term funding whereas infrastructure projects have a long term turnaround time. So, we have to change our model of financing. Only then we can continue with the infrastructure funding. You see, the knowledge level about infrastructure funding in banks was not as strong as that of the PFIs which were doing only that. As a result, funds became very easily available. It should not be like that. We have to think more about long-term funding model in infrastructure. Maybe we should be allowed to tap into the long-term funds that we handle in markets…something should be done for infrastructure.

The new governor also mentioned bonds…
Yes, he mentioned about deepening the bond market. Now pensions funds are not there in the market, bond markets are not there. That is what I meant. We need structural changes. Canara Bank cannot do it, RBI or the government only can do it. If you say we need 1 trillion US dollars for infrastructure funding, it can’t be covered by commercial banks. It has to be done with proper funding. From where you get these funds is something that has to be decided. But whatever commercial banks can do, we are doing it. Of course we may have taken a bit because of discoms etc but the government and RBI have always supported us in the case of discoms, Air India, and regions which faced natural calamities.

Do you know that the corporate debt restructure (CDR) mechanism is available only in our country?
The rest of the world does not have it. The government and RBI have proactively supported us, that’s why we were able to absorb the financial shock till now. But now things have become a bit difficult because of the steep current account deficit (CAD), fiscal deficit and the fall of the rupee. So the message from RBI is clear: support genuine defaulters but go the whole hog to recover money from wilful defaulters. Our recoveries should come under control. It can’t happen immediately because once things slide it does take a while to come to par or to improve.
If our liquidity is little better, then things would be different. Only a few banks reduced lending rates two months ago when the finance minister made a call. I reduced to 9.95 per cent, Andhra Bank, Bank of India and Union Bank reduced to 10 per cent. But in these tough times when we are looking at low NIMs (net interest margin, or the difference between the rate of lending and rate deposits), Andhra Bank and Union Bank have gone back to 10.25 per cent. I am still holding on to 9.95 per cent waiting for 20 September. If some positive announcements come on 20 September, if the RBI chief says NIM of 2 to 2.5 per cent is okay, I will retain this rate. I am hoping to keep our NIM between 2.4 and 2.2 per cent. If we improve our efficiency, asset quality and recovery, I don’t need NIM of 3.5 per cent. Canara Bank’s NIM at 2.9 per cent is lower than our peer banks but compared to other six banks our NPAs are the lowest.

What would you say about the chit fund scams?
It happens because banks are not there. When the organised sector can’t mobilise funds, these sectors will grow.

But where did banking system fail?
The banking system did not reach those places. There is great scope for the banking sector in India. There are huge financial-exclusion areas in the country. That is a great challenge. Banks have introduced technology, but we have not yet leveraged it enough. In the next few years when a generation of seniors which was introduced to technology but was never tech-naturals is replaced by a tech-savvy generation, you will start seeing technology solutions that will make banking more accessible to customers and viable for bankers.

Do you think that the chit funds scam happened because the banking system failed?
Chit fund companies and microfinance institutions have been operating for so many years because banks did not go to those places due to cost factors. Running a bank is a costly affair. Earlier our economy was not growing so it was not possible to open more rural branches. They were not viable. We have been trying the business correspondent model but it will take time to popularise it. Wherever possible, we should have brick and mortar branches. This is now possible because rural accounts are showing transactions now. Now you have demand for education loans even in the villages.

You mean the inclusive growth mantra is working…
Yes, the RBI has set clear guidelines for inclusion but it will take time to yield results. Everybody wants results immediately. But you have to wait. We were asked to make villages with a population of 2,000 bank enabled. Now we are trying to reach even villages with population of 1,000. We are either opening branches or ultra-small braches, even BC outlets. But 5,00,000 villages are still to be connected. Also, we have not properly used technology. The technology service providers are still looting the public. They are not coming to banks or banks going to them. Mobile banking operations should be rolled out in a big way. Airtel is doing that in Africa but not here in India. Service providers will have to partner with us but they don’t want to. They don’t want to leave their monopoly. So there is problem with the technology. The RBI governor has said he wants to popularise mobile banking system. If mobile service providers and technology providers join hands with the banks, then banks will be able operate at low cost and reach out areas that are currently unviable. They will have to work on payment settlement and resettlement system. If they use National Payment Corporation of India (NPCI) platform, things will be different. Nairobi in Kenya is big time into mobile banking. You can pay for a taxi ride using your mobile phone. It is so popular that small stores and service providers are on this platform. It is controlled by a regulator. In India, this has not yet been done. Mobile banking should be made popular. Of course, I’m not saying we don’t need branches in rural areas.

RBI will soon be deciding on licences for 26 new banks. How will that impact the existing banks?
We will survive as we have survived in the past. When foreign banks came in it was a challenge for us. When private sector banks came in that was also challenge, but we have done well. We are not worried, we will recruit more people. India has the capacity to absorb more banks. Go to any small country and you will find so many banks. In India, the banking industry is much protected. Let all the 26 get licences, there is still space for more banks. There is enough business in the country for a hundred more banks.

On arrangement with Governance Now

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