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Bankers are scared to lend as the norms on classifying delinquent loans are too strict. Bankers need to be given greater flexibility and decision making has to be based on practical considerations for the situation to improve and sustain into the future, Hemant Kanoria, Chairman of Srei Group, tells India Global Business Consulting Editor Arnab Mitra in an interview. Edited excerpts…
INDIA GLOBAL BUSINESS (IGB): The economy seems to be in recovery mode. But some economists are apprehensive that it may not be sustainable without a demand-side stimulus. What can be done to increase the purchasing power of the ordinary Indian?
For this, we need to generate more employment across sectors such as infrastructure, manufacturing, services and agriculture. Demand has to be created in the economy and this has to be sustained.
Then, we also need to encourage greater entrepreneurship. This will reduce the pressure on job creation and give birth to more job creators. The use of technology must be encouraged, we have to focus more on skill development.
Then, an enabling atmosphere has to be created for micro, small and medium enterprises (MSMEs) to flourish and grow and generate many more jobs.
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A recent report by IFC-Intelle-cap has estimated an unmet credit gap of $240 billion for the MSME sector. How can this be bridged?
That’s a mammoth size and the gap will be difficult to bridge. The fact is that bankers are scared today to advance loans to the MSME sector, which is under a lot of pressure. The demand for their output is down; their costs are rising; and banks don’t want to risk creating more non-performing assets (NPAs, or delinquent loans on which borrowers have defaulted on repayments for two successive quarters).
This has become a vicious cycle. But we have to find a way to move to a more virtuous cycle – one that is sustainable. Many MSMEs have closed down or may have to do so.
We may soon end up looking like we were 20-30 years ago when there were some large companies and a few MSMEs. The same thing might repeat itself if banks and NBFCs continue remaining shy of lending to them.
I don’t see any immediate solution to this issue. To resolve this needs a massive structural change… a total change of mindset. Right now, there are too many compliances to take care of; small enterprises may not have the means to be compliant with such a big number of laws. This makes entrepreneurship difficult.
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We need to encourage entrepreneurship. This will reduce the pressure on jobs and give birth to more job creators. The use of technology and skill development must be encouraged
IGB: The NBFC sector plays a critical role in ensuring last mile connectivity for credit disbursal to many segments of the Indian economy. But the sector itself is in deep trouble. Do you see any light at the end of the tunnel?
The government is abreast of the issue and has been trying its level best to resolve the troubles in the sector. The stimulus package was good as was the decision to ask bankers to lend to NBFCs.
Despite this, bankers are scared to lend as the regulations governing lending are too strict. The norms governing NPAs have to be revisited and practical decisions have to be taken.
Right now, everything is done according to numbers. It is numbers that decide which loan is an NPA. Following guidelines has become more important than cultivating relationships.
Bankers and their customers should have a relationship based on trust. Current regulations don’t allow bankers to leverage their relationships like this.
IGB: The government has said it will create a bad bank to park the NPAs of banks. How do you see this playing out? Should the scheme be extended to NPAs of the NBFC sector as well?
In my opinion, if NNFCs cannot handle NPAs, they shouldn’t exist. That’s because a bank can have 10 different verticals and it may not be possible to pay equal attention to all of them. An NBFC parking its non-performing loans in an asset reconstruction company is a sign of poor capability. We charge a higher interest rate than banks because we take greater risks. An NBFC should be able to recover its loans from its customers without going through this route.
But current guidelines do not give NBFCs the time to allow clients to do a cash flow realignment. I’ll give you an example: If a customer is unable to repay loans due to reasons beyond his control, then his assets are immediately classified as non-performing. But it can be that giving him a two-year moratorium will help him put the asset back on track. In that case, I’ll get back my money in eight years instead of six.
NBFCs need this kind of flexibility to be able to operate.
Current guidelines do not give NBFCs the time to allow clients to do a cash flow realignment. NBFCs need this kind of flexibility to be able to operate
IGB: The government has announced it will privatise two banks this year. Will SREI bid for either of them? Should foreign banks/funds/individuals be allowed to bid for them?
In my view, everyone should be allowed to bid for them and the government should be able to realise the highest value for its stakes. Once bidders pass the fit and proper test, the only criteria, in my opinion, should be to maximise the value of the government’s holding. As to the other part of your question, SREI will not be bidding for either of the two banks.
The Indian economy has huge potential. The government is providing it active support. Our large population, our technological prowess, will ensure we can accelerate the pace of growth
Where do you see the economy going in the coming fiscal year?
The stock market is doing very well but that is a story I know very little about. The real economy has huge potential. But first, the fear factor has to be taken out. Mistakes will be made. The only way not to make one is not to take any decision. Regulations have been tightened just because of the deviant ways of some errant borrowers. Regulators have to believe and trust. Genuine mistakes must be differentiated from deliberate ones.
The question is: How can we accelerate our pace of growth? The Indian economy has huge potential. The government is providing it active support. Our large population, our technological prowess, will ensure we accelerate the pace of growth.