RBIs one-day default rule is not draconian: Rakesh Singh, HDFC Bank

By Ashwin Manikandan

Rakesh Singh as group head, investment banking at HDFC Bank, has a birds eye view of the industry as well as consumption. In an interaction with ET, he speaks on host of issues — from credit squeeze to infrastructure to start-up funding. Edited excerpts:

As a banker, how do you see the NBFC liquidity squeeze and the restrictive Prompt Corrective Action on bank that led to the breakdown of RBI-government relationship?
It is a matter of reach. If a bank can generate credit, it will capitalise on this opportunity. When the margin started squeezing due to increased competition, the rates started shrinking and the NBFCs, to maintain their profits, started squeezing their ALMs (assetliability mismatches) and thats where the problem started. All the NBFCs with a healthy ALM did not have their stocks affected and have no problem in raising money from the market. If your underwriting standards are good, the market will keep buying your pool.

The system needs credit pool and for that we still need NBFCs. We owe it to the nation, to the people for GDP growth and for consumption growth. Just like government and NGOs work in rural areas, NBFCs and banks must co-exist.

The priorities of government and the RBI differ at times. How do you see the current scenario?
Governance is improving in states right through, but employment has been a big concern. States where infrastructure has been improving, money has been put into infrastructure. As far as the RBI is concerned, it has done a very good job given the implementation of NCLT-IBC, one-day default rule. Obviously, no work is complete. The main challenge is working capital need for some segments of the economy…in that light, credit growth is essential, be it for GDP growth or consumption growth. Money flow is very essential irrespective of the route – whether through banks or NBFCs. Whether credit reaches the system through NBFCs or through recapitalisation of PCA banks is very much a matter between the government and the RBI.

There is a lot of displeasure in the corporate world around RBIs oneday rule on defaulters. What is it from a bankers perspective?
Any rule has a dispensation for understanding the intent behind it. There is enough leeway given to understand whether a default is happening due to a lack of planning or because of incipient stress in the system. If you can see such stress, then you need not wait for one-day default to happen. But if you cant see this stress, then the default is a precursor to point out that you missed something. The one-day rule should be seen in that way…from a pure bankers perspective, if you owe money, you need to pay back. Your cashflow should be aligned to pay it back to the bank. If there is a business situation due to which something has gone wrong, then RBI has given a route to restructure – extend, restructure, provide and continue. So, I dont think the rule is draconian.

Funding infrastructure is a problem. How do you fix it?
There is currently a challenge in infrastructure funding; the number of institutions providing infra funding has gone down. Therefore, I feel there is a need to recapitalise the PCA banks, so that they can fund projects. Core growth — infrastructure and consumption — you see, consumption is still getting money, but for infrastructure funding you need capitalised banks so that new projects can be funded.

SMEs that generate the key jobs are in stress either due to GST or NBFC credit squeeze…

In the new era of GST, you got to see businesses a little differently. There are large companies and their supply chains. If the supply chains are not efficient in nature, then the model would suffer. The supply chain has to either get aligned with OEM (original equipment manufacturer) or there should be investment in supply chain technology. OEM and MSMEs should think about how they should align with certain businesses. The performance of the SME sector is a function of efficiency.

On liquidity squeeze…

Youll have to check how efficient the business is, what kind of collateral they are providing, how efficiently they make money in the business. The banks have got to be more judicious regarding their lending mechanism to understand the risk.

Steel has been a drag on the banking system for years. What do you make of the bids in bankruptcy courts?
There is nothing wrong with any industry. The only issue is with payment behaviour. I do believe that infrastructure is sorely required in the country. Steel is required. We hear that there is a shortage of rails. We need to increase capacity and infrastructure needs to be built bigger and faster. With growing transportation need, we need more coal and steel. These are the basic necessities for a growing economy. Investment in these two areas should come in. Instead of looking at these industries, we should look at the underlying contracts. Also, rewarding good payment behaviour will transform our economy.

Investors have been running after start-ups. As a bank, how do you approach them?
An idea that is funded has a great value. When an idea is funded, a prototype is created and the prototype should be scaled up. In auto or the consumer industry, there is no dearth of prototypes. But the challenge is about scaling up, which needs a lot of management and funding. At this stage, there is a need for a very strong execution capability. If prototypes move to right teams, they tend to become more valuable. There are examples of Indian startups which grew, got better managerial strength and those assets became valuable. As long as the there is a good management team for a good prototype, there has never been an issue about funding.

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