In talks with Mr. Tamal Bandyopadhyay

Q. What are your views on the Apex Court hearing on the interest moratorium?

I’m not very sure whether the judiciary should have any role in this case. Banks do not have note printing presses at their disposal. They lend depositors’ money to the borrowers; earn interest which they share with the depositors and the rest goes to their operational expenses, and, of course, profit.  Where does a bank get the money from to waive interest for the borrowers? If they forgo the interest income for those particular six months, can they ask their depositors not to earn any interest on their deposits for those six months? If they do this, then what happens to the pensioners and many others who depend on bank interest to run their families? 

The judiciary getting into it is something bizarre. The government, directed by the court, has formulated a way of tackling this, which essentially involves three things:

• Interest is not being waived; the government will reimburse only the difference between simple rate and compounded rate. By the bankers’ estimate, the fiscal cost of this could be around Rs. 7000 crore.

• Any borrower whose overall exposure to the financial system is not more than Rs. 2 crore is covered by it. So, only the retail borrowers and some of the MSMEs and SMEs will get the benefit.

• It is meant for all, including those who have serviced their loans. The respective lending institutions will credit the difference between the compound and simple interest, irrespective of whether a borrower fully or partially availed of the moratorium on repayment of loan. Even those who have not taken advantage of the moratorium scheme and continued to pay their loan instalments will get the benefit. To that extent, it will not vitiate the credit culture as everybody is getting the benefit. 

To summarize, the judiciary probably does not have any role to play, it’s a business done by the banks. The government formula seems to be par for the course. 

Q. There are complaints doing the rounds by the productive sectors in the country of being starved for funding. Do you think there is a risk aversion in the banking system right now?

If you ask the bankers this question, they will say they are being prudent. If you ask the regulator and the government, they will say bankers are risk-averse. Who’s right? Probably, both are. What happened in the past few years, beginning from the year 2015 when RBI took the initiative of exposing the soft underbelly of Indian banking— the high NPA pile — has led the bankers to become extremely careful. They don’t want to make that mistake again.

What happened in the past is a combination of pressure by the government to lend to certain segments and the banks’ inefficiency in managing the risks properly. Historically, whenever bank credit has been used as a vehicle for economic growth, the banks ended up piling bad assets. The popular theory that only credit growth can push economic growth creates this mess.

The bankers have learnt the lesson and they don’t want to commit the same mistake. They are being very judicious at this point of time; for the corporate borrowers, money is no more for asking — which was the case earlier. The truth is that the banks might have become conservative in their choices but they are willing to back projects that are worthy.  

Q. You have written a book on the journey of Bandhan Bank. Is it a safer strategy for banks to follow the Bandhan model and lend more to retail / small borrowers than corporates?

Bandhan was a micro-finance entity and is the first instance in India of a micro-finance organisation turning into a universal bank. But today, if you look at it, Bandhan is trying to get into non-micro finance loans to mitigate the concentration risk. Because if you are involved too much in one particular segment and if that segment is in trouble, then your balance sheet is at stake. 

Bandhan cannot be the sole model for the entire banking system. Who will support the big investments in infrastructure, power and manufacturing sectors? There is space for all— banks like Bandhan and others which give loans to larger corporations.

Having said that, yes, India is credit-starved and there are many segments that do not have access to bank credit and Bandhan has taken banking to those pockets. 

Now many banks are getting into the hinterland and the so-called bottom of the pyramid. For example, HDFC Bank has a very large micro finance portfolio. The banks in India traditionally give small loans to meet the so-called priority sector lending norms. It has been a compulsion and the banks never saw this as a profit-making business. But now the banks are going there, with the realisation that profits can be made there too. 

There is space for all kinds of banks such as HDFC Bank, ICICI bank and Bandhan Bank. Everybody cannot become Bandhan. 

Q. The bad loans problem in the Indian banking system has been a major factor behind the economic slowdown in the country. Is there a way out for India’s NPA woes?

Many things contributed to the NPA problem in India:

• The inefficiency of the banking system when it comes to project appraisal. Project loans were the domain of the development financial institutions. We abolished them in the 1990s to embrace universal banking but the banks have not learnt the art of project financing.

• Corporate India was taking the banking system for a ride. Many of the corporations were actually not using their own money for their projects. Instead of putting their own money on the table, they used the bank’s money both for debt and equity.  

• There were a lot of other issues like misgovernance and even frauds, in certain cases.

All these led to a huge pile of NPAs— 10% of the total loans in the country. This is when the Reserve Bank of India drove an exercise—unique of its kind— called Asset Quality Review (AQR), which started in December 2015. Till then, the banks had been hiding bad loans but they were forced to come up clean. Some of them, like IDBI Bank, Indian Overseas Bank and UCO Bank have seen one-fourth of their assets turning bad. 

Parallelly, the IBC— Insolvency and Bankruptcy code — came into the picture, in an attempt to recover bad assets. The IBC had its own challenges at the initial stage; the platform was not that effective. But gradually things settled down. The IBC actually put the fear of God among the corporations and the bankers used that to get the corporations on the discussion table, which was not happening earlier. 

Things started getting better in 2018-19. And, as we approached March 2020, we had thought that the phase for bad loans recognition was over and now would be the time of recovery wherein banks would become prudent and the lending would start. But unfortunately, Covid has affected the Indian economy like the rest of the world and we have to wait and see how the banks get back to the credit markets. 

Q. In continuation to what you mentioned about how the AQR and the IBC have been helpful in diagnosing and treating the financial system ills, what do you think could be done in the coming future for tightening the discipline in the system for bank loan recoveries?

The banks have understood that they made mistakes and hence they are now being very careful. Similarly, companies have understood that they cannot take the banking system for a ride any more. They now know that they need to bring in their money on the table, and not just use the banks’ money, even infuse equity. Both the sides have learnt lessons from their experience, and simultaneously we have the IBC in place.  

Then, of course, there are other mechanisms like the CRILC platform where the banks need to give information to the RBI on an almost real time basis when a loan goes bad. We have the props in place, and once the economy is out of the Covid-19 grip, we will see a far stronger banking sector.

Q. At a time today when bank interest rates are falling drastically, what is the best investment option according to you for risk averse investors like senior citizens and perhaps pensioners, who so far have depended on the bank Fixed Deposits?

This is a very valid question. As we speak, our savings bank rate has gone down to the 1960s. Back in the 1960s, the Chartered Bank in Kolkata offered 2.5% and now the State Bank of India offers 2.5%. And Fixed Deposits (FDs) give 5.0-5.5% interest rate for most of banks, barring a few. It’s a tough time for the savers; however, there are avenues like-

• A government savings scheme which now offers 7.15% (the rates are reset every 6 months).

• Some tax-free bonds are available in the market (they are all trading in the secondary market). For example, bonds of Power Finance Corporation, Rural Electrification Corporation, National Highways Authority of India (NHAI), etc. 

• Gold could be an option too, since it has been appreciating. I mean the sovereign gold bond. 

• One could also benefit from investing in Public Provident Fund (PPF). And, of course, one can put money in Mutual funds.

Among asset classes, I would not recommend anybody to go for real estate— it has now become solely for use and not for investments. 

You need to consider three things while making your investment choices— return, liquidity, and safety. Keeping these in mind, and considering one’s age and risk profile, one should ideally consult a certified financial planner for earning a little more. Overall, judiciously diversifying your portfolio would be very helpful in raising your income from your investments.

Q. What can we expect from your upcoming book: Pandemonium: The Great Indian Banking Tragedy?

Well, I have tried to unravel the behind-the-scene stories of what went wrong and what exactly happened in the Indian banking system. 

There are a few ways of doing this. One is, I tell you that this has gone bad and this should be corrected but am I qualified to say this? I’m not a central banker; I’m not an economist, so I don’t think anybody would listen to me. The second way of doing this is to pick up all the data and analyse them to figure out what had gone wrong but that’s a sort of academic exercise; everybody may not be interested in that.

I have chosen the third way, which is basically telling the story.

In this book, you will read many stories. Stories of what exactly is the AQR. How did the Reserve Bank of India steer this? How Rana Kapoor made Yes Bank into My Bank and then No Bank for himself. How Chanda Kochhar took the board of ICICI bank for a ride. Why did the rating agencies fail? What happened to the NBFCs in India? How did the government behave as an owner of banks?

This book is an attempt by a journalist to tell you the behind-the-scene story of what has gone wrong with the Indian banking sector, what are the lessons learnt from it and what is the way forward. 

Q. All of us have been following your columns week after week, for years now. How is it that you manage to come up with such enthralling content each time? Also, from your illustrious career spanning over 3 decades, what would be your key takeaways for the students of St. Xavier’s College, Kolkata interested in finance and/or journalism?

To answer the first part of your question, I would say that if you treat your work as purely work, then it becomes a drudgery, but if you treat your work as something you love and enjoy, it flows smoothly. The key is that no matter what you do, what profession you’re in— you must enjoy and love what you do to excel in any field. Otherwise, it is difficult to get the motivation and enthusiasm to work for long. I’m aware that money is an important incentive but if you do what you love, you’re bound to excel in it, and eventually money will come in. I think where most people go wrong is, they first look for the money and compromise on their quality of life and intellect. Then work becomes boring. 

Coming to the second part, I don’t think I am qualified to give any advice, but I personally feel that schools and colleges imbibe some kind of basic discipline in us. But unfortunately, for many of us, learning stops after that. I personally believe that our learning actually starts after we finish our academics. Anecdotally, I can tell you, I know many brilliant students who are not doing really well in their career and I know many average students who have been doing pretty well. It’s because some of us stop learning and push ourselves only for money and that doesn’t take us very far.

To explain this idea more effectively, it may sound a cliche but I would quote Rama Krishnadev:

“Joto din baachi, tohtoh din seekhi” (One must continue to learn till the last day of one’s life)

The day you cease to learn, you are intellectually dead. And, specifically when you are involved in the field of finance, you cannot let yourself feel that you know everything that’s required. The world changes every minute. If you have the perception that you know it all, then you are not being fair to your intellect, your readers or the industry. I would just say that life is the bigger classroom, and that learning must never stop.

The opinions expressed in this article are personal views of the interviewee.

Interview by: Utsav Chirimar & Jasmine Kaur Bhatia