00:00 Evening everyone.
00:00 Welcome to the 3rd
00:03 in the World Bank series of corporate debt restructuring events.
00:07 Um,
00:08 this
00:09 event is focusing on the,
00:11 on fostering systemic financial stability
00:13 in developing countries in the pandemic,
00:16 and we're very pleased to have you join us this morning.
00:19 We will be taking questions via Twitter
00:22 using the hashtag #insolvency Series
00:25 insolvency series.
00:26 We will be able to take your questions.
00:28 For a short portion of Q&A towards the end of the hour
00:32 and with that I will turn the proceedings over to
00:35 the World Bank chief economist and your chair for today,
00:38 Carmen Reinhardt.
00:41 Uh,
00:42 good morning everyone.
00:44 Um,
00:45 I'm very,
00:46 uh,
00:46 delighted,
00:48 uh,
00:48 uh,
00:49 to be here.
00:49 This is,
00:50 uh,
00:51 uh,
00:52 the 3rd,
00:54 uh,
00:54 series of events on corporate debt restructuring,
00:58 and today's session focuses on fostering systemic
01:02 financial stability in,
01:04 in developing countries
01:06 in,
01:06 in,
01:06 in a pandemic.
01:08 And the aim of the session is to
01:12 raise awareness of
01:14 a problem.
01:15 I've actually called this problem the quieter
01:19 financial crisis,
01:21 which is the problem posed by
01:25 Uh,
01:25 high,
01:26 uh,
01:27 corporate
01:28 and,
01:29 uh,
01:30 household debt servicing,
01:32 uh,
01:32 burdens and the likelihood of rising,
01:35 uh,
01:36 non-performing loans,
01:37 NPLs,
01:39 uh,
01:40 you know,
01:40 with a view to,
01:41 to identifying
01:43 what can be done,
01:44 um,
01:45 in facilitating,
01:47 uh,
01:48 uh,
01:49 the,
01:49 the what is likely to be.
01:52 A rise in
01:53 in
01:55 NPLs
01:58 through through debt restructuring.
02:00 So we,
02:00 we plan to have this morning an,
02:02 an in-depth discussion
02:05 with our panelists.
02:06 Uh,
02:07 we'll discuss some of the forbearance measures that may be
02:12 camouflaging,
02:13 uh,
02:14 the true,
02:15 uh,
02:16 asset quality
02:18 and,
02:19 um.
02:20 Talk about what are some of the policy initiatives so that a healthier
02:26 financial sector can contribute
02:28 to the economic recovery.
02:31 We're very fortunate today
02:33 to have 3
02:35 distinguished experts,
02:37 uh,
02:37 representing three different
02:39 perspectives.
02:41 Uh,
02:41 Mr.
02:43 Swami
02:44 Swaminathan
02:46 Jannakiraman,
02:47 I hope
02:48 I have that OK,
02:50 uh,
02:50 is a managing director of the State Bank of India,
02:53 the SBI,
02:54 and his current responsibilities,
02:56 uh,
02:57 include stressed asset recovery.
03:01 Uh,
03:01 SBI is the largest bank in India,
03:03 accounts for about 25% of the market share,
03:06 and serves about 440 million customers.
03:10 Mr.
03:11 Tombias Adrian,
03:12 my neighbor from the virtual across the street,
03:16 is the financial counselor
03:18 and director of Monetary and Capital Markets Department at the IMF.
03:24 And
03:26 uh
03:27 Ms.
03:27 Aisha Ahmad
03:29 is deputy deputy governor of the Central Bank of Nigeria.
03:34 Her current responsibilities
03:37 include financial stability
03:39 and banking regulation and supervision.
03:43 Um,
03:44 I am
03:45 just going to lay out very,
03:47 very briefly,
03:49 uh,
03:50 some of the issues,
03:51 uh,
03:52 that we will be discussing and then turn it over to you with,
03:55 with
03:56 some,
03:56 some,
03:57 some questions.
03:58 Um.
04:01 I would note that this very topic is also uh
04:06 uh the theme is going to be the theme of the next uh World Development report,
04:11 uh,
04:11 the issue of dealing
04:13 with the COVID legacy.
04:15 Uh,
04:16 in the financial sector,
04:19 so
04:20 corporate debt and in many cases government debt
04:24 were
04:25 at
04:27 very high levels,
04:27 in some cases all-time highs,
04:30 even before.
04:32 Uh,
04:32 the pandemic,
04:34 uh,
04:35 but,
04:35 uh,
04:36 since the pandemic,
04:37 of course,
04:38 uh,
04:39 indebtedness,
04:40 uh,
04:41 has grown markedly,
04:43 and at the moment among the
04:46 74 DSSI
04:49 eligible countries,
04:51 uh,
04:52 about
04:53 53 of them,
04:54 more than half are
04:57 in
04:58 either debt distress
05:00 or at high risk
05:02 of debt distress,
05:03 and on the corporate side.
05:05 They're important
05:07 analogies,
05:09 uh,
05:09 and the issue of corporate debt,
05:11 it really cuts across income levels.
05:14 This is not just,
05:16 uh,
05:17 it's,
05:17 it's not an emerging market developing
05:20 country phenomenon.
05:21 This is also a big issue.
05:23 In the advanced economies
05:26 where not only during the pandemic corporate debt has continued to soar,
05:32 but also the quality has
05:35 swung the pendulum towards lower quality
05:39 and
05:40 lower quality
05:42 covenants
05:44 as well.
05:46 And,
05:46 and,
05:46 uh,
05:47 uh,
05:47 a real potential
05:50 issue here
05:50 is,
05:51 is,
05:52 is,
05:52 is also an issue that,
05:53 that,
05:54 that I'm currently doing research on with,
05:56 with,
05:57 uh,
05:57 Graciela Kaminsky and Katherine Holmstrom,
05:59 which is what is the impact of a big shock
06:03 like the output collapse
06:05 that we have had
06:07 on,
06:08 on household
06:09 and corporate balance sheets,
06:11 which in turn means really the banking sector balance sheet as well.
06:15 Um,
06:17 this is a very unequal crisis,
06:19 so it's hitting
06:21 low income sectors within countries,
06:24 particularly hard,
06:26 small and medium businesses.
06:27 It's also very unequal crisis across countries.
06:31 So,
06:31 so,
06:32 uh,
06:33 these are the countries also where there are bigger challenges
06:37 in terms of the toolkit,
06:39 in terms of fiscal space,
06:41 uh,
06:41 monetary
06:43 policy space.
06:44 So,
06:46 uh,
06:47 our focus,
06:48 uh,
06:48 today here is also,
06:50 uh,
06:50 on,
06:51 on
06:52 the impacts on small and medium,
06:54 uh,
06:55 uh,
06:56 enterprises which have been shown to be more vulnerable than large firms.
07:00 Now,
07:01 during
07:02 this pandemic,
07:04 Uh,
07:05 we've heard a lot about a fiscal policy.
07:07 We've heard a lot about monetary policy,
07:09 but an equally powerful policy tool
07:11 that has sustained,
07:13 um,
07:14 uh,
07:15 the,
07:15 the households and the firms
07:18 has been
07:19 very broad-based,
07:21 uh,
07:22 forbearance policies and other
07:25 ways that the financial sector,
07:27 uh,
07:28 has helped.
07:29 Um,
07:30 households and firms maintain,
07:33 uh,
07:33 liquidity
07:34 by,
07:35 uh,
07:37 you know,
07:37 systematically,
07:39 uh,
07:39 delaying.
07:41 Uh,
07:42 repayment of,
07:44 of pre-existing debts.
07:45 Now,
07:46 uh,
07:47 this is,
07:48 it's been a very heterogeneous response both in the timing,
07:52 the nature,
07:53 um,
07:54 as of March of this year,
07:56 about 152 jurisdictions had initiated,
08:00 uh,
08:01 over 2000 COVID-19 response measures related to the banking sector,
08:06 um,
08:07 and
08:09 I think it's also.
08:13 refreshed,
08:15 uh,
08:16 a problem that we had decades ago,
08:18 which,
08:19 you know,
08:20 in the last two decades,
08:21 which we've been,
08:22 we
08:23 globally have been moving towards
08:26 um more convergence.
08:28 Uh,
08:29 in regulation,
08:31 supervision,
08:31 and so on,
08:32 and this,
08:33 this crisis,
08:35 uh,
08:35 has,
08:36 has,
08:36 uh,
08:37 uh,
08:37 set us back on that account as well.
08:41 So,
08:42 uh,
08:42 you know,
08:43 we don't expect to get all the answers here,
08:45 but from this very distinguished group.
08:48 Uh,
08:49 we,
08:49 uh,
08:50 hope to,
08:51 uh,
08:52 uh,
08:53 discuss,
08:54 uh,
08:54 what are some of the building blocks
08:56 that we need to,
08:58 to,
08:58 uh,
08:59 um.
09:01 Um,
09:02 maintain or,
09:03 or improve the health of the financial sector to aid recovery.
09:07 So,
09:08 uh,
09:08 I am going to start
09:10 with,
09:11 um,
09:12 Deputy Governor,
09:13 uh,
09:13 Aisha.
09:15 Um,
09:16 may,
09:17 may,
09:17 may,
09:17 may I call you Aisha?
09:20 Uh,
09:22 Yes,
09:23 please do that.
09:24 OK.
09:25 All right,
09:26 thank you.
09:26 Um,
09:28 uh,
09:29 thanks to the,
09:30 uh,
09:30 uh,
09:30 post 2008 reforms,
09:33 um,
09:34 banking,
09:35 uh,
09:36 uh,
09:36 systems have
09:38 held up
09:38 relatively well,
09:40 um,
09:41 but as I said,
09:42 we've been talking about forbearance,
09:45 um,
09:46 and the importance
09:48 of.
09:49 Uh,
09:50 these measures,
09:51 uh,
09:52 as part of the COVID response,
09:53 and there's a big question also what is the right time
09:57 to exit,
09:58 uh,
09:59 from the COVID-related,
10:01 uh,
10:01 policy measures,
10:03 um,
10:04 in Nigeria,
10:04 as in other countries,
10:06 inflation has been rising.
10:09 So the uh policy mix of when to exit
10:14 would also uh take this into account and,
10:17 and make,
10:18 make shape the,
10:19 the response.
10:20 Could you,
10:20 could you share your views
10:22 on the strategy
10:24 for extending,
10:26 amending,
10:28 or ending the
10:29 COVID response measures and how the policy mix and,
10:33 and
10:34 the regulatory dimension can,
10:36 can be managed.
10:39 Thank you very much and um it's good to be here with you
10:44 this morning or this afternoon,
10:45 depending on where we are.
10:47 Um I think in response to the COVID pandemic,
10:52 It's new and a lot of fiscal,
10:56 monetary,
10:57 and prudential measures
10:59 were put in place
11:01 to
11:02 help
11:03 businesses,
11:04 households,
11:05 and most importantly,
11:06 the financial sector
11:09 preserve resilience and
11:13 ensure that
11:14 the
11:15 negative economic impact
11:18 of this health crisis was short-lived.
11:21 Now,
11:23 One year down the line.
11:26 After
11:27 a vaccine has been vaccine,
11:29 a number of vaccines have been produced,
11:32 they've started to be distributed,
11:35 the
11:36 global supply chains are back up and running,
11:39 perhaps not
11:40 at 1000% yet,
11:41 but they're back up.
11:43 Travels have improved.
11:45 And there's now a focus on recovery.
11:48 The question
11:49 of when,
11:51 first of all,
11:51 if,
11:53 when
11:54 and how
11:55 to exit this,
11:57 you know,
11:57 forbearances becomes a key issue.
12:00 I think one big word that,
12:04 that
12:05 remains with me is uncertainty.
12:08 This is a very uncertain
12:12 environment with which to make this decision.
12:15 You talked about the idiosyncrasies across jurisdictions
12:21 in terms of what was implemented,
12:22 but even today in terms of recovery prospects.
12:26 So on the one hand we have
12:29 many countries that have
12:32 lower infection rates,
12:34 lower death rates.
12:35 We have other countries
12:37 that have a long
12:38 second wave.
12:40 There are new variants.
12:42 All of that
12:43 brings the
12:44 picture of the recovery,
12:46 makes it very uncertain.
12:47 I think withdrawing
12:49 any forbearances or any prudential support
12:53 will be heavily dependent on what we feel about the recovery.
12:56 If we withdraw too soon,
12:59 there will be an impact.
13:02 On the economic
13:04 side,
13:04 we may have a slower recovery.
13:07 If we leave it too long.
13:09 There may be unintended consequences
13:12 and moral hazards from a risk perspective.
13:15 So what are the key factors that we should be
13:17 thinking about or policymakers need to need to consider?
13:22 Balancing the
13:24 objective of having the financial system be at the core of
13:28 the economic recovery
13:31 with preserving
13:34 the sanctity,
13:35 I would say,
13:35 of prudential measures.
13:37 You talked about
13:39 the,
13:39 the masking of the true position on asset quality,
13:43 you know,
13:43 and what forbearance
13:45 does from that respect.
13:48 Determining what the key leading indicators,
13:51 and this will be different for countries,
13:54 it will be different for sectors,
13:56 for
13:57 the obligers,
13:59 the corporate obligers that have been most affected,
14:02 trying to get a sense for where those leading indicators of
14:06 the future are and if that.
14:09 presupposes that they are now ready
14:12 to carry on
14:13 um
14:14 pre,
14:14 pre-COVID levels.
14:16 The availability of capital buffers.
14:20 Um,
14:21 I think globally we can say that going into the pandemic,
14:25 the financial,
14:25 the global financial industry was better capitalized,
14:29 had better
14:30 financial standards indicators,
14:33 you know,
14:33 still retaining some of the policy measures that were implemented
14:38 post the global financial crisis.
14:40 However,
14:43 the
14:44 potential
14:47 Asset quality challenges we may have when we
14:50 withdraw these forbearances will be dependent on the
14:52 ability
14:54 of
14:55 balance sheets,
14:56 financial
14:58 institutions in the emerging and developing economies
15:01 to absorb those losses will be dependent on
15:03 the capital buffers that are available.
15:05 And then finally,
15:07 I would say
15:09 what
15:11 What the policymakers have within their toolkits
15:15 from a maybe countercyclical measure perspective,
15:19 what haven't they deployed yet will be important.
15:22 For instance,
15:23 I know that
15:24 certain countries relaxed,
15:26 you know,
15:27 the general loan laws provisioning as a way to help banks,
15:31 you know,
15:31 preserve capital.
15:34 Some looked at dividend restriction policies to see how those
15:37 capital buffers could be built up and all of that.
15:40 So
15:40 I think a combination of all of these things
15:43 needs to be considered,
15:44 but there's no easy answer.
15:46 It will depend on
15:48 where each jurisdiction is,
15:49 the view of the future,
15:51 how they see the recovery,
15:52 and what point they are in the recovery.
15:55 Thanks.
15:57 Thank you,
15:58 thank you,
15:58 uh,
15:58 um,
15:59 and let me just quickly press you,
16:02 you said
16:03 Uh,
16:04 banking sector at the center of their recovery,
16:07 which is,
16:08 I,
16:08 I think,
16:09 Uh,
16:10 a,
16:10 a very important statement.
16:13 Do you feel that the banks will be well placed to
16:18 Uh,
16:19 sustained credit
16:21 to the private sector,
16:23 uh,
16:23 new credit
16:24 that hopefully rather than evergreening,
16:27 uh,
16:28 pre-existing loan,
16:29 how,
16:29 what,
16:30 what,
16:30 what,
16:30 how do you see that?
16:32 Very briefly,
16:33 so I can turn to,
16:34 yes,
16:34 very briefly,
16:35 I think that they will be well placed.
16:38 The challenge may be in the supply of such good credit.
16:43 Um,
16:43 there's a role for
16:45 expanding the balance,
16:46 expanding the credit portfolio
16:48 in bringing down the NPLs,
16:51 but
16:51 you will get to a point where you have,
16:54 um,
16:54 um,
16:55 you have exhausted what we would call good credit.
16:57 So yes,
16:58 they are positioned.
16:59 I believe their position and I believe that
17:02 they have been more resilient going into this crisis because of,
17:05 you know,
17:06 the position they were in going in.
17:07 I think they've been more resilient thus far.
17:12 Thank you.
17:13 Uh,
17:14 Tobias,
17:15 uh,
17:15 I,
17:16 I am going to,
17:17 uh,
17:18 uh,
17:19 uh,
17:20 turn to you now and,
17:21 and,
17:22 and,
17:22 and,
17:23 you know,
17:24 uh,
17:26 you recently,
17:28 uh,
17:28 guided the,
17:29 the,
17:30 uh,
17:31 April,
17:32 uh,
17:33 global financial stability report,
17:36 uh,
17:37 and.
17:39 Again,
17:39 like,
17:40 like,
17:41 uh,
17:42 Aisha was saying,
17:43 uh,
17:43 the report does flag the,
17:45 you know,
17:46 asynchronous,
17:47 uh,
17:48 and divergent path,
17:49 especially between advanced and emerging market and developing economies and,
17:54 and the daunting,
17:55 uh,
17:56 uh,
17:57 challenges.
17:58 Can you,
18:00 uh,
18:00 share your views how,
18:02 uh,
18:03 this poses.
18:05 Uh,
18:06 financial stability risks,
18:08 uh,
18:09 in the emerging markets,
18:11 um,
18:12 uh,
18:13 what kinds of risks,
18:15 uh,
18:15 and
18:17 Depending on the risk,
18:18 of course,
18:19 what policymakers
18:21 in,
18:21 in emerging markets in developing countries should be doing or thinking about.
18:28 Thank you,
18:28 Carmen.
18:29 Uh,
18:29 thanks so much for having me on this,
18:31 uh,
18:31 distinguished,
18:32 uh,
18:32 panel.
18:33 Um,
18:34 and,
18:34 um,
18:35 while we are,
18:36 uh,
18:36 neighbors from across the street,
18:37 I don't believe,
18:38 uh,
18:39 we have been able to meet,
18:41 uh,
18:41 since you joined the World Bank due to this,
18:43 uh,
18:44 terrible,
18:44 uh,
18:44 pandemic,
18:45 uh,
18:46 that continues to,
18:47 uh,
18:47 to,
18:48 uh,
18:48 cost the lives of so many.
18:50 Um,
18:51 we fully,
18:52 uh,
18:52 share,
18:52 uh,
18:53 your worries about emerging market and developing
18:56 economies from a financial stability perspective.
18:59 And we really flag
19:01 vulnerabilities in three areas.
19:04 And uh so when we look across the large universe of EMDE countries,
19:09 we see
19:10 uh uh a relative,
19:12 uh uh more or less vulnerabilities in those three areas.
19:16 So
19:16 one is the sovereign sector,
19:18 uh,
19:19 one is the banking sector,
19:21 and,
19:21 uh,
19:22 the other,
19:22 the corporate sector.
19:24 Um,
19:24 so starting with the sovereign sector,
19:27 sorry,
19:27 sovereign banks and corporates,
19:29 so starting with the,
19:30 uh,
19:30 sovereign sector,
19:32 uh,
19:32 already many,
19:33 uh,
19:34 low income countries and emerging markets went into the crisis
19:38 with elevated debt levels.
19:40 Um,
19:40 so,
19:41 uh,
19:42 you know,
19:43 just cited that 53 out of 74
19:47 DSSI countries
19:49 have debt in distress or close to distress,
19:52 uh,
19:52 prior to the crisis in the somewhat larger uh low income country universe,
19:57 uh,
19:57 you,
19:57 you had about 50%,
19:59 so the situation has worsened,
20:01 uh,
20:02 but,
20:02 um,
20:03 Uh,
20:03 uh,
20:04 it was already,
20:04 uh,
20:05 worrisome,
20:05 uh,
20:06 going into the crisis,
20:07 and,
20:07 uh,
20:08 we have indeed seen,
20:09 uh,
20:10 countries,
20:10 uh,
20:11 restructure,
20:12 uh,
20:12 and default,
20:13 and of course,
20:14 uh,
20:15 the World Bank,
20:16 uh,
20:16 together with the IMF,
20:18 um,
20:19 and the G20
20:20 have done a great efforts to improve,
20:23 uh,
20:23 the restructuring of sovereign debt.
20:26 Uh,
20:26 but it remains to be seen how,
20:28 how effective that is in terms of addressing,
20:31 uh,
20:31 the problems,
20:32 uh,
20:32 going forward.
20:33 Uh,
20:33 these are still early days in,
20:35 in some sense on the sovereign,
20:37 uh,
20:37 side.
20:38 Now,
20:38 uh,
20:39 one of the most striking charts in the GFSR,
20:43 uh,
20:43 is on,
20:44 uh,
20:45 the sovereign,
20:46 uh,
20:46 debt that is being held by
20:49 banks in emerging markets.
20:51 Um,
20:52 so,
20:53 uh,
20:54 clearly emerging markets have increased,
20:56 uh,
20:57 their sovereign debt,
20:58 and,
20:59 uh,
20:59 about 60% of that increase
21:02 has ended up on bank balance sheets.
21:04 Uh,
21:05 so here I'm talking about,
21:06 uh,
21:07 local currency denominated debt.
21:09 Uh,
21:09 for hard currency that,
21:10 of course,
21:11 foreign investors are more important,
21:13 but for local currency,
21:15 uh,
21:15 debt.
21:16 Uh,
21:16 it's primarily,
21:18 uh,
21:18 the domestic banks,
21:20 uh,
21:20 that,
21:21 uh,
21:21 are,
21:21 are the buyers,
21:23 and,
21:23 um,
21:24 so if you imagine,
21:26 uh,
21:26 that,
21:27 uh,
21:27 sovereign,
21:28 uh,
21:28 distress
21:29 will become,
21:30 uh,
21:31 more acute in some countries,
21:34 and,
21:34 uh,
21:35 it was already mentioned that some banks are
21:38 in,
21:38 in,
21:39 in,
21:39 in,
21:39 in a tight spot.
21:41 Uh,
21:41 so there you have the sovereign bank Nexus,
21:44 that is an amplifier,
21:46 uh,
21:46 for,
21:47 uh,
21:47 these,
21:48 uh,
21:48 vulnerabilities.
21:50 Um,
21:50 and then,
21:51 uh,
21:51 the third,
21:52 uh,
21:52 element
21:53 are the corporations.
21:56 And
21:57 of course we do see weaknesses in the corporate sector
22:02 in many countries.
22:04 So in this GFSR we present
22:06 a kind of corporate stress test for about 20,000 corporations
22:10 in advanced economies and emerging markets.
22:14 Um,
22:14 and earlier we had done the global bank stress test,
22:17 uh,
22:18 across about 30 countries
22:20 also covering emerging markets
22:23 and advanced economies.
22:24 And for both,
22:26 uh,
22:26 the bank and the corporate stress tests,
22:28 the base,
22:29 the bottom line is that
22:31 the advanced economies
22:32 look fairly good,
22:34 but there are many,
22:36 many red flags in emerging markets
22:39 and uh even more uh vulnerabilities in low income countries.
22:43 And uh let me,
22:45 let me give you um uh some of the reasons uh for those weaknesses.
22:50 Um,
22:51 so one is uh the fiscal support
22:53 that has been provided uh throughout this crisis,
22:57 um,
22:57 that uh Carmen already mentioned.
23:00 Um,
23:00 so
23:01 in many countries we have seen
23:03 Economic collapses of a magnitude
23:07 not experienced in 100 or sometimes 200 years.
23:10 So the UK has
23:12 very long economic data
23:14 and you have to go back
23:16 to,
23:16 uh,
23:17 uh,
23:18 more than 200 years to see such a sharp economic contraction.
23:22 But advanced economies were able to provide a
23:25 very large fiscal support.
23:27 On average,
23:28 that's 15%
23:30 of fiscal support
23:32 in 2020.
23:34 Emerging markets
23:35 only did about half of that,
23:37 about 7 to 8% on average.
23:40 And once you go to low income countries,
23:42 the fiscal support is only about 1 to 2%.
23:46 And of course
23:47 this is reflective of the fiscal capacity
23:51 of the countries.
23:52 And um so
23:54 um
23:55 in advanced economies,
23:57 this economic scarring,
23:59 bankruptcies,
24:00 layoffs,
24:01 uh,
24:02 scarring
24:03 of the physical and human capital stock
24:06 has been contained
24:07 through this massive fiscal support.
24:11 But much less of that was able to be provided
24:15 in emerging markets and even less in low income countries,
24:19 so we certainly expect
24:21 more distress
24:22 and more scarring,
24:24 and it is very asynchronous.
24:27 It is very much correlated with income.
24:31 So in our baseline forecasts,
24:34 when you look at output gaps relative to pre-crisis trends,
24:39 so relative to what we had forecasted
24:42 back in January 2020 before the pandemic hit,
24:46 uh,
24:47 say out to
24:48 3 years,
24:49 uh,
24:50 the end of 2023.
24:52 Um,
24:53 you know,
24:53 for some countries,
24:54 those output gaps will be closed entirely.
24:57 China is already closed,
24:59 the US is expected to be closed.
25:01 Many advanced economies
25:03 are going to get closed,
25:04 not,
25:04 not entirely closed,
25:06 they will not be entirely able to close the output gap,
25:10 but they're going to be,
25:11 you know,
25:11 fairly narrow.
25:12 But then if you go down,
25:14 uh,
25:14 the income spectrum in emerging markets,
25:16 the
25:17 Expectation of gaps is much larger
25:20 and the low income countries even larger,
25:23 and so in that sense this crisis
25:26 is uh uh uh uh a a big drag on convergence,
25:31 and that is ultimately the source of the financial stability concerns,
25:36 um.
25:37 So,
25:38 uh,
25:38 to finish up my,
25:39 uh,
25:40 my remarks here,
25:41 so,
25:41 uh,
25:42 let me just turn to the regulatory forbearance question.
25:45 Um,
25:46 so,
25:47 um,
25:48 it is absolutely necessary
25:50 to
25:51 ease
25:52 regulatory requirements.
25:54 Uh,
25:55 use the flexibility built into regulations
25:58 and into accounting standards
26:01 in order to allow
26:02 the banks to absorb the shocks.
26:07 And
26:08 this again was one of the biggest economic shocks we have seen.
26:12 Uh,
26:12 the key question,
26:13 uh,
26:14 going forward is,
26:15 uh,
26:16 how to exit and when to exit,
26:18 and
26:19 as,
26:19 uh,
26:19 the recovery,
26:21 uh,
26:21 will take a long time for many,
26:24 uh,
26:24 of the EMDEs,
26:26 um,
26:27 you know,
26:28 this might also take a long time,
26:30 uh,
26:30 to be able
26:31 to relax those,
26:32 um,
26:34 Uh,
26:34 flexibilities,
26:36 um,
26:36 but that does pose the question of transparency of the banks,
26:40 so in our view,
26:42 it is important,
26:43 uh,
26:44 to
26:45 keep,
26:45 uh,
26:45 banks transparent,
26:47 um,
26:48 so,
26:48 um,
26:49 you know,
26:49 forbearance can be done in different ways,
26:52 and,
26:53 uh,
26:53 you don't sort of want to hide,
26:55 uh,
26:56 the amount of NPLs on bank balance sheets,
26:59 uh,
26:59 because that is going to inhibit recovery,
27:02 uh,
27:02 down the line.
27:04 Uh,
27:04 so yes,
27:04 you want to use the regulatory flexibility,
27:07 uh,
27:08 you want to,
27:09 uh,
27:09 uh,
27:10 push the banks to lend to help economic recovery,
27:14 but
27:14 no,
27:14 you don't want,
27:15 you don't want to hide losses in some sense,
27:18 so,
27:18 so transparency is very key.
27:20 Uh,
27:21 in order to get out of the crisis,
27:23 so it's a,
27:23 it's,
27:24 it's a bit of a balancing act,
27:26 uh,
27:26 in that sense,
27:27 uh,
27:28 but we certainly do expect that,
27:30 uh,
27:30 losses will accumulate
27:32 and,
27:33 uh,
27:33 that,
27:33 that can be a headwind to the recovery because bank lending
27:38 might well be inhibited.
27:40 Let me stop here.
27:43 And at the very,
27:44 very end,
27:45 actually,
27:45 you
27:46 hit the question that I was going to pose to you,
27:48 which is the same,
27:50 very related to,
27:51 to what I asked,
27:52 uh,
27:52 Aisha,
27:53 which is,
27:54 you know,
27:54 uh,
27:57 What,
27:57 what is the
27:59 between zombie
28:00 clones.
28:02 If
28:03 these arise and this is where I'm,
28:05 I'm coming to Swaviathan,
28:08 uh,
28:09 and,
28:10 uh,
28:11 large holdings of government debt,
28:12 you know,
28:13 I think a big question is,
28:14 of course,
28:15 will there be
28:17 space,
28:18 uh,
28:18 for,
28:18 for new,
28:19 new lending,
28:20 uh,
28:20 Swamiathan,
28:21 um,
28:22 you know,
28:23 restructuring,
28:24 uh,
28:26 it
28:27 can be a,
28:27 uh,
28:28 an effective tool.
28:30 To preserve businesses that are liquid.
28:35 But are still
28:37 solvent.
28:38 Um,
28:39 at the same time,
28:40 it's very difficult
28:42 to know
28:43 and separate insolvency from,
28:46 uh,
28:46 liquidity with
28:48 imperfect information and a great deal of uncertainty.
28:51 So,
28:52 you know,
28:54 forbearance can also
28:56 give rise to
28:57 a proliferation of,
28:59 of zombie firms
29:00 and
29:02 Something Tobias also mentioned that
29:04 of course delays in recognition
29:08 uh of problem assets
29:10 uh historically has meant
29:13 delayed
29:14 uh outcomes and,
29:16 and delayed recovery,
29:18 um,
29:19 so,
29:20 um,
29:21 you're,
29:21 you're coming now
29:24 at.
29:25 You know,
29:25 here also,
29:26 we'd love to hear your views on the
29:28 country that's
29:30 going through the,
29:31 the,
29:31 the,
29:31 the worst,
29:33 uh,
29:33 of the COVID pandemic at this very moment,
29:37 uh,
29:37 with the current wave being,
29:39 uh,
29:40 uh,
29:41 the worst by a good margin.
29:43 Um,
29:44 can you
29:45 please share your experience
29:47 with maintaining an information system.
29:51 Um,
29:53 compiling data on the status of restructured,
29:58 uh,
29:58 rescheduled loans,
30:00 um,
30:01 and
30:02 say something also about the scale
30:05 of restructuring and rescheduling,
30:08 uh,
30:09 you know,
30:09 given the challenges and uncertainty that,
30:12 that we're
30:13 facing,
30:14 uh,
30:16 for,
30:16 for the banks to,
30:18 to ensure that
30:19 indeed we avoid the zombie.
30:22 Uh,
30:22 the zombie loan,
30:24 uh,
30:25 problem.
30:28 Uh,
30:28 thank you,
30:29 Carmen.
30:29 Uh,
30:30 thanks for,
30:30 uh,
30:31 having me here.
30:32 It's uh,
30:32 it's my privilege to be part of this,
30:34 uh,
30:34 panel of distinguished members.
30:36 It was a pleasure listening to my co-panelists.
30:39 And,
30:40 uh,
30:40 I think,
30:41 uh,
30:42 to come to your question pretty straight,
30:45 uh,
30:45 are we
30:46 in,
30:47 in,
30:47 in the name of forbearance and then accommodation,
30:50 are we
30:51 Uh,
30:51 encouraging formation of the zombie firms.
30:54 Are we,
30:55 are we allowing NPL to
30:57 build up?
30:58 Are we kicking the can down the road?
31:00 Uh,
31:02 what is the concern that is,
31:04 that is part of this question.
31:06 So at least from my,
31:07 my personal experience,
31:09 uh,
31:10 uh,
31:10 in,
31:10 in,
31:10 in State Bank of India,
31:12 and as well as the country's experience,
31:15 uh,
31:15 I would say that see this what we saw like that they said.
31:21 Uh,
31:21 this is never seen at least for a century,
31:23 so obviously the responses have to be very
31:26 strong and very deep and very broad-based.
31:28 So we don't,
31:29 uh,
31:30 when,
31:30 when you have to extend the
31:32 helping hand,
31:33 the government and the regulators have to put the best possible,
31:36 uh,
31:37 things in place to ensure that
31:39 whatever it takes to keep the economy going has got to be done.
31:43 Whatever it takes to keep the businesses alive
31:46 has got to be done so that
31:49 a health crisis does not become a full blown financial crisis
31:53 or an employment crisis or a livelihood crisis.
31:56 So that is what I think the world over the countries have done,
31:59 and India is no exception.
32:01 Uh,
32:02 and of course,
32:02 as you rightly mentioned that we are at the,
32:04 uh,
32:05 right now,
32:05 uh,
32:06 in the,
32:06 in a second wave which is turning out to be,
32:09 uh,
32:10 deadlier than the first wave,
32:11 but of course,
32:12 uh,
32:12 that is something which the government is fully engaged on
32:15 and I'm sure that uh over the next couple of weeks we will
32:18 be able to flatten this curve and then get back to normalcy,
32:22 uh,
32:22 but uh keeping that aside,
32:24 coming back to the question.
32:25 Uh,
32:26 is in terms of this forbearance,
32:28 this restructuring,
32:29 this rescheduling,
32:30 is it encouraging
32:32 postponement of the recognition of stress in the system?
32:35 Uh,
32:36 I would like to respond in two parts.
32:38 See,
32:38 the first part,
32:39 as what we did as the leading bank of this country,
32:43 um,
32:44 which was of course was also followed by
32:46 the other Indian banks later on,
32:48 that when the 6 months of moratorium,
32:50 the forbearance was given,
32:52 the asset standstill
32:54 was given by RBI
32:55 and later on by the honorable Supreme Court where
32:58 another almost 6 months of standstill was provided.
33:01 Uh,
33:02 what we did was that we didn't stop our NPA clock.
33:06 Uh,
33:06 while,
33:06 of course,
33:07 there was a forbearance in terms of stamping the accounts
33:09 as NPA or irregular or overdue on the main system.
33:14 Uh,
33:14 we,
33:14 of course,
33:15 for the purpose of both the generation of regulatory reports as well as
33:21 various reports
33:22 have a subsidiary system to which we transfer the data every month end.
33:26 So
33:26 we decided to make use of this subsidiary system
33:29 wherein
33:30 we recognized the NPLs as if there was no forbearance,
33:34 as if there was no Supreme Court audit.
33:37 So that showed us the true picture of
33:39 accounts that would have slipped into NPLs but for
33:43 the moratorium given by the regulator or but
33:45 for the standstill provided by the Supreme Court.
33:48 So
33:48 we practively from quarter 1 onwards of last year,
33:52 we started disclosing this number to the market
33:55 with a twin purpose.
33:57 One is that
33:59 all the stakeholders are fully aware as to what
34:01 is the stress building up in the system.
34:03 And the second
34:04 is that internally also
34:06 people don't give up the culture of following up for recovery.
34:11 Otherwise,
34:11 in case if there is a standstill system of about 3 to 6 months,
34:14 people may forget
34:16 the repayment culture may get forgotten.
34:18 So we continue to
34:20 track moratoriums don't exist,
34:22 but of course that was in a subsidiary system that helped us in terms of.
34:26 Generating adequate MIS
34:29 to ensure
34:30 that the accounts are followed up
34:34 with utmost sincerity in terms of its serviceability.
34:38 And the second thing is that it also helped us in terms of
34:41 to whom we should be extending the restructuring and rescheduling.
34:45 It helped us in terms of identifying
34:47 businesses that are otherwise viable
34:49 but are undergoing a
34:51 temporary liquidity crisis,
34:53 as you rightly said,
34:54 it is difficult to make a judgment in terms of is
34:57 it a solvency crisis or it is a liquidity crisis.
35:00 If it is a solvency crisis,
35:02 then we'll be pushing the problem down the road,
35:04 which is not something which we are interested in.
35:07 Instead,
35:07 what we did,
35:08 we supported such of those businesses
35:11 which are genuinely into difficulty
35:14 on account of the liquidity crisis that is caused by the pandemic,
35:18 so that we choose the right customers in sending our assistance.
35:22 The third was the governmental relief that was provided
35:25 in terms of
35:27 The guaranteed emergency line of credit
35:30 which was lent through all the financial institutions
35:33 which helped
35:34 overcome
35:35 any liquidity crisis for all the
35:38 initially for all the micro what we call as MSME micro,
35:42 small and medium enterprises,
35:44 which was later on extended to other trusted sectors.
35:47 So
35:47 all these
35:48 steps together
35:50 helped in terms of
35:52 ensuring
35:53 that the restructuring work.
35:55 It was not as bad as
35:57 as it was estimated in the beginning.
35:59 If you would recall,
36:00 the rating agencies were estimating
36:03 that the restructuring book,
36:05 the stress book,
36:06 could be in the region of 8 to 10% of the total loan book
36:09 of all the
36:10 lending institutions.
36:12 That was the estimate the rating agencies were putting out
36:15 somewhere in June,
36:15 July of last year.
36:17 But at the end of the day,
36:18 if you take a quick take on what is the position as
36:21 at the end of March 2020 in the Indian banking system.
36:24 The restructuring book is not even 2%,
36:27 so which means that
36:28 the country has been able to manage the financial sector
36:33 much better than what it was thought to be.
36:35 Well of course on the healthcare side,
36:37 the infrastructure would have would have had
36:39 its difficulties in terms of fighting.
36:42 But at least the financial sector,
36:45 to our mind has been largely managed better
36:48 and banks like us,
36:50 because we could keep the proper MIR system in place
36:53 that we could,
36:54 we could have the
36:56 System in which
36:57 these accounts continue to get tracked.
36:59 So the
37:00 reversal back to pre-COVID times
37:03 is something which is happening without much
37:05 of a difficulty when these forbearances,
37:08 even when they get
37:10 rolled back,
37:11 we are pretty confident
37:13 that we should be able to manage the
37:15 rollback in
37:16 much more
37:17 organized manner
37:19 than what it was thought to be.
37:21 I think I will end that.
37:22 Maybe I can take if there are any follow on questions for.
37:26 Well,
37:26 what I'd like to do is
37:29 now go back to all of you,
37:31 but
37:32 keep your answers really short,
37:35 uh,
37:35 so that we have time to open up also for the floor.
37:39 I'm gonna reverse order and,
37:41 and,
37:42 uh,
37:42 sorryathan I'm gonna,
37:43 uh,
37:44 come back to you and,
37:45 and,
37:46 you know.
37:49 Ask you,
37:51 are there
37:52 particular tools
37:54 that in the past
37:56 have been
37:58 very helpful
37:59 in resolving,
38:02 uh,
38:03 NPLs,
38:04 uh,
38:05 you know,
38:05 are there
38:07 particular measures,
38:08 um,
38:10 that,
38:11 that.
38:13 You think will be,
38:14 uh,
38:16 once again,
38:17 uh,
38:18 useful,
38:18 notwithstanding the,
38:20 the
38:21 You know,
38:21 your narrative that,
38:23 that,
38:23 that the damage
38:25 is,
38:25 was not as severe
38:27 as,
38:27 as one thought,
38:28 but,
38:29 uh,
38:29 what kinds of tools
38:32 Um,
38:33 uh,
38:33 do you,
38:34 do you,
38:34 do you favor?
38:37 Yeah,
38:37 absolutely.
38:38 Uh,
38:39 I think,
38:39 uh,
38:40 there are about 4 or 5 things that we do,
38:42 uh,
38:42 when we,
38:43 when we pursue resolution.
38:45 One is,
38:45 of course,
38:45 the normal recovery process that we pursue with the,
38:48 with the defaulting borrowers.
38:50 Uh,
38:50 that's something which keeps happening always.
38:52 But the second most popular thing
38:55 is in terms of
38:57 one-time settlements.
38:58 What we call compromises are one-time settlements where we take a haircut.
39:03 These negotiations are generally bilateral
39:06 for the businesses that have genuinely suffered.
39:09 Losses,
39:10 uh,
39:10 when the entrepreneur comes up
39:12 to the institution
39:13 proposing a compromise or a one-time settlement,
39:16 we look at it more favorably because
39:18 uh we we have been normally handling the usual course,
39:21 but in the last one year,
39:23 uh,
39:23 the losses have been
39:25 unusual.
39:26 So as the entrepreneurs come back to us in terms of settling.
39:31 Which we would like to pursue
39:33 more favorably.
39:34 That is something which can get us money quickly
39:37 and also
39:38 allow us with a little amount of haircut
39:40 and also
39:41 avoids in terms of a litigation cost.
39:44 The third
39:46 popular methodology is of course resorting to a legal process.
39:49 Which could be what we call the debt recovery tribunals
39:53 which are constituted under the Security Interest Act in the country
39:57 and
39:58 the recent thing that has been
40:00 very popular in the last 3 years has been the insolvency and bankruptcy court
40:05 where we take the cases to the National Company Law Tribunal.
40:08 So these,
40:09 these recoveries account for about 20% each,
40:12 which means the
40:14 legal process of recovery
40:16 accounts for about 40%,
40:17 while the normal recoveries
40:19 account
40:20 for about
40:21 and the compromises
40:23 in general
40:24 account for about 20% of the recovery.
40:25 That's a general distribution that we pursue.
40:28 The legal process,
40:29 of course,
40:30 in these times of pandemic,
40:31 it is a little difficult to pursue.
40:34 One is of course because of the pandemic,
40:36 even the judiciary
40:38 is functioning with 50% strength,
40:40 25% strength.
40:41 There are not many regular hearings,
40:42 so it's not going to be very helpful unless the full scale normalcy gets restored,
40:47 but we will continue to use them very selectively.
40:50 The two new initiatives I want to very quickly mention,
40:53 one is of course under the insolvency and bankruptcy code
40:56 today we have a pre-pack.
40:58 Which of course the corporate debtor can prepare for himself
41:01 and bring it up
41:03 to the lenders
41:04 for an acceptance
41:05 which envisages
41:07 a complete
41:08 resolution
41:09 in 90 to 120 days.
41:11 So this is something which has come as a new tool
41:13 we would like to experiment on that.
41:15 This is,
41:16 this is a unique data in position,
41:18 creditor in control kind of a model we would like to use
41:22 and then see how far
41:23 we can
41:24 limit the time it takes to resolve things legally.
41:28 The second is of course
41:29 what we call a bad bank.
41:31 A national asset reconstruction company is in the offing,
41:35 and the legislative framework is all getting in place at this point in time.
41:39 Uh,
41:40 so we would soon have this formation very soon in about 3 to 6 months.
41:44 This particular mechanism of a national
41:47 asset recovery.
41:48 A company
41:50 asset reconstruction company,
41:52 and an asset management company structure is what is expected to
41:55 be in play in the next 3 to 4 months.
41:58 This will handle the large value corporate debt
42:02 which are
42:04 by way of an aggregation.
42:05 So this is again another unique.
42:07 And
42:08 very helpful tool that is coming into our fold.
42:11 So we're going forward,
42:12 apart from the usual things that we do,
42:15 we have always been doing in the past,
42:17 these two tools in terms of the IBC prepack
42:20 and the bad bank transfer are two tools we think that will come in handy
42:25 as we go forward.
42:28 Uh,
42:30 to be,
42:30 to be honest,
42:31 I,
42:31 I,
42:31 I'm going to
42:32 put a very similar,
42:34 uh,
42:35 question to you,
42:36 uh,
42:37 you know,
42:38 I,
42:38 I mean,
42:39 you,
42:39 you're,
42:39 you're.
42:40 Uh,
42:42 work
42:42 has cut across
42:44 many countries' problems and of course they're all,
42:47 you know,
42:47 have their own idiosyncrasy,
42:49 so,
42:49 you know,
42:50 it's not a cookie cutter,
42:51 uh,
42:52 approach,
42:52 but
42:53 in terms of
42:54 your own assessment,
42:55 what are,
42:56 what do you think
42:57 may be some of the most useful
42:59 approaches and if you could also touch on the issue of,
43:03 of prudential policy measures,
43:05 uh,
43:06 as well in,
43:07 in resolving,
43:08 uh,
43:09 NPLs.
43:14 Yeah,
43:14 thanks so much,
43:15 um.
43:16 Let me,
43:17 uh,
43:17 let me start by pointing out,
43:19 uh,
43:19 that,
43:19 uh,
43:20 we conduct,
43:21 um,
43:21 uh,
43:22 regular FSAs,
43:23 uh,
43:23 financial sector assessment programs,
43:26 uh,
43:26 together with the World Bank,
43:28 uh,
43:28 where we take a very deep dive look at,
43:31 um,
43:32 at the banking systems,
43:34 uh,
43:34 and where we,
43:35 uh,
43:36 uh,
43:36 provide very granular,
43:38 uh,
43:38 recommendations,
43:40 uh,
43:40 in,
43:41 in general.
43:42 And,
43:43 uh,
43:43 I,
43:44 I've in preparation of this panel,
43:45 I looked back to some of those recommendations uh in the FSAs and uh
43:50 uh
43:51 they,
43:51 they generally look uh very fresh even though,
43:54 uh,
43:54 of course,
43:55 uh they were done uh prior to,
43:57 to the pandemic.
43:58 So,
43:59 um,
44:00 you know,
44:00 NPL resolution is certainly,
44:02 uh,
44:03 very high on the agenda.
44:04 Uh,
44:05 we have seen,
44:05 uh,
44:06 in countries,
44:07 uh,
44:07 that have created mechanisms for NPL resolution.
44:12 Uh,
44:12 that,
44:13 uh,
44:13 uh,
44:14 involves um
44:16 You know,
44:17 investors,
44:17 uh,
44:18 uh,
44:18 uh,
44:18 a microcosm of,
44:20 of firms that are resolving NPLs,
44:23 that is
44:24 extremely helpful in getting NPLs down.
44:29 Um,
44:30 secondly,
44:31 uh,
44:31 loan loan classification and provisioning,
44:34 uh,
44:35 of the banks
44:36 is very much first order.
44:38 This is very closely tied to accounting issues,
44:41 of course,
44:41 IFRS 9.
44:44 Uh,
44:44 has been,
44:45 uh,
44:45 phased in,
44:47 uh,
44:47 and,
44:48 uh,
44:48 that has been,
44:49 uh,
44:49 slowed down,
44:50 the phase-in has been slowed down in some countries due to the pandemic,
44:54 uh,
44:54 but I would look at,
44:56 at those,
44:56 uh,
44:57 accounting standard,
44:58 uh,
44:58 changes as an opportunity,
45:00 uh,
45:01 to have,
45:02 uh,
45:02 a more transparent,
45:03 more forward looking,
45:05 and generally better,
45:07 better system,
45:08 uh,
45:08 to account for losses,
45:09 uh,
45:10 in a forward-looking,
45:11 uh,
45:11 manner.
45:12 Um,
45:13 of course,
45:14 uh,
45:15 in,
45:15 in many countries where we help,
45:17 uh,
45:17 with,
45:18 uh,
45:18 systemic banking crisis,
45:20 uh,
45:21 uh,
45:21 an AQR and,
45:22 and asset quality review is,
45:24 is the first thing that we do because,
45:26 um,
45:27 You know,
45:27 you,
45:28 you really have to understand what the state is,
45:30 what the true uh economic
45:32 state of the balance sheets of the banks are.
45:34 And,
45:35 uh,
45:35 so that is the fundamental trade-off that I,
45:38 I,
45:38 that I mentioned earlier.
45:39 So,
45:40 um,
45:41 uh,
45:41 relaxing,
45:42 uh,
45:42 the regulatory
45:44 uh constraints to some extent can be helpful.
45:47 What we prefer is to use the flexibility that is built into the regulations
45:52 and into the accounting standards,
45:54 uh,
45:54 for example,
45:55 in terms of debt moratorium.
45:57 Um
45:58 You know,
45:58 as opposed to just relaxing regulations,
46:02 um,
46:02 but
46:03 in,
46:03 in either case it is,
46:05 it is key to get back to a place
46:08 where transparency
46:10 is restored so that the market policymakers
46:14 and the general public can understand what the health of the banking system is.
46:19 Um,
46:20 you know,
46:20 of course,
46:21 prompt corrective action in,
46:23 uh,
46:23 supervision is first order.
46:25 We,
46:25 we often see weaknesses,
46:27 uh,
46:27 in that,
46:28 uh,
46:29 regard,
46:29 and in this,
46:30 uh,
46:31 in this environment,
46:32 uh,
46:32 this is,
46:32 of course,
46:33 uh,
46:33 very much first order.
46:35 Uh,
46:35 and finally,
46:36 the shadow banking system,
46:37 uh,
46:38 is,
46:38 uh,
46:38 large in many countries,
46:40 uh,
46:40 so the banks are a problem,
46:42 but,
46:42 uh,
46:42 banks oftentimes have exposure to non-banks,
46:45 uh,
46:45 which are less,
46:47 uh,
46:47 string stringently,
46:49 uh,
46:49 supervised,
46:51 and,
46:51 uh,
46:52 in those sectors we have also seen,
46:54 uh,
46:54 quite a bit of stress,
46:55 uh,
46:55 some of that already occurred prior to the pandemic
46:58 and has been,
46:59 uh,
47:00 made that much worse,
47:01 uh,
47:02 in the pandemic,
47:03 um.
47:04 So,
47:05 uh,
47:05 let me just,
47:06 um,
47:07 uh,
47:08 pitch,
47:08 uh,
47:08 one paper that,
47:10 uh,
47:10 the IMF put out,
47:12 uh,
47:12 uh,
47:13 uh,
47:14 last year,
47:15 uh,
47:16 just before the pandemic,
47:17 uh,
47:18 which is on systemic banking crisis,
47:20 and that is really about managing
47:22 NPLs,
47:24 managing,
47:25 getting out of crisis,
47:26 and it's,
47:27 it's very practical and,
47:29 and very relevant to this discussion.
47:32 Thank,
47:33 thank,
47:33 thank you,
47:34 uh,
47:34 Mattis.
47:36 Um,
47:37 Aisha,
47:38 um,
47:38 uh,
47:39 very,
47:39 in very similar spirit,
47:41 uh,
47:41 uh,
47:43 how are the Nigerian banks.
47:46 Uh,
47:47 preparing.
47:49 To handle a potential increase.
47:52 In NPLs
47:53 including
47:55 risks,
47:56 uh,
47:57 from cross-border,
47:59 uh,
48:00 operations,
48:01 uh,
48:02 or,
48:02 you know,
48:03 operations in subsidiaries.
48:08 Thank you,
48:08 Carmen.
48:09 I think that uh we should always start from the first base,
48:13 which is
48:14 sound risk management and corporate governance
48:17 practices.
48:19 Um,
48:19 that remains,
48:21 you know,
48:21 the age-old
48:23 um
48:24 key
48:25 strategy
48:26 to reducing NPLs.
48:29 Um,
48:29 of course,
48:30 the restructurings have their place.
48:32 And
48:33 all of the other options that we put on the table
48:37 earlier that the State Bank of India is working on.
48:42 And from a policy perspective,
48:44 we've introduced one or two
48:46 initiatives.
48:47 One was the Global
48:49 standing order policy which Allows banks to
48:56 widen the horizon in terms of the sources of repayment.
49:00 So the sources of repayment for an obliger can go beyond
49:05 that financial institution
49:07 to go
49:08 across the financial industry and financial other financial assets.
49:13 Last year we also strengthened
49:15 the legal framework for the Banking Act.
49:18 The Banks and Other Financial Institutions Acts of 2020
49:23 introduces a credit tribunal
49:25 that allows
49:27 banks
49:28 greater enforcement,
49:30 quicker recovery.
49:32 And that is a,
49:32 is a huge deterrent as well for
49:36 obligers that will be willfully,
49:38 um,
49:39 you know,
49:39 defaulting.
49:41 Of course,
49:42 enhanced credit risk management system is very important
49:47 along with,
49:48 so in terms of having a system that can track obligers and their
49:53 asset quality across the industry.
49:56 Help
49:57 to reduce the incidence of,
49:59 you know,
49:59 going from one bank to the other,
50:01 you know,
50:02 in terms of poor loan policies.
50:04 We're also looking at how we can use data to improve the credit origination process
50:09 by working with other regulators
50:12 to provide a broad base of information
50:16 that banks can use in their credit decision making.
50:20 It has been applied by a lot of
50:23 financial technology companies,
50:24 etc.
50:25 but we find it,
50:27 it has some good use and good applicability even in traditional banks.
50:31 This strengthening supervisory practices as well will be very important.
50:36 I think one of the things that COVID has taught us.
50:39 As what has brought to fore has not taught us
50:41 because I think as supervisors we saw the role of
50:45 regulatory technology,
50:46 supervisory technology in our practices,
50:48 but we were not as
50:50 quick
50:50 to implement these areas.
50:53 And so I think going forward,
50:56 Policymakers in prudential space will need to make that a
50:59 way of life and not just a business continuity response
51:03 on the cross-border
51:05 area.
51:07 Luckily again last year we came up with a framework for cross-border supervision,
51:12 and what that was trying to do was to converge
51:17 to the highest standards,
51:19 and supervisory practices across.
51:22 The continent,
51:24 for example,
51:24 and that has
51:25 actually helped to have similar
51:28 sort of standards of looking at the same risks,
51:31 you know,
51:32 across,
51:32 across the board.
51:33 And then finally,
51:34 I think the macroprudential framework
51:37 needs to be more heavily used.
51:38 It needs to be more integrated to everyday life,
51:41 stress testing,
51:43 scenario planning,
51:45 integrating.
51:46 We just
51:49 Enhanced trespassing framework to a dynamic one.
51:53 We had an early warning system that we had
51:55 created in conjunction with the IMF
51:58 that we're using
51:59 to get a sense for the probability of failure of some of these banks.
52:03 And
52:04 for me,
52:04 I think what is most important
52:06 is what
52:07 The sole what of these tests
52:10 and what actions need to be taken,
52:12 you know,
52:13 after you get these results.
52:14 I think
52:15 a combination of all of these would be really,
52:17 really critical going forward.
52:19 It is a very,
52:20 like I said,
52:21 uncertain,
52:22 highly evolving space,
52:24 and we need to look at the universe of risks as well.
52:28 You know,
52:29 it's like,
52:29 you know,
52:30 cybersecurity risk,
52:32 climate change,
52:33 and what those and the likelihood
52:36 and the impact
52:38 of those risks on banks would need to be integrated into
52:43 the supervisory process,
52:45 and I think
52:46 a combination of all of these would
52:48 be very useful.
52:51 Thank you.
52:51 Thank you for that.
52:52 Now,
52:52 I'm going to turn to Mahesh and see if,
52:55 if we have
52:56 uh
52:57 questions from the,
52:58 uh,
52:59 listeners.
53:01 Thank you very much,
53:01 Carmen.
53:02 We've had several questions come in through the Twitter feed and
53:05 my apologies to the audiences we won't have time to get through all of them,
53:08 but
53:08 Aisha,
53:09 the first question is for you,
53:11 uh,
53:11 and the,
53:12 the audience member asks,
53:14 do you see the resolution of NPLs
53:17 as purely a question of domestic policy,
53:20 or are the things
53:21 that you would like to see
53:22 international financial institutions like the World Bank
53:25 and the IMF do.
53:27 To help emerging markets and developing economies manage this issue.
53:34 Thank you.
53:35 Good question.
53:37 Yes,
53:37 that is a good question.
53:39 I think that
53:40 they're doing a lot already.
53:42 I was taking a lot of notes,
53:43 um,
53:44 in terms of the,
53:45 you know,
53:45 papers that Tobias,
53:46 you know,
53:47 is pointing us to,
53:49 um,
53:49 but
53:51 the biggest,
53:51 um,
53:53 The biggest they can offer is where they sit at the vantage point,
53:57 the convening power they have,
53:58 the fact that
53:59 you're looking across jurisdictions and you can
54:02 quickly get best practices and share those best practices.
54:06 I think that is the biggest area they can help.
54:09 And
54:09 you know,
54:10 jurisdictions,
54:10 countries need to
54:12 do more.
54:12 To leverage what is already
54:15 significantly provided
54:17 by these international financial institutions,
54:19 because
54:19 when we use and we engage
54:22 with the ideas that are put forward,
54:25 we can better refine them
54:27 and help subsequent
54:29 subsequent efforts in that respect.
54:33 Thank you Aisha.
54:35 The next question is for Swami.
54:37 Um,
54:38 it could be said that
54:40 compromise settlements with defaulting borrowers
54:43 can involve
54:44 either potential conflicts of interest or moral hazard concerns
54:48 that could lead to an erosion in credit discipline.
54:51 Can you explain,
54:52 uh,
54:53 how your bank would
54:54 mitigate the risk of those challenges?
54:58 Yeah,
54:58 very good question.
55:00 Uh,
55:00 this is something,
55:00 of course,
55:01 which,
55:01 which bothers us also whenever we embark on
55:04 a bilateral compromise settlement.
55:07 So we do two things.
55:08 One is that
55:10 we
55:11 group the
55:11 exposures of the customers into different markets.
55:15 Uh,
55:15 there are very small,
55:16 small borrowers
55:18 in the,
55:19 in the micro small enterprise sector
55:22 or
55:23 people who pursue agriculture as a,
55:25 as,
55:26 as a vocation.
55:27 These are very small borrowers
55:29 who are very,
55:30 very prone to high amount of risk and business losses,
55:34 and it is,
55:35 it is very,
55:35 very likely
55:37 that unless a settlement is provided to them,
55:40 they may not be able to rebuild their businesses.
55:42 For them,
55:43 we normally
55:44 implement
55:45 a non-discriminatory,
55:46 non-discretionary settlement
55:50 process
55:50 approved by the board of the bank.
55:52 So this covers the segment one of the borrowers.
55:56 The segment two of the borrowers
55:58 is by way of scrutiny by an internal committee
56:02 where we evaluate
56:04 the realizability of the collaterals that we hold
56:07 and also the timeline that it will take
56:10 in case we have to pursue a legal process.
56:13 So we do a
56:14 NPV of the recovery that may come in
56:16 by way of enforcement of collaterals through a legal process.
56:20 We put a value to it
56:21 as long as the value offered by the customer
56:24 is more than that.
56:26 In any case,
56:26 by resorting to a legal means,
56:28 I'm going to recover only X,
56:30 and then there is going to be a certain haircut.
56:32 If the offer
56:33 as on date,
56:35 the cash value,
56:36 the
56:36 NPV of what is being offered today is better,
56:39 then we go ahead and get those approvals done,
56:41 but they are generally approved by an internal committee
56:44 rather than any individuals.
56:46 The third is very large borrowers.
56:48 The corporate customers who approach us for
56:51 settlements,
56:52 for them we
56:53 have a monitoring mechanism by way of an external expert committee.
56:58 This committee consists of
57:00 retired senior officials of the banking and financial institutions,
57:04 so the proposal is taken by the by the relationship manager
57:09 or the account management team
57:11 to this external committee,
57:13 and the committee sits on judgment in terms of scrutinizing the proposal
57:16 and then gives its stamp of approval
57:18 so that
57:20 The possibility of any nexus
57:23 or a moral hazard that could probably come tomorrow or there could be a scrutiny
57:28 as to that we have taken a larger haircut as compared to what we should have,
57:32 so we get it scrutinized by an external committee.
57:35 So by segmenting these customers,
57:37 small customers where a non-discretionary scheme operates,
57:40 mid-size customers where an internal.
57:42 Of the bank scrutinizes as
57:43 as opposed to individuals residing
57:45 and very large borrowers,
57:47 the proposal gets scrutinized by a completely independent external committee,
57:51 and then it comes back to the bank for acceptance,
57:54 by which
57:55 we do ensure a pretty transparent mechanism
57:57 and we managed to stay
58:00 away from any moral hazards
58:02 that may come at a later date.
58:04 Thank you.
58:05 Thank you.
58:06 We,
58:06 we have just about 1 minute left,
58:07 and the next question is,
58:09 uh,
58:09 also relates to,
58:10 uh,
58:11 what you were just discussing,
58:12 which is
58:13 that in India,
58:14 the legal tools for resolving NPLs have evolved
58:17 considerably over the last 5 or 6 years,
58:19 and it
58:20 does seem to have moved from an environment of enforcing a security interest
58:25 to one that is more collaborative with the borrower.
58:28 Do you,
58:28 uh,
58:29 internally have a way of quantifying
58:31 whether these new tools actually result in better
58:33 outcomes for you as a financial institution,
58:36 um,
58:37 or is that a still a little bit of a mystery for you?
58:42 Yeah,
58:42 that that's a good development.
58:43 In fact,
58:44 uh,
58:44 today we have,
58:45 um,
58:46 both IBC that came and then the prepack that we today have,
58:50 uh,
58:51 with the data in position scenario is more a collaborative approach
58:55 and uh as you would know
58:57 that this is a mechanism which is still evolving.
58:59 Uh,
58:59 the success of that,
59:01 uh,
59:01 I would imagine that will take about 3 to 4 quarters for us to establish,
59:05 but we are quite keen,
59:06 quite excited about this
59:08 new approach
59:09 that has come in terms of resolving stress
59:11 because
59:12 this is something which can we feel that.
59:14 And provide a cost effective,
59:16 timely resolution,
59:18 preserve value of
59:20 the business of jobs.
59:22 So we are quite keen to make use of this collaborative process,
59:25 but the outcomes,
59:26 I think we need to probably wait about 34 quarters to see the efficacy of it.
59:31 Thank you.
59:32 Thank you.
59:32 Carmen,
59:33 back to you.
59:35 I really just want to very quickly thank our wonderful
59:41 participants for,
59:42 for a very rich,
59:44 uh,
59:44 and
59:46 very important discussion on a topic that I think,
59:49 uh,
59:50 will be requiring our attention for some time to come.
59:53 Um,
59:54 I,
59:54 I,
59:54 I think
59:55 more will be known on the legacies of COVID,
59:58 but
59:59 I think,
1:00:00 uh,
1:00:01 the discussion of the issues we've had here.
1:00:04 Uh,
1:00:05 will be,
1:00:06 uh,
1:00:07 you know,
1:00:08 very important,
1:00:09 and I,
1:00:11 it,
1:00:11 it,
1:00:11 in,
1:00:12 in the,
1:00:13 in the process of recovery itself,
1:00:16 and
1:00:17 I would encourage our listeners to continue,
1:00:21 uh,
1:00:21 to pursue,
1:00:22 uh,
1:00:23 our series,
1:00:24 and,
1:00:25 uh,
1:00:26 again,
1:00:26 I really
1:00:27 enjoyed very much,
1:00:29 uh,
1:00:29 having the opportunity to meet you even virtually.
1:00:34 Thank you all.
1:00:36 Thanks,
1:00:36 Carmen.
1:00:37 Thank you.
1:00:39 Thank you.
1:00:40 Bye-bye.
1:00:42 OK.
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