S S Mallikarjuna Rao, MD & CEO Punjab National Bank; Rajkiran Rai G, MD & CEO, Union Bank of India; Amitabh Chaudhry, MD & CEO, Axis Bank
Leading names of India’s banking industry, including Punjab National Bank
MD & CEO S S Mallikarjuna Rao
, Union Bank of India
MD & CEO Rajkiran Rai G
, Axis Bank
MD & CEO Amitabh Chaudhry
, IDBI Bank
MD & CEO Rakesh Sharma
, Citi India CEO Ashu Khullar
, and IDFC First Bank
MD & CEO V Vaidyanathan
join Tamal Bandyopadhyay
at Business Standard’s Unlock BFSI 2.0
to discuss the issues plaguing the sector. They shed light on their moratorium portfolios, their reluctance to lend, the paradigm shift in the banking space, and much more. Edited excerpts:
What’s happening on the moratorium front?
: Moratorium-II was definitely better than moratorium-I. And, I think the overall trend is obviously in the right direction. There was a significant level of reduction in the overall moratorium numbers across the financial system. Now, we have a new dispensation announced by the Reserve Bank of India
(RBI) on restructuring, and you will get a better idea in terms of how many institutions and individual borrowers have used this facility and how many banks have granted that refinance option to their borrowers. The range of moratorium numbers, in some cases, is quite worrying, because the numbers are quite large.
The moratorium should not be used as the only barometer of the problem. There are issues around the fact that a lot of customers are just conserving cash. As the RBI governor has said, it is very difficult to predict how this crisis will play out, how quickly the economy will revive. Given the slowdown which we have observed, it will be a long haul before the economy comes back to pre-Covid levels.
The economy had been slowing down in the last financial year, anyway. Then we had the economic shock of Covid. Yes, we have this restructuring option. Then we had the Supreme Court asking some tough questions on interest and interest-on-interest and I don’t know what implications it could have. But a lot of the banks are watching it very closely, at least we are looking at it in Axis Bank.
Giving borrowers a restructuring option is one thing and borrowers should get it if they deserve, but what kind of accounting policies you follow and whether you are conservative or not is a different option.
Rakesh Sharma, MD & CEO, IDBI Bank; Ashu Khullar, CEO, Citi India; V Vaidyanathan, MD & CEO, IDFC First Bank
: First of all, a moratorium should be seen as a temporary phenomenon. It can never be a permanent solution for the impact of Covid. The moratorium was an immediate reaction for what happened, and it will work as a panacea in the shorter term. On that note RBI has really come out with the policy. Now, while the moratorium has given some element of comfort to those particularly in the personal loans segment, those in the salaried class and in the retail segment, who were not aware of what could have been the impact — many of these accounts probably can return to normal just with the moratorium.
However, the window of restructuring is open for taking care of the majority of business concerns that are badly affected, and the question of returning to normal may depend on how they come back. That is, it depends from sector to sector. Aviation, hospitality and tourism will take a longer time to come back, because they are dependent on the social behaviour of people post the pandemic. But then we’ll have to look at them in terms of restructuring to understand how they will come back.
Other sectors and industries, if they are labour-intensive, may take a little more time. However, if they are dependent on technology where the operating cycle returns very fast, they will come back much better than expected, because everybody in the ecosystem is longing to return to normalcy.
Khullar: Our general assessment — while it varies from sector to sector — is that corporates are back to 70-75 per cent of pre-Covid levels. The constraints are perhaps more limiting on the demand side, though there are obstructions on the supply side too, because of the local lockdowns. So, there are lots of obstacles, and as long as consumers do not get on with their normal activity, I think we will not have full certainty. Where we have started seeing early green shoots are automotive, cement and steel. We saw the steel sector actually raising prices since July, with some of the infrastructure spending from the government coming through. So, there is some recovery but clearly, we are far away from getting back to normal times.
Vaidyanathan: Economic activity has definitely started. Income is coming back. If you give this another six-odd months, things should be back in reasonably good steam. Maybe it’ll be at 90-95 per cent. The second implication that we’re seeing around us is how quickly people moved online. So, some industries actually benefitted and we should not forget that in the current situation.
As for the moratorium, as Amitabh very correctly pointed out, moratorium-II is better than I, and the numbers are different. In our case, we reported 28 per cent moratorium. But when we used State Bank of India’s definition of the moratorium, that number was 15 per cent for us. And we felt suddenly happy. Otherwise we were beating ourselves up and saying, ‘why are we at 28 per cent?’ Now we figure that we are at 15 per cent.
Which industries will bounce back faster?
Vaidyanathan: Those which are affected are tourism, airlines and hotels — all physical contact things. The middle category will be information technology, ITES, automobiles, the components market, consumer durables — these will come back faster. We have already seen commentary on the automobile industry, for example.
Those not affected by the slowdown were industries like FMCG, chemicals, agri products, agri components, rural, oil and gas, packaging and pharma. They are okay. So when we see the extent of destruction going on, we should see in totality that some actually did better (like online), some did okay (like the ones I talked about), some will bounce back quickly, and some are, of course, in bad shape.
Rajkiran Rai: The moratorium was a temporary relief. Actually, when the shock came, for businesses this was such a big relief because for six months there was no demand from any customer. It gave good relief to everyone such that they can reorient themselves. So, the moratorium, though useful, has been of limited use. Now, many people are trying to draw a conclusion from the moratorium numbers to access my asset quality. I think this is wrong, because the moratorium was availed of by people who needed it as well as people who did not need it.
So, the numbers really do not indicate how my balance sheet will look like, because some customer would have paid his instalment, may not be in the moratorium, but still may need restructuring. These numbers are going to be different for different banks, depending on the quality of assets they hold. Actually, we have better clarity on corporates today, because these are much bigger accounts, so we have gone case by case and seen who will need restructuring.
But when it comes to personal loans and MSME, we still not know how the customer is going to behave. If you look at retail mortgage and housing, people have used the moratorium, but by September they were regular because life came back to normal. Similarly, there are a lot of sectors which were back to normalcy at about 80 per cent operations in six months, and since they have not paid instalments, they have conserved cash also.
Sharma: I fully agree that based on the moratorium numbers, we should not judge the quality of any bank’s balance sheet. Basically, it should be judged how the securities are backed. The position is changing regularly, because everyday people are withdrawing from the moratorium. Now, on restructuring, information available with us is that only 4-5 per cent will avail of this facility. Even if we stay on the conservative side, a maximum of 6-8 per cent may avail of this facility.
I think things are coming back to normal, but certainly certain sectors like aviation, hotels and tourism are hugely affected. The steel industry is running at almost same capacity which they were running before the Covid situation. So, things are improving, but the bank’s balance sheet size will be clear onlylater.
Have banks become risk-averse?
Sharma: One thing I would like to clarify is that no banker is risk-averse, because we are in the business of lending. If we raise deposits and do not lend, how will we make a profit? So, there is no risk-aversion, but yes, certainly we have to manage risk in a better way, because in the past, we have been guilty of giving disproportionate advances to certain industries. It’s not that we are not lending. We are lending up to a certain limit, in fact, up to March there was very good growth. But, during the next six months, there was no growth, which means that there is also not much demand in the retail sector. But the government schemes are helping.
: I heard the governor use the words ‘extreme risk-aversion’, not ‘risk-aversion’. We have said on multiple occasions in the past that Axis Bank
is quite comfortable with rocketing a conservative strategy towards growth. But the important point to note is that we are talking of growth, and actually, if you look at our first quarter numbers, we showed more than decent growth during that particular quarter. Our overall growth in loans was upwards of 16 per cent.
Now, obviously, overall credit growth in the economy has come down. All of us have tightened our standards and you might see this growth tapering off a little for the industry. I’m not commenting on what will happen with Axis Bank, but we are out there lending to the right customers all the time.
Actually, we are quite hungry for business and we are trying to win business from the right kind of corporates and individuals.
When people say that we are not lending, it is to individuals or corporates who are already quite vulnerable, and the Covid crisis has pushed them to the edge and then you have to ask the question, whether you’re throwing good money after bad, or why would those individuals need money at this point in time? So you have to be careful. I think every bank has been careful. All of us have gone through quite tumultuous times as far as our overall credit performance is concerned. And it is very, very important that we be conservative.
Khullar: I don’t think there is any extreme risk-aversion. We’ve been very focused in terms of segments. Therefore, the recalibration for us has not needed to be as dramatic. For example, we were never very big on construction and real estate, which has been under stress. We continue to support our clients, but if there is some sector which is under a lot of stress, we will take a second look at our exposure.
The principle challenge continues to remain the lack of demand. The working capital side is obviously linked to activity levels, which is 70-75 per cent, and as they pick up, demand should hopefully come up. And the second is the capex element, which is the one which, on the private sector side specifically, is very muted right now. Having said that, we try and work around the issues where we can add value to our clients. So, we have been doing a lot of work around co-lending. We have been doing sponsor financing in some cases.
Rajkiran Rai: During difficult times bankers are prudent in lending, because currently, if I am not careful in lending, then three years down the line I will be saddled with huge NPAs. It is not risk-aversion, it is prudence. Utilisation levels of working capital limits have gone down substantially. So, people are looking at credit growth in the system and concluding that banks are not lending.
But the number of sanctions has not gone down. It is the utilisation level which has gone down, because actually it is outstanding credit which is being monitored, which shows a lower growth. Banks are eager to lend to good projects where there is sufficient certainty of cash flows. When we get that confidence, we do lend.
Vaidyanathan: Some months ago, when we were trying to estimate the impact of Covid, we felt this is going to be a washout year in which the book is not going to grow. In fact, in the annual report, I wrote a note to shareholders saying that we expect a flat year. But suddenly, after we saw the May, June and July numbers, our estimate changed. And it is not because existing customers are taking more money, or MSMEs are borrowing more.
It is because there is also an untapped market in India on the consumption side which was always under-penetrated, but is now getting served. So, if you put that important variable together, I think a 10-15 per cent growth on the retail side is very much on the cards for us. It is an upgrade of our own earlier guidance.
Mallikarjuna Rao: With due respect to the assessment of the RBI and the government on what they say is risk-aversion among bankers, I would like to say two things: First, I am driven to think that probably, the empirical evidence of credit growth during the last couple of years and the perception gathered from the industry are the determining factors for the RBI and the government to think that there’s a distortion. Now let us take only a couple of important points in our discussion. The 2014 December asset quality review by the RBI led all banks to review their risk assessment standards and their credit underwriting standards. They had to be re-evaluated properly to see that underwriting standards are upgraded.
The second tranche was done from October 2017 onwards, and we have seen many banks being brought under prompt corrective action (PCA). As many as 11 banks were under PCA by 2018, which indicated that these banks were not able to lend in the market. That created an impasse in the banking system, with credit delivery not happening. The third dimension is that in the last one and a half years, through the Insolvency and Bankruptcy Code, Rs 4 trillion of debt has been settled, even though the received amount was roughly Rs 1.86 trillion.
The Rs 4 trillion has gone out of the system. When credit growth is assessed, this Rs 4 trillion is never seen. If it had been reinstated, the percentage of growth would have been differently understood. So, this is probably why, on looking at credit growth and the perceptions of industry, the RBI and the government think there is risk-aversion. But I would like to categorically say there is no risk-aversion.
The way forward on the current low deposit rates
Rajkiran Rai: I hope this is temporary, because we are a high-inflation country. So, real interest rates will count. We are back to a period of slightly higher inflation now. Real interest rates are negative, but this should correct gradually.
Now, look at the money which is on reverse repo. I give you 5 per cent on deposits and the same day I go and deposit with the RBI at 3.35 per cent, which does not make business sense. So, I need to cut deposit rates. But then I sincerely hope that this is a short-term phenomenon. We will definitely reward savers as things stabilise, as inflation stabilises and as lending rates stabilise.
: It is a tricky situation. As an emerging economy, we need a greater contribution from savers. Savings is one of the sources for generating capital investment, and interest rates — being influenced by only assets and liabilities at a point in time — cannot be the only factor driving the economy. Ours is not a consumption economy. As such, if interest rates on savings deposits go below 3 per cent, it is an alarming situation. In fact, 2.5 per cent is being offered. Banks are driven to offer that kind of rate because of the asset-liability match, but it is not a sustainable phenomenon for a country like ours.
Covid — a moment of truth for Indian banking?
Chaudhry: If the institutions use this crisis well and invest in the right kind of platforms and spend resources in educating customers, it could be a huge game-changer for both customers and employees of the financial industry. I think the size and the format of branches will undergo a change. I think that branches that are mainly service centres now could over a period of time become more sales centres.
I also believe that Indian customers would like banks to have a physical presence in the community they live in. But the size and format will change, and if you can invest in technology and educate customers, you can completely change the face of how you interact with them, how you service them, how you originate loans. The entire gamut of services which you provide customers could change and probably become more productive over a period of time. That is what all of us are trying to do.