Working capital cycles returning, especially in manufacturing: Axis Bank MD

On retail loan growth, the season went better than expected, CEO Chaudhry said

The festive season brought cheer to the banking sector and segments like home and auto loans did well. Amitabh Chaudhry, managing director and chief executive officer, Axis Bank, talks on a wide range of topics like the low interest rate cycle, Axis-Max deal, and the debt restructuring exercise in an interview to Subrata Panda and Abhijit Lele. Edited Excerpts:

How beneficial was the festive season for the bank?

The festive season was expected to bring some cheer and I do not think it disappointed. On retail loan growth, the season went better than expected. However, one does need to watch out for sustainability as the pent-up demand and higher savings due to moratorium may have boosted buying.

There has been improvement overall, and as of September end, we were growing at 14 per cent on assets (YoY). Since July, disbursals have grown three times and reached 90 per cent of pre-Covid levels in Q2. In October and November, we saw disbursal numbers equal to or better than pre-Covid levels in some asset classes.

Which segments are doing well?

Home loans, loans against property, and auto loans are the top three in the secured loans segment, which contributed 65 per cent in H1FY21. Post Diwali is normally a cooling down period for a couple of weeks. We expect business to pick up in the holiday season. We also expect demand for car loans to pick up because of year-end offers from manufacturers. The demand for home loan is rising steadily and this is expected to continue with interest rates at 15-year lows, good offers from builders, and state governments levying lower stamp duty.

Collections are better than our projections. In secured loans, collections are almost at pre-Covid levels. On the unsecured side, it is slightly below pre-Covid levels but we are not surprised. Given the size of the moratorium, and as the meter has started again, you will see slippages in the retail book across the financial system in Q3 and Q4.

On the corporate and SMEs (Small and medium-sized enterprises) side, has traction for working capital loans improved?

There is incremental improvement in sentiment (quarter-on-quarter) and this applies to most business segments, including corporate credit and SME. During the peak of the pandemic, funds were being used mainly for refinancing or managing liquidity crunch. Now, working capital cycles are coming back, especially in manufacturing, and we are seeing activity pick up substantially.

Interest rates continue to be at record lows so it might make sense for corporates to make capex today and get ahead of the curve. Our philosophy is to be conservative so we remain cautious of opening our balance sheet quickly. But we do not want to let go of any opportunity for growth.

What is the credit growth you are anticipating by the end of FY21?

We have been saying that Axis Bank can continue to grow at a rate 500-600 basis points higher than the industry rate.
 

Will interest rates stay low or gradually correct?

Liquidity is close to Rs 6 trillion. We expect this to rise further because foreign flows remain very strong and the Reserve Bank of India is indicating that it will maintain liquidity. If you take that into account, I do believe that it will be a highly liquid situation for quite some time and that will keep interest rates low. There is the other headwind of higher inflation. So, my expectation is, we can hope to see interest rates hover around the same level.  Despite low interest rates, loan demand has not picked up. So, the real driver of credit demand is not low interest rates but economic activity.

Are you going slow on retail loans?

We tightened our risk frameworks once the Covid crisis started. We are slowly lightening this as we see economic activity pick up, salaries getting restored, and people getting back into jobs. So, on one side we have to be cautious in recog-nising problems, but on the other, as a bank with requisite amount of capital, we should be capitalising on opportunities for growth on the retail side.
 

Do you need to make any further Covid-related provision?

December is still left, and restructuring is underway. We have received some restructuring requests from corporate and retail borrowers. And, some more are expected by month end. We are in the midst of formulating a framework for such cases. The requests will not be very large, but that does not mean slippages might not happen. We will see two kinds of stressed pools that banks will declare after Q3.

The Axis Bank-Max Life deal was changed repeatedly. By when do you expect the stake hike in Max Life?

Max has got central government approval for swapping stake of Mitsui Sumitomo from Max Life to Max Financial services. They have put in the application of the revised investment proposal of Axis Group into Max Life. It requires Irdai approval, and discussions have been going on. Second approval will be of CCI, and an application should be made soon. Once the approvals come, we will consummate the transaction.

The deal was revised from 30 per cent stake to 19 per cent. What changed?

When we went with 30 per cent, RBI did not have a clear guideline on how a bank can hold in businesses like insurance. I think the recent paper on where banks can invest clearly indicates that it does not want banks to own more than 20 per cent, unless under a non-operating holding company structure. So, in a way RBI is hinting that it is comfortable with maybe 20 per cent shareholding. In our discussion with RBI, what officials told us was please go ahead with the existing guidelines because we are still looking at the paper’s proposals. So, stick to a maximum 10 per cent with the bank and acquire remaining 10 per cent through subsidiaries.