 "Banking round table: 6 leading bankers debate on economic recovery")
Moderator: There has been a lot of talk about a change in mood - is the worst really over?
Chanda Kochhar: There are definitely some positive signs. It's clear that agriculture will play a more positive role in the country's GDP growth and could bring back the momentum in the GDP numbers. The second positive sign is the entire set of measures that have brought about some amount of stability on the currency. The third is the improvements in exports. Finally, approvals around some projects have started to come in.
But I must add that the pace of the appearance of these green shoots is pretty slow. So, while I do think that we have hit the bottom and from here on, there will be improvement, the pace will be slow and gradual.
From the internal point of view, if you take consensus GDP growth expectation, you will come at something between 4.5 per cent and five per cent in FY14. In FY15, the consensus is it will be higher than that. There are some early signs of recovery, but I think it's still early days and the investment cycle needs to come back.
Moderator: But there is a view that the measures taken for currency stability are just quick fixes and not sustainable.
Aditya Puri: There has to be both quick fixes and long-term solutions. There is no magic wand. Our current account deficit and its financing is less of a problem now. Some administrative issues have been sorted. I think we are moving in the right direction. With good growth expected in agriculture, exports picking up and some stalled projects re-starting, we will see better GDP growth in the last two quarters of the current financial year. While five per cent GDP growth is possible in the fourth quarter, attaining seven per cent growth may take 18 months.
Moderator: One worry is that the fresh project pipeline is completely dry. Do you share the concern?
Shikha Sharma: Actually, there are a lots of investments that are stuck in stalled projects, mainly power and some road projects. It makes sense to get these projects going first before more money is pumped into these projects. What is important in the next 12-18 months is that these projects becomes operational after solving the bottlenecks like fuel linkages. Fresh investment will come in only after these issues get resolved.
We will continue to see consumption grow, driven by agriculture, rural markets and service-based delivery. But for that to continue, we will need a benign interest rate environment.
Moderator: Going by the Reserve Bank of India's stance, that seems a long way off.
Sharma: I think that's for RBI to decide. But I don't think standard economics has all the answers to the problems in a fast-evolving world. I am sure RBI will look at data and based on that, they will decide what the right action is.
Kochhar: High interest rates are required because they are a tool to control inflation. But if you ask if it is desirable to bring down interest rates, it is indeed desirable when you look at the growth compulsions of the economy. Easing of interest rates enables better servicing of loans.
Puri: Inflation is a problem and has to be controlled; otherwise, it will affect long-term growth. RBI has said it cannot control this wholly through monetary policy and there has to be control on the fiscal side as well. The fact of the matter is that you cannot bring the interest rates down till you solve the infrastructure around it.
You have to reduce the fiscal deficit, ensure that expenditure is for productive purposes. So in the interim, there is no way out, unless you are able to sort out the supply side. With the monsoon coming in, let us hope that food inflation is down and RBI gets inflation numbers that allows it to act positively. If we create the appropriate structure and in that we infuse liquidity, the valid rate will become the repo rate. At this point, due to inadequate liquidity, the operational rate is the marginal standing facility rate.
Debabrata Sarkar: We have compulsions. Banks are not getting deposits at the desired levels. Therefore, we are unable to reduce the cost of deposits. I do feel that interest rates are at a higher level. There is no credit demand, as the players feel that at this level of interest rates, sustainability and profitability of projects is a big question mark.
Stuart Milne: The fight against inflation is critical. The fact is that inflation affects the poorest in society the most. While we all would like interest rates to come down, they can't unless inflation numbers come down. A lot of concrete measures have been taken, especially after the new RBI governor took over.
Sharma: We are trying to spur investment, ensure consumption at the right levels and trying to make sure that savings find interest rates attractive. If we are saying this is an economy in transition which is deliberately trying to contain some of its risk by reducing the fuel subsidy, we are doing some social objectives in transfer of incomes to the rural poor and that is resulting in food inflation, then you have two big macro themes here. One which is going to continue is food inflation, since we are doing a transfer of money from urban to rural markets. Second, since we are reducing fuel subsidy, it will have an impact on fuel prices and a consequent impact on inflation. Those are macro choices we have chosen to make, since those will be an appropriate development model for India.
If that is the case, inflation is going to take time to control. Should inflation be the only factor to determine interest rates? This needs to be debated.
Moderator: At the round table last year, there was a view that cash-rich PSUs should kick-start investment. But nothing much has happened. What do you think is the problem?
Sarkar: Companies are apprehensive whether the time is right for making investments. Another issue is lack of clearances. The other apprehension is over getting return on investments or capital.
Moderator: With economic indicators offering no signs of relief, don't you think asset quality issues will only get worse?
Milne: There is definitely more concentration of risk in the corporate world today. If you take non-performing advances and add in the assets under restructuring, you are getting up to high teens in terms of percentage of portfolio across systems which are stressed. The interest cover ratios, the quantum of equity versus debt; these are all indicators that they are not behind us. We are going to still see more assets come under restructuring, especially construction and engineering, textiles and trading.
Moderator: A lot of promoters appear to have misused the corporate debt restructuring forum (CDR) and have rushed to get laxer terms in order to avoid admitting they are bust - ably assisted by their bankers. What's your assessment?
Kochhar: When you have an economy which was growing at nine per cent per annum eight quarters ago and is now at half of that, everything slows down. Every investment that was geared at a nine per cent rate is now geared for a 4.5 per cent rate. There are reasons that led to restructuring. This does not deny the basic viability of the project but just means they will need a little longer time to repay the loan. In a growth economy like ours, most projects need handholding. Restructuring is a good concept for a growth economy like India.
On the concerns you raised, banks need to take a very calculated call to say if this project indeed needs two years to come out, let us provide the handholding. But, banks as well as promoters have a responsibility to meet their obligations. You will still see some more assets getting added to the restructured base. For us, the flow of restructured assets into NPA is 10 per cent. This is not very high, but is higher than what it used to be in the past, that is five per cent.
Sharma: We have a lot of concern around restructuring and we call restructured assets stressed assets. In that context, if you look at markets across the world, restructuring gets done by banks. We have more detailed disclosures than many other parts of the world and that could be causing confusion on the nature of the asset. We have been indicating since 2009 that 25 per cent of restructured loans will turn into NPAs. So, in a much more stressed economy, it is not a surprising number. But 25 per cent is not 100 per cent. Restructured assets should not be seen as NPA. In a difficult marketplace, it is a legitimate thing to allow restructuring.
Moderator: RBI recently issued norms regarding foreign bank's subsidiarisation. But foreign banks still seem to have a lot of concerns in areas like taxation and stamp duty. How do you see the guidelines?
Milne: Whether foreign banks operate as a branch or as a subsidiary is not really a driver of our strategy in India. If you look at our own business around Asia, we have subsidiarised operations in China, Vietnam, Taiwan, Malaysia and Australia. The regulations have encouraged us to do so. In return, we have a level playing field with other banks in those countries.
We are closely looking at the subsidiary guidelines. Whether we operate as a branch or as a subsidiary, we have still got to do what we are good at and in this market, that's connecting customers to international markets and financing trade and investment flows from outside India into India and from India to the global market place. We can do that either way, through a branch structure or a subsidiary.
Moderator: So subsidiarisation is not on the priority list for HSBC?
Milne: No I didn't say that. It's a priority. If it's a priority for the RBI, obviously it's a priority for us.
Moderator: Will Citibank take the subsidiary route?
Jhaveri: I don't think we are going to be able to take a decision in a few weeks. As with everything, the devil is in the detail. There are a lot of things for us to contend with - whether it's capital gains or stamp duty. When you make a decision of this significance, you will look at the pros and cons.
The other thing to consider is what is our strategy for a particular market. I don't think our strategy, even if we were given unfettered access to branches, is ever going to be to try and compete with our friends on the table. At the end of the day, they have 3,000 to 4,000 branches, and I don't think that for a bank like Citi over the next five to 10 years, we are looking at several hundred or thousand branches.
Moderator: Do the existing banks see foreign banks with branch and M&A freedom a serious competition going forward?
Puri: The more the competition, the better. But do I see foreign banks becoming major competition very quickly? First, I am not sure how many want to put that kind of money, and second, that probability is low.
Moderator: We will also have new banks, probably backed by big corporate houses, coming in. Then, the RBI is talking about differentiated bank licences. How do you see competition changing the existing banking landscape?
Sharma: Competition is always good. It can spur new ideas and innovation and, ultimately, expansion of the market. In the short term, if there are a lot of new licences given out, there will be a scramble for talent, so that's the place I see some confusion happening.
Moderator: On the issue of competition, there is also a question of reciprocity. While we allow foreign banks to have a certain degree of freedom in India, that freedom is not the same when our banks go abroad. This must be a big irritation.
Kochhar: Reciprocity is a very good concept to follow. When you look at different countries, there are different levels at which they allow foreign banks to operate. Once you become a subsidiary, you get a level playing field in some countries. In many others, it takes years to get a branch licence. In India, we pretty much allow all foreign banks to be on the same page, irrespective of whichever the country they come from. I think following the principle of reciprocity makes a lot of sense.
Moderator: Going by their business models, does it make sense for foreign banks to take the subsidiary route considering the priority sector responsibility and the financial inclusion clause in the guidelines?
Jhaveri: As far as the priority sector is concerned, until last year, we were operating at slightly lower targets of 32 per cent, and we have met that target every single year. That limit was increased to 40 per cent last year. We won't shy away from that. The priority sector is important for inclusion, but I don't think that is the only way for inclusion. We will continue to do what is necessary and what is responsible. But I think one has to be a little careful. If you look at agri-lending, our footprint is 40-odd branches in a country that has 105,000 branches. Some of these are challenging. I don't think that we have the experience.
Milne: We would never argue that we should be treated differently than any other private sector bank in this regard. We have been in the country for 150 years; we have significant business. We are very happy to play our part in what is, after all, a very valid instrument of government policy. Having said that, there is definitely a need to form a system to make it work better, because all of us know that most banks are not able to meet all the targets, particularly the agri-targets. The complexion of the economy has changed quite dramatically since these targets were first brought in and, therefore, there is a reason to look at it again. There is absolutely no doubt that the requirement of an 18 per cent agriculture loan target is a very significant hurdle to growth for foreign banks. We do not have the expertise for the product. We do not have the reach, we do not have the ability to deliver that kind of quantum. Even the Indian public sector banks are not able to consistently deliver those targets.
Moderator: Indian companies hold about $225billion of US dollar-denominated debt and as much as half of that is estimated to be unhedged. Isn't that a big worry?
Jhaveri: Let's not generalise but there are certainly some areas where there has been excessive dollarisation of balance sheets. There are some businesses where you could argue that the amount of indebtedness is higher than what's prudent. RBI has been talking to us as an industry for being cautious on that front. At the end of the day, as lenders, you can advise your client but there is only a limit as to how much you can do. Companies that have this excessive indebtedness will be in trouble.
Kochhar: Corporates took dollar loans because these were cheaper compared to the rupee loans as far as basic interest rates are concerned. Of course, no one planned for such an unprecedented change in the exchange rate movement and, clearly, that has hit the corporate sector. So, clearly some companies will be in trouble. The second issue is that many Indian companies have tried to cut losses and switched to the rupee form of financing. However, it is not possible to cut long-term loans and change the structure from foreign currency to rupee.
I think many companies had financed a whole lot of working capital through foreign currency funding. This year, many have cut losses and switched their loans from foreign currency to rupee. In fact, one of the reasons for increase in credit for the domestic banking sector on the working capital side is the substitution that is taking place from foreign currency funding.
Puri: It is definitely not a crisis. If foreign banks want to sell their loans to each other, it still remains their risk. Within that, there are companies that would have their cash flows. Even if they cover now, it will be like taking a rupee loan. So, if somebody has unhedged exposure, he has a larger principal to repay but that's over 10 years. This time around, it is only one instalment that's due. Will they need some-hand holding, yes, they would. If it is a crisis, it's between the bank and the borrower'. It's definitely not a country crisis.
Chanda Kochhar: There are definitely some positive signs. It's clear that agriculture will play a more positive role in the country's GDP growth and could bring back the momentum in the GDP numbers. The second positive sign is the entire set of measures that have brought about some amount of stability on the currency. The third is the improvements in exports. Finally, approvals around some projects have started to come in.
But I must add that the pace of the appearance of these green shoots is pretty slow. So, while I do think that we have hit the bottom and from here on, there will be improvement, the pace will be slow and gradual.
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Pramit Jhaveri: On the external front, with $23-24 billion expected to come in from the twin swap windows, in general there is no doubt that the sentiments have improved. That's not to say that the issues around Fed tapering have disappeared. As the US economy grows stronger, tapering is inevitable. But RBI now is in a much stronger position to deal with that.
From the internal point of view, if you take consensus GDP growth expectation, you will come at something between 4.5 per cent and five per cent in FY14. In FY15, the consensus is it will be higher than that. There are some early signs of recovery, but I think it's still early days and the investment cycle needs to come back.
Moderator: But there is a view that the measures taken for currency stability are just quick fixes and not sustainable.
Aditya Puri: There has to be both quick fixes and long-term solutions. There is no magic wand. Our current account deficit and its financing is less of a problem now. Some administrative issues have been sorted. I think we are moving in the right direction. With good growth expected in agriculture, exports picking up and some stalled projects re-starting, we will see better GDP growth in the last two quarters of the current financial year. While five per cent GDP growth is possible in the fourth quarter, attaining seven per cent growth may take 18 months.
Moderator: One worry is that the fresh project pipeline is completely dry. Do you share the concern?
Shikha Sharma: Actually, there are a lots of investments that are stuck in stalled projects, mainly power and some road projects. It makes sense to get these projects going first before more money is pumped into these projects. What is important in the next 12-18 months is that these projects becomes operational after solving the bottlenecks like fuel linkages. Fresh investment will come in only after these issues get resolved.
We will continue to see consumption grow, driven by agriculture, rural markets and service-based delivery. But for that to continue, we will need a benign interest rate environment.
Moderator: Going by the Reserve Bank of India's stance, that seems a long way off.
Sharma: I think that's for RBI to decide. But I don't think standard economics has all the answers to the problems in a fast-evolving world. I am sure RBI will look at data and based on that, they will decide what the right action is.
Kochhar: High interest rates are required because they are a tool to control inflation. But if you ask if it is desirable to bring down interest rates, it is indeed desirable when you look at the growth compulsions of the economy. Easing of interest rates enables better servicing of loans.
Puri: Inflation is a problem and has to be controlled; otherwise, it will affect long-term growth. RBI has said it cannot control this wholly through monetary policy and there has to be control on the fiscal side as well. The fact of the matter is that you cannot bring the interest rates down till you solve the infrastructure around it.
You have to reduce the fiscal deficit, ensure that expenditure is for productive purposes. So in the interim, there is no way out, unless you are able to sort out the supply side. With the monsoon coming in, let us hope that food inflation is down and RBI gets inflation numbers that allows it to act positively. If we create the appropriate structure and in that we infuse liquidity, the valid rate will become the repo rate. At this point, due to inadequate liquidity, the operational rate is the marginal standing facility rate.
Debabrata Sarkar: We have compulsions. Banks are not getting deposits at the desired levels. Therefore, we are unable to reduce the cost of deposits. I do feel that interest rates are at a higher level. There is no credit demand, as the players feel that at this level of interest rates, sustainability and profitability of projects is a big question mark.
Stuart Milne: The fight against inflation is critical. The fact is that inflation affects the poorest in society the most. While we all would like interest rates to come down, they can't unless inflation numbers come down. A lot of concrete measures have been taken, especially after the new RBI governor took over.
Sharma: We are trying to spur investment, ensure consumption at the right levels and trying to make sure that savings find interest rates attractive. If we are saying this is an economy in transition which is deliberately trying to contain some of its risk by reducing the fuel subsidy, we are doing some social objectives in transfer of incomes to the rural poor and that is resulting in food inflation, then you have two big macro themes here. One which is going to continue is food inflation, since we are doing a transfer of money from urban to rural markets. Second, since we are reducing fuel subsidy, it will have an impact on fuel prices and a consequent impact on inflation. Those are macro choices we have chosen to make, since those will be an appropriate development model for India.
If that is the case, inflation is going to take time to control. Should inflation be the only factor to determine interest rates? This needs to be debated.
Moderator: At the round table last year, there was a view that cash-rich PSUs should kick-start investment. But nothing much has happened. What do you think is the problem?
Sarkar: Companies are apprehensive whether the time is right for making investments. Another issue is lack of clearances. The other apprehension is over getting return on investments or capital.
Moderator: With economic indicators offering no signs of relief, don't you think asset quality issues will only get worse?
Milne: There is definitely more concentration of risk in the corporate world today. If you take non-performing advances and add in the assets under restructuring, you are getting up to high teens in terms of percentage of portfolio across systems which are stressed. The interest cover ratios, the quantum of equity versus debt; these are all indicators that they are not behind us. We are going to still see more assets come under restructuring, especially construction and engineering, textiles and trading.
Moderator: A lot of promoters appear to have misused the corporate debt restructuring forum (CDR) and have rushed to get laxer terms in order to avoid admitting they are bust - ably assisted by their bankers. What's your assessment?
Kochhar: When you have an economy which was growing at nine per cent per annum eight quarters ago and is now at half of that, everything slows down. Every investment that was geared at a nine per cent rate is now geared for a 4.5 per cent rate. There are reasons that led to restructuring. This does not deny the basic viability of the project but just means they will need a little longer time to repay the loan. In a growth economy like ours, most projects need handholding. Restructuring is a good concept for a growth economy like India.
On the concerns you raised, banks need to take a very calculated call to say if this project indeed needs two years to come out, let us provide the handholding. But, banks as well as promoters have a responsibility to meet their obligations. You will still see some more assets getting added to the restructured base. For us, the flow of restructured assets into NPA is 10 per cent. This is not very high, but is higher than what it used to be in the past, that is five per cent.
Sharma: We have a lot of concern around restructuring and we call restructured assets stressed assets. In that context, if you look at markets across the world, restructuring gets done by banks. We have more detailed disclosures than many other parts of the world and that could be causing confusion on the nature of the asset. We have been indicating since 2009 that 25 per cent of restructured loans will turn into NPAs. So, in a much more stressed economy, it is not a surprising number. But 25 per cent is not 100 per cent. Restructured assets should not be seen as NPA. In a difficult marketplace, it is a legitimate thing to allow restructuring.
Moderator: RBI recently issued norms regarding foreign bank's subsidiarisation. But foreign banks still seem to have a lot of concerns in areas like taxation and stamp duty. How do you see the guidelines?
Milne: Whether foreign banks operate as a branch or as a subsidiary is not really a driver of our strategy in India. If you look at our own business around Asia, we have subsidiarised operations in China, Vietnam, Taiwan, Malaysia and Australia. The regulations have encouraged us to do so. In return, we have a level playing field with other banks in those countries.
We are closely looking at the subsidiary guidelines. Whether we operate as a branch or as a subsidiary, we have still got to do what we are good at and in this market, that's connecting customers to international markets and financing trade and investment flows from outside India into India and from India to the global market place. We can do that either way, through a branch structure or a subsidiary.
Moderator: So subsidiarisation is not on the priority list for HSBC?
Milne: No I didn't say that. It's a priority. If it's a priority for the RBI, obviously it's a priority for us.
Moderator: Will Citibank take the subsidiary route?
Jhaveri: I don't think we are going to be able to take a decision in a few weeks. As with everything, the devil is in the detail. There are a lot of things for us to contend with - whether it's capital gains or stamp duty. When you make a decision of this significance, you will look at the pros and cons.
The other thing to consider is what is our strategy for a particular market. I don't think our strategy, even if we were given unfettered access to branches, is ever going to be to try and compete with our friends on the table. At the end of the day, they have 3,000 to 4,000 branches, and I don't think that for a bank like Citi over the next five to 10 years, we are looking at several hundred or thousand branches.
Moderator: Do the existing banks see foreign banks with branch and M&A freedom a serious competition going forward?
Puri: The more the competition, the better. But do I see foreign banks becoming major competition very quickly? First, I am not sure how many want to put that kind of money, and second, that probability is low.
Moderator: We will also have new banks, probably backed by big corporate houses, coming in. Then, the RBI is talking about differentiated bank licences. How do you see competition changing the existing banking landscape?
Sharma: Competition is always good. It can spur new ideas and innovation and, ultimately, expansion of the market. In the short term, if there are a lot of new licences given out, there will be a scramble for talent, so that's the place I see some confusion happening.
Moderator: On the issue of competition, there is also a question of reciprocity. While we allow foreign banks to have a certain degree of freedom in India, that freedom is not the same when our banks go abroad. This must be a big irritation.
Kochhar: Reciprocity is a very good concept to follow. When you look at different countries, there are different levels at which they allow foreign banks to operate. Once you become a subsidiary, you get a level playing field in some countries. In many others, it takes years to get a branch licence. In India, we pretty much allow all foreign banks to be on the same page, irrespective of whichever the country they come from. I think following the principle of reciprocity makes a lot of sense.
Moderator: Going by their business models, does it make sense for foreign banks to take the subsidiary route considering the priority sector responsibility and the financial inclusion clause in the guidelines?
Jhaveri: As far as the priority sector is concerned, until last year, we were operating at slightly lower targets of 32 per cent, and we have met that target every single year. That limit was increased to 40 per cent last year. We won't shy away from that. The priority sector is important for inclusion, but I don't think that is the only way for inclusion. We will continue to do what is necessary and what is responsible. But I think one has to be a little careful. If you look at agri-lending, our footprint is 40-odd branches in a country that has 105,000 branches. Some of these are challenging. I don't think that we have the experience.
Milne: We would never argue that we should be treated differently than any other private sector bank in this regard. We have been in the country for 150 years; we have significant business. We are very happy to play our part in what is, after all, a very valid instrument of government policy. Having said that, there is definitely a need to form a system to make it work better, because all of us know that most banks are not able to meet all the targets, particularly the agri-targets. The complexion of the economy has changed quite dramatically since these targets were first brought in and, therefore, there is a reason to look at it again. There is absolutely no doubt that the requirement of an 18 per cent agriculture loan target is a very significant hurdle to growth for foreign banks. We do not have the expertise for the product. We do not have the reach, we do not have the ability to deliver that kind of quantum. Even the Indian public sector banks are not able to consistently deliver those targets.
Moderator: Indian companies hold about $225billion of US dollar-denominated debt and as much as half of that is estimated to be unhedged. Isn't that a big worry?
Jhaveri: Let's not generalise but there are certainly some areas where there has been excessive dollarisation of balance sheets. There are some businesses where you could argue that the amount of indebtedness is higher than what's prudent. RBI has been talking to us as an industry for being cautious on that front. At the end of the day, as lenders, you can advise your client but there is only a limit as to how much you can do. Companies that have this excessive indebtedness will be in trouble.
Kochhar: Corporates took dollar loans because these were cheaper compared to the rupee loans as far as basic interest rates are concerned. Of course, no one planned for such an unprecedented change in the exchange rate movement and, clearly, that has hit the corporate sector. So, clearly some companies will be in trouble. The second issue is that many Indian companies have tried to cut losses and switched to the rupee form of financing. However, it is not possible to cut long-term loans and change the structure from foreign currency to rupee.
I think many companies had financed a whole lot of working capital through foreign currency funding. This year, many have cut losses and switched their loans from foreign currency to rupee. In fact, one of the reasons for increase in credit for the domestic banking sector on the working capital side is the substitution that is taking place from foreign currency funding.
Puri: It is definitely not a crisis. If foreign banks want to sell their loans to each other, it still remains their risk. Within that, there are companies that would have their cash flows. Even if they cover now, it will be like taking a rupee loan. So, if somebody has unhedged exposure, he has a larger principal to repay but that's over 10 years. This time around, it is only one instalment that's due. Will they need some-hand holding, yes, they would. If it is a crisis, it's between the bank and the borrower'. It's definitely not a country crisis.