 "Banking Round Table: 'Asset sale of Rs 1.5 lakh crore in the last two years'")
The main issues concerning the banking sector don't seem to have changed too much over the past year. There has been some talk of moving from recognising bad assets to resolving problems. There is still a credit growth issue. What are your thoughts and perspectives on these?
Rajiv Lall: One particularly striking thing about the banking system is the extreme concentration on both the assets and liabilities side. Forty-five per cent of the advances of the entire banking system are only to 300 corporates. If the data is re-classified by groups, it's an even smaller number. This concentration could be because large chunks of the economy are left out from the formal lending business. On the liability side, 85 per cent of our CASA (current and savings account) deposits come from the top 50 centres whereas the GDP (gross domestic product) data shows that financial savings, as a percentage of total savings, has come down to 40 per cent, and 60 per cent of household savings are outside the form banking system.
The lack of credit demand is because of the focus of the banking system. And the principal target of the banking system, the large companies, are now moving to bond markets and their balance sheets are getting deleveraged. This is helping banks to come out from a phase of fragility. If you combine these three, you get the reasons for lack of credit growth. Those willing to come out this and lend to a deeper tissue in the economic strata or community would find growth opportunities.
Arun Tiwari: The two fashionable issues being talked about are stressed assets in the core sector and capital. If we believe in 7.6 per cent annual growth, it can't happen without core sector growth. It's more about the cash flows of the affected sectors than the sectors being bad. With dispute resolution becoming important, in a year or so the issues in these sectors will be fixed. If this happens, a lot of provisioning made so far will be written back and take care of the capital. If we look at retail loans, and mortgage loans in specific, the 2022 Housing-for-all programme requires investments of $2 trillion. The current loan book of the home loan sector is not even a-tenth of that. There is adequate demand. And, when there is more traction from corporates, small-and- medium enterprises (SME) and a retail side, the scenario will change.
Shikha Sharma: The emergence of the bond and commercial paper market has helped corporates access loans outside of banks. Two-three years back, there was massive lending for companies. That demand is obviously not there anymore. The working capital cycle has also been depressed. That is why corporate demand is slower currently than in a normal cycle. And, there is a larger factor of market playing a role in funding their demand.
But, there is strong demand from other sectors such as SME and retail, and we do worry whether it is the next bubble in the making. Retail credit as a percentage of GDP in India is less than half of that in Asian countries. So, there is still lot of headroom for growth. There's going to be a decadal shift from informal to formal sector as far as retail and SME is concerned. We are seeing demand for working capital loans coming back. Investment demand will also return, though it won't pick up in a hurry because of base effect issues and global uncertainly.
On dispute resolution, there are four options: Change of hands, sale through a stressed asset manager who could turn around the asset, fresh equity issuances or restructuring of debt. The fifth is going the legal route. We've seen more change of management in the past 18-24 months than I've seen in the history of working in the financial sector, and that pace is only increasing. Resolution takes its own time but we are definitely seeing evidence of that.
Chanda Kochhar: The consumer side of business continues to grow. Within that, the housing business, more than 50 per cent of the consumer business, continues to grow at a healthy pace of 16 per cent. Car loans are growing at a slightly lower pace but loans against property and unsecured loans are growing faster. The good part is that growth continues and the quality remains stable.
Whatever we see as the credit growth rate, we should assume the growth rate is three per cent higher. Within that growth, it is the retail part and SME that are growing much more than the corporate part. The next leg of growth will come from the secondary impact of all the government spending taking place.
We, as an industry, should focus on resolution. The banks are conscious of recovery and going about it in a focused manner. The promoters have understood that they will have to sell assets in order to deleverage. Regulations are also creating an enabling environment. The Scheme for Sustainable Structuring of Stressed Assets (S4A) will be used as and when it fit into the various cases. The judicial system is also gearing up to become more and more of an enabler in this - whether it is the strengthening of the debt recovery tribunal, debt recovery appellate tribunal or the focus towards arbitration or the Bankruptcy Act. In the past two years, we have seen sales of Rs 1.5 lakh crore finalised - the largest ever in any corporate history. These are sales of very large assets and very small assets across sectors such as roads, power, cement, etc. We have to understand that each one of these resolutions takes very long. The kind of results we see now are probably a result of two years of working on those deals.
Aditya Puri: The economy is growing at 7.5-7.6 per cent. Even if you don't accept the numbers, it is the new methodology. You could apply a larger GDP deflator, but the growth is definitely six per cent-plus and the trajectory is up. So, if you look at economic growth of 7-7.5 per cent, credit growth should be around 14 per cent, a pretty good growth rate.
At this rate, both industry and consumption will be growing. But, you don't have the investment. So, the delta on investment to take it past 7.5 per cent will have to be consequent to private investment. That will come and we are optimistic about the growth rate.
Working capital demand is growing. India remains the most underpenetrated market for the consumer side of the business. About 60 per cent of India is semi-urban and rural, an untapped market. We have completely changed the offering through digitisation to be able to expand to larger geographies. We are very happy going forward. We think it's a brilliant time when the growth is going up.
Also, the message from government and banks is that we are not here for charity. You take our money and give it back. When the ship sinks, you will have a lot of resolutions a lot faster and no borrower will think of living a king's lifestyle with our money.
Pramit Jhaveri: If you look at any of the relevant markets, what we have in terms of growth, no one even comes remotely close to that. There are not many things going on - whether revival in the agriculture sector, Seventh Pay Commission or spending in defence or railways and, hopefully, spending and investment on the private side will begin. When you think about it in that context, the prospects are good. We talk a lot about the past. I am not suggesting those are not issues and that we can wish them away, but a fair amount of progress has been already made. We have to focus more on the positives.
Yes, there are issues but there is enough in there to think about the future. Beside growth, there are other positives like the credit-to-GDP ratio, the penetration and technology.
There is a belief that 30 years from now there might not be any banks due to technological advances. Your views.
Kochhar: Technology is changing the way customers interact with us, the way we offer products to customers and the way we internally handle our businesses. Technology is becoming a daily part of our life. It might be as simple as continuing to enhance mobile banking applications to trying out a blockchain possibility in a trade transaction. Banks can offer almost anything across the payment chain that anybody else can offer. That's a very exciting part of banking and in my view, has become an inherent necessity of banking as well. Banks have to be agile and active to keep evolving their business model.
Banks need to be nimble, agile and ahead in terms of technology, as it allows you to do many more things like actually providing the cost efficiency to reach out to more customers who you might not have been able to reach otherwise. The question is how each bank uses it.
Puri: We are very optimistic about the digital revolution that is coming. We will mostly eat other guys for breakfast. Let me explain this. No new digital player is creating a new bank. All their offerings are on the top of the banking system. If he can make an offer, technology is nobody's private domain. I can use technology equally. It will substantially change the cost revenue dynamics for the banks. It will also not lead to any displacement in terms of number of people. Today, I am dealing with the consumer and I say, 'think money and think HDFC Bank'. You can pay bills, get loans, transfer money, buy goods, get discounts, pay tax, etc. I don't think any of them are doing this. So, should we not be concerned? We should be but they should be equally concerned.
Jhaveri: I think we spend far too much time talking about technology and how it's going to harm the industry. Look at the past as an aggregation to the future. I have been in the industry for 30 years and ever since I've been around, I think this industry has used technology to its advantage. Yes, technology is a disruptor-it has been in the past and will be in the future. It may become more disruptive in the future than it has been in the past. But, if you look at the banking industry, we have been in the forefront of so much change driven by technology that it will be naive to suggest technology is going to disrupt the industry in a manner that it will cease to exist.
Technology is going to be the biggest driver for the industry and it will be aided by the things that are going on in our country that aren't going on anywhere else in the world. Which country has 250 million smartphones and a billion unique biometric identities? The right technology can aid you to grow faster. Let's think about the customer and the household.
For banks, it is the entire value chain and when you think about everything a bank can offer to one household, one enterprise, one large corporation and one individual, how many of the start-ups can do all of that? At the end of the day, regulations have changed very dramatically in the recent past and are allowing new entrants. But, there are regulations that are protective of the banking industry and must be. We have to look at technology as something that is going to powerful and that will drive our businesses.
The new Reserve Bank of India (RBI) governor has suggested bankers take managerial control of troubled assets of companies or find new management for those assets. Two questions: One, do you see a new signal from RBI? Two, how do you react if that's the case?
Tiwari: It's a little too early. From what we read in the media, there seems to be a more cohesive effort. For example, S4A was good to start with on an A4-sized paper but it was not working. And, after all the suggestions we gave to RBI, one can be sure the new format of S4A will be workable
Kochhar: We, as an industry, are shifting our focus from recognition to resolution. But, that does not mean recognition is over. This kind of signalling has never happened in the history of corporate India. It's clearly one way to say that banks have also been giving out this message and the kind of sales of troubled assets that we are seeing today are a result of many more things happening in the entire system and the deals we are seeing are clearly a signal that banks will recover their money and solve the bad loan problem.
The resolution comes in various forms. It comes sometimes from the fact that industry prospects improve. For example: the Ebitda levels have improved for steel companies on the back of minimum import prices. There are some cases where you just bring in infusion of equity, some cases where you bring about a change in management and someone else can takeover that asset and start managing it. It serves the purpose of giving out the right signals. In some public sector entities where there is money, where there are growth plans, why can't they take over the troubled assets of the private sector?
Sharma: Whether it is the current governor or previous governor, the focus has been to ensure that what is borrowed gets paid back. If, however, a company is going through short-term stress but has long-term viability, they need to have a surplus and banks need to be more accommodative. Banks need to support the right projects and the right managements. There are cases where the project and management are right and, hence, RBI has come up with schemes such as strategic debt restructuring, S4A, etc.
Lall: While we are moving in the right direction in relation to projects that can be revived. I am optimistic that the reforms started by RBI will aid in resolving those type of assets. I am not very optimistic where 'wrong project-wrong management' and 'decent management-wrong project' because they are difficult to resolve. A lot of these projects have multiple lenders and resolution is not easy in such cases, as it requires a lot of coordination between the lenders.
What about corporate projects? Will these come back?
Puri: There is enough demand for financial services in this country. When demand exceeds supply, new projects will also come. Whether it is 12 months or 18 months, I don't know. With respect to financing for those projects, there is no shortage of money in this country.
What about infrastructure projects and their funding?
Sharma: The fundamental lesson in infrastructure has been that if there was an intent by the government, it would be followed through. There has been a reverse of policy, I see that projects are going to get financed only if there is a tighter contract. I would suspect that is how projects are going to get financed in the future. Forget banks, even promoters are going to look at it that way because if banks and promoters have suffered as well because they were probably hoping to get some equity value in those cases and the equity value has been eroded. That's a lesson that has been hopefully learnt irreversibly for the future.
Over FY10-12, a lot of credit growth came from infrastructure and large projects. But, we as a country have had double-digit credit growth for a very long time and that has come from the small, medium-sized brownfield projects. That is going to continue. After two years, the base effect would have gone and all these segments would continue to grow.
Kochhar: The entire project finance and project implementation will get much more structured to start with. Concentrations that you have seen in the past will also get granular. We also see investments becoming granular. In the past, almost all of project finance was done by banks. Now, there will be banks as well as others who do the financing. Also, in the past, 20-year projects were funded by seven-eight year loans; you will now see these getting funded by much longer repayment periods as well.
Lall: No bank is going to give finance to private sector greenfield infra projects for some time at a big scale and the government has to understand that until the soft infrastructure of dispute resolution and contractual infirmity is not resolved, you will not get adequate funding for project finance.
Jhaveri: A disproportionate amount of risk was being borne by banks. Going forward, if it is more evenly distributed among stakeholders, there is no reason why a project cannot continue to get financed.
What is the view on the debit card breach?
Puri: Not all banks had a problem with their systems. What is needed is that the entire system is only as strong as its weakest link and the problem should be fixed where it started. There should be greater oversight to ensure the entire ecosystem of payments is covered, including if you allow third-party providers and that there are appropriate actions if you don't deliver. We are very safe, the system is safe. But, in today's world there are always crooks.
Kochhar: The actual number of impacted customers is less. Also, some credit should be given to banks that they have done some pro-active monitoring of transactions, getting customers to change the PINs, etc. The whole size of the problem should also be looked at.
Sharma: There are crooks who work in the physical work and some who work in the digital world. Some of them are very smart minds. So, banks have to keep looking at their response strategy. Banks need to look at where fraud happens and how we are going to improve our systems to detect and control it, and respond to it. As soon as banks saw these, we took response action.
Jhaveri: In India, the regulator introduced chip-and-pin card on credit cards about 15 months ago; there are many countries today that still do not even have it. So, the regulator is acting pro-actively.
Rajiv Lall: One particularly striking thing about the banking system is the extreme concentration on both the assets and liabilities side. Forty-five per cent of the advances of the entire banking system are only to 300 corporates. If the data is re-classified by groups, it's an even smaller number. This concentration could be because large chunks of the economy are left out from the formal lending business. On the liability side, 85 per cent of our CASA (current and savings account) deposits come from the top 50 centres whereas the GDP (gross domestic product) data shows that financial savings, as a percentage of total savings, has come down to 40 per cent, and 60 per cent of household savings are outside the form banking system.
The lack of credit demand is because of the focus of the banking system. And the principal target of the banking system, the large companies, are now moving to bond markets and their balance sheets are getting deleveraged. This is helping banks to come out from a phase of fragility. If you combine these three, you get the reasons for lack of credit growth. Those willing to come out this and lend to a deeper tissue in the economic strata or community would find growth opportunities.
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Shikha Sharma: The emergence of the bond and commercial paper market has helped corporates access loans outside of banks. Two-three years back, there was massive lending for companies. That demand is obviously not there anymore. The working capital cycle has also been depressed. That is why corporate demand is slower currently than in a normal cycle. And, there is a larger factor of market playing a role in funding their demand.
But, there is strong demand from other sectors such as SME and retail, and we do worry whether it is the next bubble in the making. Retail credit as a percentage of GDP in India is less than half of that in Asian countries. So, there is still lot of headroom for growth. There's going to be a decadal shift from informal to formal sector as far as retail and SME is concerned. We are seeing demand for working capital loans coming back. Investment demand will also return, though it won't pick up in a hurry because of base effect issues and global uncertainly.
On dispute resolution, there are four options: Change of hands, sale through a stressed asset manager who could turn around the asset, fresh equity issuances or restructuring of debt. The fifth is going the legal route. We've seen more change of management in the past 18-24 months than I've seen in the history of working in the financial sector, and that pace is only increasing. Resolution takes its own time but we are definitely seeing evidence of that.
Chanda Kochhar: The consumer side of business continues to grow. Within that, the housing business, more than 50 per cent of the consumer business, continues to grow at a healthy pace of 16 per cent. Car loans are growing at a slightly lower pace but loans against property and unsecured loans are growing faster. The good part is that growth continues and the quality remains stable.
Whatever we see as the credit growth rate, we should assume the growth rate is three per cent higher. Within that growth, it is the retail part and SME that are growing much more than the corporate part. The next leg of growth will come from the secondary impact of all the government spending taking place.
We, as an industry, should focus on resolution. The banks are conscious of recovery and going about it in a focused manner. The promoters have understood that they will have to sell assets in order to deleverage. Regulations are also creating an enabling environment. The Scheme for Sustainable Structuring of Stressed Assets (S4A) will be used as and when it fit into the various cases. The judicial system is also gearing up to become more and more of an enabler in this - whether it is the strengthening of the debt recovery tribunal, debt recovery appellate tribunal or the focus towards arbitration or the Bankruptcy Act. In the past two years, we have seen sales of Rs 1.5 lakh crore finalised - the largest ever in any corporate history. These are sales of very large assets and very small assets across sectors such as roads, power, cement, etc. We have to understand that each one of these resolutions takes very long. The kind of results we see now are probably a result of two years of working on those deals.
Aditya Puri: The economy is growing at 7.5-7.6 per cent. Even if you don't accept the numbers, it is the new methodology. You could apply a larger GDP deflator, but the growth is definitely six per cent-plus and the trajectory is up. So, if you look at economic growth of 7-7.5 per cent, credit growth should be around 14 per cent, a pretty good growth rate.
At this rate, both industry and consumption will be growing. But, you don't have the investment. So, the delta on investment to take it past 7.5 per cent will have to be consequent to private investment. That will come and we are optimistic about the growth rate.
Working capital demand is growing. India remains the most underpenetrated market for the consumer side of the business. About 60 per cent of India is semi-urban and rural, an untapped market. We have completely changed the offering through digitisation to be able to expand to larger geographies. We are very happy going forward. We think it's a brilliant time when the growth is going up.
Also, the message from government and banks is that we are not here for charity. You take our money and give it back. When the ship sinks, you will have a lot of resolutions a lot faster and no borrower will think of living a king's lifestyle with our money.
Pramit Jhaveri: If you look at any of the relevant markets, what we have in terms of growth, no one even comes remotely close to that. There are not many things going on - whether revival in the agriculture sector, Seventh Pay Commission or spending in defence or railways and, hopefully, spending and investment on the private side will begin. When you think about it in that context, the prospects are good. We talk a lot about the past. I am not suggesting those are not issues and that we can wish them away, but a fair amount of progress has been already made. We have to focus more on the positives.
Yes, there are issues but there is enough in there to think about the future. Beside growth, there are other positives like the credit-to-GDP ratio, the penetration and technology.
There is a belief that 30 years from now there might not be any banks due to technological advances. Your views.
Kochhar: Technology is changing the way customers interact with us, the way we offer products to customers and the way we internally handle our businesses. Technology is becoming a daily part of our life. It might be as simple as continuing to enhance mobile banking applications to trying out a blockchain possibility in a trade transaction. Banks can offer almost anything across the payment chain that anybody else can offer. That's a very exciting part of banking and in my view, has become an inherent necessity of banking as well. Banks have to be agile and active to keep evolving their business model.
Banks need to be nimble, agile and ahead in terms of technology, as it allows you to do many more things like actually providing the cost efficiency to reach out to more customers who you might not have been able to reach otherwise. The question is how each bank uses it.
Puri: We are very optimistic about the digital revolution that is coming. We will mostly eat other guys for breakfast. Let me explain this. No new digital player is creating a new bank. All their offerings are on the top of the banking system. If he can make an offer, technology is nobody's private domain. I can use technology equally. It will substantially change the cost revenue dynamics for the banks. It will also not lead to any displacement in terms of number of people. Today, I am dealing with the consumer and I say, 'think money and think HDFC Bank'. You can pay bills, get loans, transfer money, buy goods, get discounts, pay tax, etc. I don't think any of them are doing this. So, should we not be concerned? We should be but they should be equally concerned.
Jhaveri: I think we spend far too much time talking about technology and how it's going to harm the industry. Look at the past as an aggregation to the future. I have been in the industry for 30 years and ever since I've been around, I think this industry has used technology to its advantage. Yes, technology is a disruptor-it has been in the past and will be in the future. It may become more disruptive in the future than it has been in the past. But, if you look at the banking industry, we have been in the forefront of so much change driven by technology that it will be naive to suggest technology is going to disrupt the industry in a manner that it will cease to exist.
Technology is going to be the biggest driver for the industry and it will be aided by the things that are going on in our country that aren't going on anywhere else in the world. Which country has 250 million smartphones and a billion unique biometric identities? The right technology can aid you to grow faster. Let's think about the customer and the household.
For banks, it is the entire value chain and when you think about everything a bank can offer to one household, one enterprise, one large corporation and one individual, how many of the start-ups can do all of that? At the end of the day, regulations have changed very dramatically in the recent past and are allowing new entrants. But, there are regulations that are protective of the banking industry and must be. We have to look at technology as something that is going to powerful and that will drive our businesses.
The new Reserve Bank of India (RBI) governor has suggested bankers take managerial control of troubled assets of companies or find new management for those assets. Two questions: One, do you see a new signal from RBI? Two, how do you react if that's the case?
Tiwari: It's a little too early. From what we read in the media, there seems to be a more cohesive effort. For example, S4A was good to start with on an A4-sized paper but it was not working. And, after all the suggestions we gave to RBI, one can be sure the new format of S4A will be workable
Kochhar: We, as an industry, are shifting our focus from recognition to resolution. But, that does not mean recognition is over. This kind of signalling has never happened in the history of corporate India. It's clearly one way to say that banks have also been giving out this message and the kind of sales of troubled assets that we are seeing today are a result of many more things happening in the entire system and the deals we are seeing are clearly a signal that banks will recover their money and solve the bad loan problem.
The resolution comes in various forms. It comes sometimes from the fact that industry prospects improve. For example: the Ebitda levels have improved for steel companies on the back of minimum import prices. There are some cases where you just bring in infusion of equity, some cases where you bring about a change in management and someone else can takeover that asset and start managing it. It serves the purpose of giving out the right signals. In some public sector entities where there is money, where there are growth plans, why can't they take over the troubled assets of the private sector?
Sharma: Whether it is the current governor or previous governor, the focus has been to ensure that what is borrowed gets paid back. If, however, a company is going through short-term stress but has long-term viability, they need to have a surplus and banks need to be more accommodative. Banks need to support the right projects and the right managements. There are cases where the project and management are right and, hence, RBI has come up with schemes such as strategic debt restructuring, S4A, etc.
Lall: While we are moving in the right direction in relation to projects that can be revived. I am optimistic that the reforms started by RBI will aid in resolving those type of assets. I am not very optimistic where 'wrong project-wrong management' and 'decent management-wrong project' because they are difficult to resolve. A lot of these projects have multiple lenders and resolution is not easy in such cases, as it requires a lot of coordination between the lenders.
What about corporate projects? Will these come back?
Puri: There is enough demand for financial services in this country. When demand exceeds supply, new projects will also come. Whether it is 12 months or 18 months, I don't know. With respect to financing for those projects, there is no shortage of money in this country.
What about infrastructure projects and their funding?
Sharma: The fundamental lesson in infrastructure has been that if there was an intent by the government, it would be followed through. There has been a reverse of policy, I see that projects are going to get financed only if there is a tighter contract. I would suspect that is how projects are going to get financed in the future. Forget banks, even promoters are going to look at it that way because if banks and promoters have suffered as well because they were probably hoping to get some equity value in those cases and the equity value has been eroded. That's a lesson that has been hopefully learnt irreversibly for the future.
Over FY10-12, a lot of credit growth came from infrastructure and large projects. But, we as a country have had double-digit credit growth for a very long time and that has come from the small, medium-sized brownfield projects. That is going to continue. After two years, the base effect would have gone and all these segments would continue to grow.
Kochhar: The entire project finance and project implementation will get much more structured to start with. Concentrations that you have seen in the past will also get granular. We also see investments becoming granular. In the past, almost all of project finance was done by banks. Now, there will be banks as well as others who do the financing. Also, in the past, 20-year projects were funded by seven-eight year loans; you will now see these getting funded by much longer repayment periods as well.
Lall: No bank is going to give finance to private sector greenfield infra projects for some time at a big scale and the government has to understand that until the soft infrastructure of dispute resolution and contractual infirmity is not resolved, you will not get adequate funding for project finance.
Jhaveri: A disproportionate amount of risk was being borne by banks. Going forward, if it is more evenly distributed among stakeholders, there is no reason why a project cannot continue to get financed.
What is the view on the debit card breach?
Puri: Not all banks had a problem with their systems. What is needed is that the entire system is only as strong as its weakest link and the problem should be fixed where it started. There should be greater oversight to ensure the entire ecosystem of payments is covered, including if you allow third-party providers and that there are appropriate actions if you don't deliver. We are very safe, the system is safe. But, in today's world there are always crooks.
Kochhar: The actual number of impacted customers is less. Also, some credit should be given to banks that they have done some pro-active monitoring of transactions, getting customers to change the PINs, etc. The whole size of the problem should also be looked at.
Sharma: There are crooks who work in the physical work and some who work in the digital world. Some of them are very smart minds. So, banks have to keep looking at their response strategy. Banks need to look at where fraud happens and how we are going to improve our systems to detect and control it, and respond to it. As soon as banks saw these, we took response action.
Jhaveri: In India, the regulator introduced chip-and-pin card on credit cards about 15 months ago; there are many countries today that still do not even have it. So, the regulator is acting pro-actively.