BFSI Summit: Worst is behind, slippages may rise, say India's top bankers

The banking sector has come out of the pandemic relatively unscathed, but it has to be cautious going forward because once the regulatory measures end, the system may see a rise in stress, said some of India’s top bankers at the Business Standard BFSI Summit.

If the cash-flow situation does not improve for those who opted for restructuring, the system might see a rise in slippages. However, banks are resilient enough and have adequate capital to deal with any crisis, the bankers said.

“If the cash flows do not come back, you could see further slippages coming through the system. But I do believe the banking system is resilient, has the balance sheet, the capital to manage any new crisis,” said Amitabh Chaudhry, managing director and chief executive officer, Axis Bank.

Echoing his views, Rakesh Sharma, MD and CEO of IDBI Bank, said: “…unless and until the cash flow improves, [those who opted for] restructuring will not be able to honour their commitments. And, that may create problems. So, the bankers have to be strong in following up and the government has to continue some fiscal measures so that their cash flow improves. Otherwise, the NPAs may shoot up.”

The bankers agreed that the worst is behind and things are definitely looking up. And, the measures taken by the Reserve Bank of India (RBI) and the government have certainly helped in defusing the crisis, else the situation could have been worse.

“The sense of optimism is palpable. Credit goes to the RBI and the government because the aid which they gave in the form of moratoriums, restructuring support, ECLG showed that when you have a short-term cash flow problem, some of the schemes really work. Otherwise, we would have been in a much worse position,” said Ashu Khullar, CEO, Citibank India.

Notwithstanding the support, banks themselves were better prepared to face the crisis this time as they had cleaned up their balance sheets after the asset quality review and had built enough capital cushion to withstand the pandemic.

The asset quality review, global financial crisis, infusion of capital by government in public sector banks, and private banks raising capital from the market strengthened balance sheets and made them more resilient, Sharma said.

V Vaidyanathan, MD and CEO of IDFC First Bank, said: “The banking system is battle hardened because of the number of crises it has faced in the past 10 years and I do get a lot of comfort from that. Secondly, even after the Covid crisis, the collections after the second wave are better than pre-Covid levels.”

“We are well prepared to face any eventuality. Foreseeable threats have been well taken care of,” said Dinesh Kumar Khara, chairman of the State Bank of India.

As far credit demand is concerned, while retail has shown excellent pick-up, the wholesale segment continues to be muted. The corporates have deleveraged a great deal and have also moved to other avenues of raising funds, mainly by tapping the bond and overseas markets.

“We are getting to see a decent scenario in retail, both in terms of growth and quality. There is a challenge on the corporate side and as of now the behaviour is patchy. Capacity utilisation continues to be around 60 per cent,” said Khara. 

“Money will go where the demand is and right now the demand is on the retail side. Because of the deleveraging, the demand for corporate loans has gone down, but as the economy picks up, private capex picks up, I think there will be a need for debt and banks will step in at that stage to provide that at the right price,” Chaudhry said.

As far as demand for credit from the corporate segment is concerned, Khara said, infrastructure remains a key focus areas, followed by the commodities sector. There is also demand for investment credit. Another sector coming up is the logistics sector, and we are seeing traction for new capacity creation.

Khullar said though the corporate (credit) side has been weak, there has been a pick up in the working capital side. But private capex is probably a year away.

Rajkiran Rai G, MD and CEO of Union Bank of India, said it is not a conscious decision to increase the retail segment, but circumstances have forced many banks to go big on it. “The corporates are not inclined to borrow today. Even when they are borrowing, they are structuring it very well. The short-term rates are low so they are resorting to bonds, CPs, including ECBs. But corporate credit is going to come back and on bank books, because the other players in the market will not be able to finance infrastructure the way we can.

Speaking on fintechs, the bankers said the right way to go about this is collaboration, but they may also have to compete with these players for their share of the pie. “If more players come into this game, expand the market, it will be good for the incumbents as well,” said Vaidyanathan.

“... We think we should collaborate with them. There is value that fintechs provide to banks and banks provide to fintechs,” said Khullar.

Chaudhry said there are certain sectors and products where they are competing with these fintechs head on. “I don’t want to shy away from saying that they are our competition.”