BS Banking Annual 2016: 'Our message is we are not here for charity'

Edited excerpts from a discussion at the Business Standard Banking Round Table held in Mumbai in October

The issue of credit growth continues, while there is some talk of moving from recognising bad assets to resolving problems. What are your thoughts?

Rajiv Lall:  There is 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. 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 current and savings account deposits come from the top 50 centres whereas the GDP 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 formal banking system.

The lack of credit demand is because of the focus of the banking system. The principal target of banks, 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 of 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 will take care of the capital. If we look at retail loans, and  specifically mortgage loans, 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 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 demand from companies, which is not there anymore. The working capital cycle is also depressed. 

But, there is strong demand from other sectors such as SME and retail. There’s going to be a decadal shift from informal to formal sector as far as retail and SME are 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.

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 changes 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: 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. Within retail, the housing business, which is more than 50 per cent of the consumer business, continues to grow at a healthy 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 is stable. 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. 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 fits into the various cases. The judicial system is also gearing up to become an enabler — whether it is 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 after the new methodology, the growth is definitely six per cent-plus and the trajectory is up. So, if you look at a 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 grow. 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.

Sixty 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. It’s a brilliant time when growth is rising.

Also, the message from the 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: No other country comes remotely close to what we have in terms of growth. Revival in agriculture, Seventh Pay Commission or defence and railways spending and, hopefully, spending and investment on the private side will begin. Thus, the prospects are good. It’s not that we can wish past issues away, but a fair amount of progress has already been made. We have to focus more on the positives.

Yes, there are issues but there is enough in there to think about the future. Besides growth, there are positives like the credit-to-GDP ratio, 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. That’s a very exciting part of banking and has become an inherent necessity too. 

Banks need to be nimble, agile and ahead in terms of technology, as it allows you to do more things, like actually providing the cost efficiency to reach 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 coming digital revolution. We will mostly eat other guys for breakfast. No new digital player is creating a new bank. All their offerings are on the top of the banking system. Technology is nobody’s private domain. I can use technology equally. It will substantially change the cost-revenue dynamics for 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 is doing this. It’s not that we should not be concerned, but they should be equally concerned.

Jhaveri: 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, 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 at 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. For banks, it is the entire value chain a bank can offer to household, enterprise, large corporation and individual. How many start-ups can do all of that? We have to look at technology as something that is going to be powerful and will drive our businesses.

Are public sector banks moving towards retail banking, away from corporate banking?

Tiwari: There is a misconception that home loans and car loans are only retail. But there’s more in retail looking at the penetration levels. But considering the loan-to-value and elongated repayment tenure, I will not be surprised if there’s a bubble in retail credit.

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. Do you see a new signal from RBI?

Kochhar: 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 deals that we are seeing today 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, like in steel. 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 take over 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 private sector assets?

Sharma: Whether it is the current 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. The right projects and the right managements need to be supported. 

Lall: While we are moving in the right direction in relation to projects that can be revived, RBI’s reforms will aid in resolving those type of assets. I am not very optimistic in ‘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.

Will corporate projects come back?

Puri: There is enough demand for financial services in this country. When demand exceeds supply, new projects will also come in 12-18 months. With respect to financing for those projects, there is no shortage of money.

What about infrastructure projects and their funding?

Sharma: Infrastructure projects are going to get financed only if there is a tighter contract. Forget banks, even promoters are going to look at it that way and that’s a lesson that has been hopefully learnt irreversibly for the future.

Kochhar: It will get more structured to start with. Concentrations that you have seen in the past will also get 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 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 will not get financed.