 "BS Banking Round Table: Recovery on ground will take a couple of quarters")
Are banks shying away from funding large projects?
Aditya Puri: If there is a viable project and if there is a capital requirement, banks will definitely lend. There is no liquidity crunch if the project is viable. And it is a myth that banks are not lending because of NPA (non-performing asset) issues.
Arundhati Bhattacharya: To say that growth is not coming because banks are not financing is extremely wrong. We have more than enough liquidity to fund if a project is good. From 2011, the number of projects that have been put to us has significantly come down. Just two months back we saw that the non-infra projects that were 17 last year is down to three. So, it is more a question of getting projects off the ground than financing.
How do you see the next twelve months?
Shikha Sharma: Fundamentally, you want banks to lend for growth and for that projects have to start. Now, we are definitely seeing focus on clearing some of those bottlenecks. For instance, what they announced at the coal auctions is very well thought through, well executed.
There are two positive signals that we can see already. One is that some of the projects that were earlier stuck are moving, we are beginning to see some expenditure happening. The second is in case of highly leveraged companies, they have managed to start some of their assets. And as those projects become more productive, it adds to capacities allowing them to do the next round of investments. Recovery on ground will take a couple of quarters but we are fairly optimistic that things should look better next year.
Ravneet Gill: Next year, we expect things to be better. We expect earnings growth in the range of 16-17 per cent next year. Earlier there was a threat that we could see some reversal of capital from the emerging markets, but if that was to happen then India would be looked at a little differently from the other emerging markets. If we put all that together, you will realise that India is on a growth trajectory.
Are the savings rates for depositors attractive?
Currently, I think people are definitely coming back into financial instruments but not so much in banks. The more lucrative area is the capital markets. But my advice to savers is that when any market is trending upwards they should not jump in with everything; it should be over a period of time. But, I definitely think, that banking deposits need a leg up from the government in respect of tax deducted at source. Because for senior citizens, liquidity can be a challenge.
Puri: Given the fact that there is a real return available on deposits today I would strongly recommend people access these deposits. The second point is normally we find retail investors come into the market at probably the wrong time. So I am not saying don't go into the market; I am saying keep a proportion.
Are you looking at lack of projects from the capacity side for the companies and if they don't have profits, they don't have the equity component of projects. So, when you look at company balance sheets, do you see a change in profit levels?
Bhattacharya: A process of consolidation is already on. What we are seeing is that many of the companies' completed projects are getting sold. People are now trying to bring down leverage to a bearable level.
Companies which had got over-leveraged on account of lack of access to capital markets, are also beginning to access capital markets and this is happening for small companies as well. As that happens and they bring in more equity, their ability to come in with further projects will be restored. So this is a process and will take 12 months. This is why you are also seeing that the credit growth is almost at the bottom.
One of the reasons is that people have put up capacity which was not getting used. Now the time has come to start using that capacity.
But for ramping up capacity, you need working capital funds which are short-term. And short term is better available in the CP (commercial paper) market especially for well-rated companies.
Further you have large projects which are fully commissioned, capex is completely in the ground, but they have not come on stream and hence banks or lenders become the victims. Third, India Inc is highly leveraged. I think these issues need to be sorted out. Unless that happens, it is unrealistic to expect new capacity getting built up.
What is the picture from the SME sector?
The RBI governor raised the question of 'super equity' the other day. Promoters don't suffer and the person who gives credit takes the hit. Your comments.
Sharma: For credit to grow, it's very important to ensure collectability and we have a lot of systems and structures to allow that to happen such as SARFAESI, DRT. But, sometimes they are not very effective.
The governor is talking about getting them to be more effective, timely decision-making and so on. If we can actually execute that, it is going to improve the credit culture and will allow credit to be delivered more easily and priced more rationally. The effect of that will probably be felt in the medium term and that could be a huge positive for credit quality. I think we have a lot of structures in place and if those just work more effectively, we can get collections to work better.
Puri: We need something on the lines of a Chapter 11 here. They have to be committed to better delivery whereby if a project is unviable or if it takes a hit, then the equity should take the hit first and if the company still suffers, they (promoters) have to leave. There have to be laws to enforce that. The laws exist but the execution has to be there. And maybe you would need more laws. There has been already some beginning.
Jhaveri: What the governor spoke about is having more skin in the game. Maybe there has not been enough skin in the game. In the recent past, we have seen evidence in the banking industry of that changing. Banks are asking big borrowers to have skin in the game. Also we have seen that banks are facilitating consolidation when there is not enough skin in the game.
On financial inclusion, the Jan Dhan Yojana and payment banks have been the foremost initiatives. How do you look at that?
As far as payment banks are concerned, we have to wait and watch how they establish viability and what is the additional role that will be played in addition to Jan Dhan.
Bhattacharya: We have to take the very large number of accounts as an investment. It is indeed costly to open an account especially when you are opening it with a card. The only way we look at it is if at some point of time, money flow comes into these accounts that enables us to set up a pattern that enables us to lend to them so that we take them out of the clutch of money lenders into the banking system. These customers will need to be served closer to their doorsteps. We cannot expect them to come to the banks' branches. So the cost of serving them has to be brought down. We have to create that ecosystem of business correspondents, customer service points, etc. We currently have 100,000 touch points and we expect to double it in the next year. So when this ecosystem grows, these people will come into the banking system. And we have to hope for that.
Puri: There is enough for everyone to do. When you talk about Jan Dhan and payment banks, you are talking about financial access. Financial inclusion is a wider term where you are creating a sustainable system.
Jhaveri: The role of a bank is to facilitate progress and create economic value for its customers. If you think about India for the next 10-15 years, if you think about any of the drivers that have been talked about-whether it is penetration, whether it is access or digitisation- banks will facilitate progress and create economic value.
The problem we have is that of instant gratification. We are looking at payment banks and saying will they create value next year. Will they have good market cap in a short period? Good institutions are created over a long period of time. If we were in 1990 and having this conversation whether some of these extraordinary private banks will exist, who would have thought that in a short period of 25 years this is the kind of value that they will create. But that has happened. And I believe that the drivers that we have for the next 10 to 15 years of growth, these institutions will have a role in that to play.
How do the foreign banks see the opportunity? Will it be part of the game or do you feel left behind because the environment does not give you the room?
Gill: The point that was made was there is enough room for everybody to play. The second thing is banking has been at the forefront of innovation.
A lot of that innovation comes in banking because you are pushed to the corner. It will make banks more competitive, the cost structure will improve, and the overall efficiency will improve. We need to look at these changes more constructively.
Jhaveri: Being a foreign bank, we have been constrained by the regulation on branches but that has never worried us. We've been in operation for 112 years and have just over 40 branches. But there will be regulations and you have to find a way to operate successfully within those constraints. We are very excited by the opportunity we see in the foreseeable future.
What are your primary internal and external constraints?
Gill: This is a growth market and will continue to grow. Internal constraints are not that many. Externally, the banking opportunity will be bigger than ever before, but I think we need to see in a very different fashion. For example, the trade finance/panel business has changed in the last year and a half, because of the micro economic environment and because the entire universe of clients has got severely squeezed. Margins have collapsed. That business needs to be reinvented and the challenge for us is how quickly we can reinvent ourselves and reposition ourselves.
Bhattacharya: Human resource is the biggest challenge. We have a workforce of 220,000 and we have large-scale retirements coming up every year for the next several years. To get in that many people, to train them, to have them ready. Not only that, internally also, promotions are taking place much faster because we have a gap in the middle (level) because of 12 years of non-recruitment; so that is definitely a major challenge internally. Externally, low credit growth is a challenge.
Puri: We see a fantastic opportunity and no constraints. With 60 per cent of rural India underpenetrated, India growing at 6.5-7 per cent, and a complete change in the digital environment with a large population moving to digital, this may be the best of times.
Jhaveri: We have to make significant investment in talent; it's both a challenge and an opportunity. The priority sector lending regime that exists today needs a change.
Why is percentage of NPAs in PSBs' assets higher than private banks'?
Bhattacharya: Seventy per cent of banking in India is done by public sector banks (PSBs) and the private sector does only 30 per cent. So naturally, PSBs will account for 70 per cent of the NPAs, but it's a fact that the NPA contribution of PSBs is higher at 90 per cent.
Large corporates are funded by both private and public sector banks but they are not the ones that become NPAs and they have other funding avenues for instance from their non-core assets. So they may be stressed but they don't become NPAs.
The difference between the PSBs and private sector banks lies in mid-corporate, SME & agri areas. Here the private sector's contribution is of recent origin unlike PSBs. In the private sector, you can make bilateral deals but in the public sector I cannot do a bilateral deal till I have convened a committee that comes up with a reserve price and I do an auction. If it fails then I will have to repeat the process and only after that I can do a bilateral deal. Even if I do a deal after two auctions then the possibility is very huge that I will get an RTI and then I will have a CVC enquiry and may be even worse. So you have to understand the constraints under which PSBs work.
What's your response to the monetary policy?
Gill: I would prefer a large rate cut in February.
Tiwari: It should be a minimum of 50 bps when it happens.
Bhattacharya: Now that the status quo has been maintained, rate cut is expected in February only - whether it is 25 or 50 bps that we will have to see.
Aditya Puri: If there is a viable project and if there is a capital requirement, banks will definitely lend. There is no liquidity crunch if the project is viable. And it is a myth that banks are not lending because of NPA (non-performing asset) issues.
Arundhati Bhattacharya: To say that growth is not coming because banks are not financing is extremely wrong. We have more than enough liquidity to fund if a project is good. From 2011, the number of projects that have been put to us has significantly come down. Just two months back we saw that the non-infra projects that were 17 last year is down to three. So, it is more a question of getting projects off the ground than financing.
How do you see the next twelve months?
Shikha Sharma: Fundamentally, you want banks to lend for growth and for that projects have to start. Now, we are definitely seeing focus on clearing some of those bottlenecks. For instance, what they announced at the coal auctions is very well thought through, well executed.
There are two positive signals that we can see already. One is that some of the projects that were earlier stuck are moving, we are beginning to see some expenditure happening. The second is in case of highly leveraged companies, they have managed to start some of their assets. And as those projects become more productive, it adds to capacities allowing them to do the next round of investments. Recovery on ground will take a couple of quarters but we are fairly optimistic that things should look better next year.
Ravneet Gill: Next year, we expect things to be better. We expect earnings growth in the range of 16-17 per cent next year. Earlier there was a threat that we could see some reversal of capital from the emerging markets, but if that was to happen then India would be looked at a little differently from the other emerging markets. If we put all that together, you will realise that India is on a growth trajectory.
Are the savings rates for depositors attractive?
Currently, I think people are definitely coming back into financial instruments but not so much in banks. The more lucrative area is the capital markets. But my advice to savers is that when any market is trending upwards they should not jump in with everything; it should be over a period of time. But, I definitely think, that banking deposits need a leg up from the government in respect of tax deducted at source. Because for senior citizens, liquidity can be a challenge.
Puri: Given the fact that there is a real return available on deposits today I would strongly recommend people access these deposits. The second point is normally we find retail investors come into the market at probably the wrong time. So I am not saying don't go into the market; I am saying keep a proportion.
Are you looking at lack of projects from the capacity side for the companies and if they don't have profits, they don't have the equity component of projects. So, when you look at company balance sheets, do you see a change in profit levels?
Bhattacharya: A process of consolidation is already on. What we are seeing is that many of the companies' completed projects are getting sold. People are now trying to bring down leverage to a bearable level.
Companies which had got over-leveraged on account of lack of access to capital markets, are also beginning to access capital markets and this is happening for small companies as well. As that happens and they bring in more equity, their ability to come in with further projects will be restored. So this is a process and will take 12 months. This is why you are also seeing that the credit growth is almost at the bottom.
One of the reasons is that people have put up capacity which was not getting used. Now the time has come to start using that capacity.
But for ramping up capacity, you need working capital funds which are short-term. And short term is better available in the CP (commercial paper) market especially for well-rated companies.
Further you have large projects which are fully commissioned, capex is completely in the ground, but they have not come on stream and hence banks or lenders become the victims. Third, India Inc is highly leveraged. I think these issues need to be sorted out. Unless that happens, it is unrealistic to expect new capacity getting built up.
What is the picture from the SME sector?
The RBI governor raised the question of 'super equity' the other day. Promoters don't suffer and the person who gives credit takes the hit. Your comments.
Sharma: For credit to grow, it's very important to ensure collectability and we have a lot of systems and structures to allow that to happen such as SARFAESI, DRT. But, sometimes they are not very effective.
The governor is talking about getting them to be more effective, timely decision-making and so on. If we can actually execute that, it is going to improve the credit culture and will allow credit to be delivered more easily and priced more rationally. The effect of that will probably be felt in the medium term and that could be a huge positive for credit quality. I think we have a lot of structures in place and if those just work more effectively, we can get collections to work better.
Puri: We need something on the lines of a Chapter 11 here. They have to be committed to better delivery whereby if a project is unviable or if it takes a hit, then the equity should take the hit first and if the company still suffers, they (promoters) have to leave. There have to be laws to enforce that. The laws exist but the execution has to be there. And maybe you would need more laws. There has been already some beginning.
Jhaveri: What the governor spoke about is having more skin in the game. Maybe there has not been enough skin in the game. In the recent past, we have seen evidence in the banking industry of that changing. Banks are asking big borrowers to have skin in the game. Also we have seen that banks are facilitating consolidation when there is not enough skin in the game.
On financial inclusion, the Jan Dhan Yojana and payment banks have been the foremost initiatives. How do you look at that?
As far as payment banks are concerned, we have to wait and watch how they establish viability and what is the additional role that will be played in addition to Jan Dhan.
Bhattacharya: We have to take the very large number of accounts as an investment. It is indeed costly to open an account especially when you are opening it with a card. The only way we look at it is if at some point of time, money flow comes into these accounts that enables us to set up a pattern that enables us to lend to them so that we take them out of the clutch of money lenders into the banking system. These customers will need to be served closer to their doorsteps. We cannot expect them to come to the banks' branches. So the cost of serving them has to be brought down. We have to create that ecosystem of business correspondents, customer service points, etc. We currently have 100,000 touch points and we expect to double it in the next year. So when this ecosystem grows, these people will come into the banking system. And we have to hope for that.
Puri: There is enough for everyone to do. When you talk about Jan Dhan and payment banks, you are talking about financial access. Financial inclusion is a wider term where you are creating a sustainable system.
Jhaveri: The role of a bank is to facilitate progress and create economic value for its customers. If you think about India for the next 10-15 years, if you think about any of the drivers that have been talked about-whether it is penetration, whether it is access or digitisation- banks will facilitate progress and create economic value.
The problem we have is that of instant gratification. We are looking at payment banks and saying will they create value next year. Will they have good market cap in a short period? Good institutions are created over a long period of time. If we were in 1990 and having this conversation whether some of these extraordinary private banks will exist, who would have thought that in a short period of 25 years this is the kind of value that they will create. But that has happened. And I believe that the drivers that we have for the next 10 to 15 years of growth, these institutions will have a role in that to play.
How do the foreign banks see the opportunity? Will it be part of the game or do you feel left behind because the environment does not give you the room?
Gill: The point that was made was there is enough room for everybody to play. The second thing is banking has been at the forefront of innovation.
A lot of that innovation comes in banking because you are pushed to the corner. It will make banks more competitive, the cost structure will improve, and the overall efficiency will improve. We need to look at these changes more constructively.
Jhaveri: Being a foreign bank, we have been constrained by the regulation on branches but that has never worried us. We've been in operation for 112 years and have just over 40 branches. But there will be regulations and you have to find a way to operate successfully within those constraints. We are very excited by the opportunity we see in the foreseeable future.
What are your primary internal and external constraints?
Gill: This is a growth market and will continue to grow. Internal constraints are not that many. Externally, the banking opportunity will be bigger than ever before, but I think we need to see in a very different fashion. For example, the trade finance/panel business has changed in the last year and a half, because of the micro economic environment and because the entire universe of clients has got severely squeezed. Margins have collapsed. That business needs to be reinvented and the challenge for us is how quickly we can reinvent ourselves and reposition ourselves.
Bhattacharya: Human resource is the biggest challenge. We have a workforce of 220,000 and we have large-scale retirements coming up every year for the next several years. To get in that many people, to train them, to have them ready. Not only that, internally also, promotions are taking place much faster because we have a gap in the middle (level) because of 12 years of non-recruitment; so that is definitely a major challenge internally. Externally, low credit growth is a challenge.
Puri: We see a fantastic opportunity and no constraints. With 60 per cent of rural India underpenetrated, India growing at 6.5-7 per cent, and a complete change in the digital environment with a large population moving to digital, this may be the best of times.
Jhaveri: We have to make significant investment in talent; it's both a challenge and an opportunity. The priority sector lending regime that exists today needs a change.
Why is percentage of NPAs in PSBs' assets higher than private banks'?
Bhattacharya: Seventy per cent of banking in India is done by public sector banks (PSBs) and the private sector does only 30 per cent. So naturally, PSBs will account for 70 per cent of the NPAs, but it's a fact that the NPA contribution of PSBs is higher at 90 per cent.
Large corporates are funded by both private and public sector banks but they are not the ones that become NPAs and they have other funding avenues for instance from their non-core assets. So they may be stressed but they don't become NPAs.
The difference between the PSBs and private sector banks lies in mid-corporate, SME & agri areas. Here the private sector's contribution is of recent origin unlike PSBs. In the private sector, you can make bilateral deals but in the public sector I cannot do a bilateral deal till I have convened a committee that comes up with a reserve price and I do an auction. If it fails then I will have to repeat the process and only after that I can do a bilateral deal. Even if I do a deal after two auctions then the possibility is very huge that I will get an RTI and then I will have a CVC enquiry and may be even worse. So you have to understand the constraints under which PSBs work.
What's your response to the monetary policy?
Gill: I would prefer a large rate cut in February.
Tiwari: It should be a minimum of 50 bps when it happens.
Bhattacharya: Now that the status quo has been maintained, rate cut is expected in February only - whether it is 25 or 50 bps that we will have to see.