BS CEO round table: Six bank chiefs agree that worst is over for industry

There are some risks and we need to be watchful, say bank chiefs

Leading names of Indian banking, including State Bank of India Chairman Dinesh Kumar Khara, Union Bank of India Managing director (MD) and Chief Executive Officer (CEO) Rajkiran Rai G, Axis Bank MD & CEO Amitabh Chaudhry, IDBI Bank MD & CEO Rakesh Sharma, Citi India CEO Ashu Khullar, and IDFC First Bank MD & CEO V Vaidyanathan, joined Tamal Bandyopadhyay at Business Standard BFSI Insight Summit in November 2021, to discuss the issues plaguing the sector. They shed light on how the worst is perhaps over for the industry, the growth in retail loans and muted performance of corporate loans, and their views on how to adopt technology and the role of fintechs. Edited excerpts:

Is the worst over for the banking sector?

Rajkiran Rao G: Yes, things look good. One of the reasons why things are looking good is that expectations were pretty bad. It was widely expected that the bank’s asset quality, collection efficiency, and other things will be badly hit because of Covid. Given the expectations, we have done pretty well. However, it can be still better. The surprising thing is that with the resilience the asset portfolio of banks has shown, be it the corporate book, MSME book or retail book, things have come back to normalcy pretty quickly. Collections have improved, and the portfolios are behaving as if these were normal times. Even the income side is doing pretty well. Also, we have seen collections happening from the earlier provided accounts. So, the balance sheet looks great.

Rakesh Sharma: Banks entered the pandemic with relatively strong balance sheets. Prior to the pandemic, we had the global financial crisis, and after that we had the asset quality review (AQR). Banks were targeting a 60 per cent provision coverage ratio (PCR). So, after the AQR and with infusion of capital by the government in public sector banks, and private banks raising capital from the markets, banks’ balance sheets were strengthened. Hence, banks were more resilient in the face of this crisis.

Of course, the pandemic was unanticipated, but with various fiscal and financial measures taken by both RBI and the government, it helped banks to tackle the problem at hand. The moratorium has certainly helped, but cash-flows have to improve, because if they don’t, when the restructuring period ends those borrowers may not be able to honour their commitments. And, this can create problems. Hence banks have to be very strong in follow-up. Also, the government has to continue with some fiscal measures, so that the cash-flow situation improves. Otherwise, the non-performing assets (NPAs) may shoot up.

Amitabh Chaudhry: We have to be watchful for some of the signs from the global economy, and domestically as well. We have huge supply chain issues; commodity prices are still rising and these could have an impact on sentiments. Private capex has to come back; the government alone cannot support economic growth, which all of us are expecting. There are some risks and we need to be watchful. While restructuring has been done, a moratorium has been given, these things are coming to roost now. If cash-flows do not come back, one could see further slippages coming through in the system. But I do believe the banking system is very resilient, and has the balance sheet and the capital to manage the risks.

V Vaidyanathan: In this decade, every second year, there has been some crisis in India. First, in 2012-13, there was the taper tantrum and the rupee went to crazy levels. Then, in 2016, there was demonetisation and suddenly 86 per cent of the cash was wiped out and replaced. In 2017, there was the GST (Goods and Services Tax), which was a major change. In 2018, there was the IL&FS crisis. And, in 2020-21, we have the crisis of the century, Covid. During this period, portfolios in the Indian banking system have been quite resilient. Private sector banks have posted very strong profits during this entire 10-year period and state-owned banks have recapitalised.

The repeated crises have battle-hardened the banking system and I get a lot of comfort from that. The second comfort I get is that even after the Covid crisis, collections after the second wave are better than pre-Covid. Portfolios booked from September’20 and October’20 onwards are behaving better than pre-Covid. Hence, there is something fundamentally strong about the Indian diversified market, particularly retail. While retail credit has not yet gotten to the scale it can be, the underlying institutional framework has been built on a great scale.

Ashu Khullar: The sense of optimism is palpable. The real credit goes to RBI and the government, because of all the aid they gave in the form of moratorium, restructuring support, and emergency credit line guarantee support. This showed that when you have a small-time cash-flow support, these schemes do work. Otherwise, we would have been in a much worse position. Generally, the sentiment is very positive. In our consumer business, we are seeing our collections are very strong, our slippages are much less than we had anticipated, and whatever reserves we had created turned out to be very conservative. The demand for loans is also coming back very strongly.

The corporate side has been weak, but there is some pick-up on the working capital side because sales are coming back and commodity prices are high. Private capex is perhaps a year away, because we will first see the government and public sector units coming into the capex space. We have to probably be a little more patient on growing our corporate portfolios, because demand is going to take some time. Because large corporates have other options — the commercial paper market and the bond market — which are very liquid and attractive sources of funds. I worry about two things — inflation and the fact that Covid has made the strong even stronger and the more marginalised sections of the society have become more marginalised.

Dinesh Kumar Khara: Going forward, we hope to see a decent scenario, as far as retail lending is concerned, both in growth and quality terms. The contributing factors could be the ecosystem that has been created, the bureaus that have been formed, and the strong collection mechanism that has been put in place. Also, responsible borrowing on the part of borrowers will certainly help. So, the system has matured and it is very heartening for a banker to see such mature behaviour.

But the corporate segment still remains a challenge and, as of now, the behaviour is quite patchy. We also have a very pronounced supply chain issue. Hopefully, it will get resolved. When it comes to corporate credit quality, all banks have adopted a policy post-AQR, wherein they have started identifying risks much in advance and start providing for them. The capacity of banks to provide for any kind of stress was augmented by their capital adequacy. Bankers have recognised the potential risks and to that extent they have taken care of future uncertainties. The foreseeable threats have been taken care of very well.

Is there a shift of focus to retail credit? If so, where will corporates go? Also, with interest rates likely to go up, do you expect rising defaults?

Chaudhry: The money will go where the demand is. Right now, the demand is on the retail side and that’s where the money is going. Secondly, a lot of banks may have reached a conclusion that retail loans are easier to manage during a crisis, or at least one doesn’t get into the problem when large wholesale loans default. In that sense, retail is a better strategy. Hence, a number of banks who were very wholesale-dominated have tried to increase the share of retail loans, and so the competition has increased.

In the retail segment, they find mortgages as a secured loan, so the competition in the mortgage segment has increased, and as a result you are seeing such interest rates. Obviously, it is also a result of the excess liquidity in the system. People need to deploy their excess liquidity somewhere and they think as the corporate side is not growing, retail is perhaps the best option.

On the flip side, corporates have deleveraged a lot, raised a lot of capital, tapped the bond markets, the foreign markets, and generally, private capex has come down also. The profitability of the higher-quality Indian corporates has also improved over a period of time. So, in that sense, because of the deleveraging, the demand for loans has gone down. But, as the economy picks up, and private capex picks up, there will be a need for debt and banks will step in to provide the debt, hopefully at the right price.

I don’t think corporations have to worry that the banking system may not step up. If they have the right projects, the right profile, the money will be available. The only place where banks will be careful is in project financing, because a lot of banks have burnt their fingers in project finance. The regulatory issues around project finance are too vast, there is too much uncertainty, and time has proved that if you do project financing, not backed by the right kind of financing, the chances are you might become more of an equity provider rather than debt.

The default rates may go up. In comparison to running a very tight wholesale book, there are categories of retail assets where the slippages are higher, but that are priced accordingly. So, going into retail per se is not risky, but going into retail without putting in the right processes is risky.

Sharma: There has to be a balanced approach. You cannot have either a 100 per cent retail book or 100 per cent corporate book. This is what the bankers did in the past and even in our bank, it was skewed towards corporate banking. Retail lending has increased recently, because there is demand. Also, there is a lot of potential in the retail portfolio. To add to it, credit cost and slippages are also low in the retail book. As of now, most corporates are approaching the bond market. Rates are quite low there, so there is some interest rate risk, because in future, interest rates are expected to go up. As a bank we are assessing our risk appetite for taking this interest rate risk. Based on that, we have to decide how much financing we want to do on the corporate side.

Rajkiran: Every bank has its own business model and it is not that we change our business model every year. So, it is a very conscious decision of every financial institution, whether to be in retail or corporate, and what would be the composition. But temporarily we correct the composition, depending on the situation. In the last two years, corporates were actively deleveraging and there was not much in the system for corporate loans, but on the contrary, there was a lot of demand for retail loans.

Hence every organisation has got strong retail loans and built their book such that it seems banks are focusing on retail and not growing their corporate books. It is not as if there was a conscious decision to increase retail, but circumstances forced us to go big in retail. But I don’t foresee any problem in retail, because the whole ecosystem of retail is built on digital platforms. And collection efficiencies, post-Covid, prove that retail borrowers are very responsible and are very concerned about their credit scores.

Where do you see the investment demand coming from?

Khara: The infrastructure sector remains one of the key focus areas because of the initiatives taken by the government of India. Then, we have the commodity sector, where we have come across situations where companies have hit capacity utilisation as high as 100 per cent and reached out for capacity augmentation. There is also some traction for capacity creation in the logistics sector, which is a branch of commercial real estate, essentially coming from the e-commerce sector.

Khullar: Capex loan demand is still a year or so away, give or take. Therefore, the demand pick-up in recent times has been in the working capital space, supplier chain, and trade financing. For us as foreign banks, we try to pick spots where we think we can add value. For us, it means helping Indian companies which work globally, to get funded. The PLI (production linked incentive) scheme is something we are very focused on, both for Indian companies’ investing capacity as well as for a lot of foreign companies, to help them put up new factories to get the benefit of the scheme.

There’s another area where we are trying to grow, and it is perhaps less recognised. We actually have a viable commercial bank component, which is basically lending to companies that are not large corporates or multinationals or the upper end of the MSME space. We are doubling down on this business. We are hiring more people, trying to use more data to come up with digital approved lending. We are also trying to grow in the commercial real estate space and in the securitisation market, because we see opportunity in these areas.

Rajkiran: Corporates have managed their books very well and they are not inclined to borrow today. And even when they are borrowing, they are structuring it very well. If you look at their balance sheets, their operating cost and finance cost has come down. Before the real push on corporate credit comes, it is the environment that gets created around that. The big segment in corporate credit is infrastructure. In infrastructure, we finance two levels — the execution risk and refinance of projects that have been completed. Completed infra projects is a big pie today and there is a lot of competition and a lot of competitive pricing.
 

The corporate loan market is not going to be the same that we saw in 2011. The same mistakes are not going to be repeated. We are going to finance it differently, the risk assessment is much better, the risk pricing is being done properly. Corporate credit is bound to come back to the bank books because the other players in the market cannot finance infrastructure the way we do, because it needs specialised knowledge.

Vaidyanathan: Corporate loans are not the problem. Infrastructure loans and project financing loans are the problem. It is all about the specialisation and the capability of the financial institution. Even within retail, there are a lot of businesses and each have their own nature. In our case, none of the businesses are more than 15 per cent of the book today. In India, I feel, the driver is the economy. There is a massive amount of formalisation happening in India, particularly in the last five years. Also, a new wave of employment is being created in the white-collar sector. Very importantly, India has built the architecture and the ecosystem before building the book.

How prepared are you for digital disruption?

Khara: We are a 215-year-old institution and we have negotiated all the changes that have happened in the system very successfully. And, hopefully, we will continue doing that, going forward as well. Adoption of technology both for consumer convenience and for internal operations has become essential. The ecosystem is evolving, and there is a lot of data available in the ecosystem which can be put into effect.

As far as our internal processes are concerned, we are all drawing upon this kind of an ecosystem. Of course, we are largely dependent on our in-house development, but we are also dependent on the fintechs that are operating in this space. We are constantly updating our internal systems and improving the offerings to the customer when it comes to interface.

Vaidyanathan: The big techs are holding monopolistic or duopolistic positions in the country. What are the implications of that in the long run is something that everyone, including the regulator, has to think about. With regard to the large number of financial technology companies, banks, and payments solution providers, they are expanding the ecosystem. If more players come in and expand the market, it is good for incumbents also. I see it as an expansion of the credit market, bringing in 200-300 million more new-to-credit to the ecosystem.

Khullar: We will collaborate with fintechs. There is value which fintechs provide to banks and vice-versa. Ultimately, our mission to avoid getting disrupted is to give as seamless a digital experience to the clients as Amazon gives. That is the benchmark. In that context, you cannot do it alone. We create some solutions in-house, but then we consciously seek out last-mile solutions for our clients, which fintechs are producing.

Sharma: Like all other banks, we have also been building our technical capabilities. I strongly feel the banks have their own strengths and at the same time there are a large number of fintechs, who have expertise in their own respective fields and these fintechs have last-mile connections. So, we feel that we have to start a collaborative approach, and we are working on that. We are availing of their technical capabilities and, in some cases, working on a co-lending model with them.

Rajkiran: Technology adoption is going to be the biggest differentiator between different financial services providers. In the next two to three years this will play out. Whoever is quick to adopt technology, and give better customer service, will gain market share. Customers will become bank-agnostic because they will look at the comfort, experience, products, and pricing. With the kind of ecosystem and data points we have, we will have more and more digital lending.

Chaudhry: Fintechs are not just there to be cohabitated with or collaborated with, they have to compete as well. There are certain products where we compete with these fintechs head-on. In some cases, they decide to work with a competitive bank. So, I don’t want to shy away from saying that they are competition. But yes, they are making us do things that we otherwise would not have done. They provide a unique customer experience, using state-of-the-art technologies, and have a lot of capital to burn, so they are trying to attack, and turning to us and saying we have a great set of customers and asking for commission for getting access to those customers.

With the kind of backers they have, they can be at it for a long time. Banks have to do a few things — we have to ensure that what customers are experiencing on our platforms is as good, if not better, than what the fintechs are providing.

Secondly, we have to work with the fintechs to ensure that we can access those sets of customers which they are attracting. We also have to find some startups that can invest in some new technologies that will make the current set of fintechs redundant. Banks in the next few years will have to invest huge amounts of money to make themselves ready to work with the fintechs.