Seven leading bankers discuss the road ahead for the financial sector and the challenges of managing the economic recovery.
The country’s seven leading bankers met at the Business Standard Banking Roundtable to discuss ‘Life after the crisis’ at the ITC Grand Central in Mumbai on Wednesday. The panel consisted of State Bank of India Chairman O P Bhatt, ICICI Bank Managing Director & CEO Chanda Kochhar, Axis Bank Managing Director & CEO Shikha Sharma, Union Bank of India Chairman & Managing Director M V Nair, Citibank (South Asia) CEO Mark Robinson, HSBC India CEO Stuart Davis and Standard Chartered Bank CEO for South Asia and India Neeraj Swaroop. The discussion was moderated by T N Ninan. Excerpts:
Moderator: We have come through a difficult year, but credit growth has been slower than what the Reserve Bank of India (RBI) had forecast at the start of the year. Now, we have a situation where the RBI is signalling the first slight shift in monetary policy, and, as we look at the start of the new year, what are the issues we confront and whether the reality going to be different. We would like to begin by asking our panelists to make a brief opening statement outlining the key issues that confront banks today.
Nair: Next year is going to be slightly challenging for the simple reason that the trend GDP growth is expected to be 8-9 per cent over the next decade. One issue that will come up is the credit need of industry. Credit growth should be around 25 per cent. Considering the government borrowing programme, managing liquidity is going to be an issue. The good news is that we are getting back to the growth story. The challenges in the public sector context are going to be getting financial inclusion right. Financing infrastructure is another big requirement. There is a huge amount of risk lying there because we do finance with the option to reset the interest rate from time to time. Whether the industry will be able to take the risk, we don’t know.
Davis: There is a considerable amount of uncertainty. Looking at the global position, for developed countries it is still a difficult situation. When we look at the emerging markets we see a very different scenario. So we are getting to what commentators are calling a two-speed global economy between the developed and the developing countries. The Indian economy will grow by at least 8 per cent but it cannot be isolated from the rest of the world, as we saw during the crisis. Loan demand is muted at the moment which is surprising because at this stage of the cycle we would have expected loan demand to be a little higher
Kochhar: In the developed economies, there is still a search for what the next driver is going to be, because in the past, these economies were dependent on excess consumption.
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But, when you look at India, I am very optimistic. If you look at this decade, the Indian banking industry really has to move to the next trajectory because this is the decade where we will see accelerated growth. If we look at the past few years, the growth has been driven by domestic consumption. If we look forward, the domestic consumption is here to stay. To add to that, the next growth driver is going to be investments.
We are now seeing investment activity starting in infrastructure and coal mining. This is the kind of time that Indian banks have never seen in the past. In broad terms there is a huge opportunity. And that’s a huge responsibility on our shoulders because if we don’t fund investment, we will slow down the process of acceleration of India’s growth.
Bhatt: There is a huge opportunity awaiting everybody, for companies and banks. In India, banks are well capitalised. You look at the amount of liquidity in the system and the amount of opportunity that is there in India, in any sector or in any geography. Small villages and small towns are humming with activity.
In terms of opportunities, infrastructure is one. We said we need $500 billion of investment in infrastructure over five years, but now we are talking of a trillion dollar-plus.
During the last few years, India has been in a consumption phase of growth. Currently, the consumption part of GDP is 64 per cent. That cannot rise indefinitely. Ultimately we have to invest. India is in a unique position where growth will be divided between consumption and investment—what you invest will be consumed and what you consume will need further investment. It will be a virtuous cycle the like of which no country has seen in the recent past.
If Indian banks keep up with rate of economic growth, many of them will have the size and scale to become global players. It is huge opportunity for Indian banks. So, Citibank people will say: “Oh, I want a job in SBI”.
Sharma: Even though global markets might have lots of uncertainty around, as far as India is concerned the issues are quiet clear. Growth is going to be led by domestic consumption and infrastructure investment. The third mega trend we see is grass root entrepreneurship.
However, the crisis was a big shock and it impacted markets in India as well. We saw a very high credit-multiplier till 2008. In 2009, it was absent as companies and individuals came out of the crisis trying to tighten their belts and strengthen their financials. The good news for India is we are ending 2009 with balance sheets which are stronger than they were two-three years ago. This year was easy but the next year is going to be extremely challenging for India. Last year, liquidity was abundant, interest rates were going down, banks were making trading profits—so money markets, debt markets and equity markets were all there. Next year, if we still have a large government borrowing programme, if we get the economic growth and if credit growth picks up, it is going to be very challenging to maintain the balance. If 2009 was about waiting for growth, next year is going to be about balance and managing volatility.
Swaroop: We can’t deny the fact that our companies are globalising much faster than our banks. So the need for the financial sector to remain globally integrated remains critical and that exposes us to global trends. You cannot rule out two-three things that could happen in 2010 that could impact us in India. We are seeing dramatic regulatory changes being suggested in Europe and the US and we also are talking about G-20 as a platform and an integrated regulatory framework. Whether that would flow into India, what our regulator would do — there is talk about norms around capital and liquidity — so somebody will have to bear the cost of it. An event risk in terms of a sovereign default is there. If something like that was to happen, what it would do to global flows of capital would impact us in India.
Robinson: There is clearly a strong thread of optimism and I would share that with respect to the Indian banking system. In 2010, the biggest challenge is going to be putting in place a platform for the next several years in terms of what we want our banks to look like — the technology, the customer proposition, among other things. India has unique issues in terms of the financial inclusion agenda. We saw what the absence of a robust credit bureau did to banks in India a couple of years back. Things like credit bureaus, the shape of the equity markets and financial intermediation are as important as the physical infrastructure. There is a lot of talk about what role banks are going to play in infrastructure finance but not too much discussion about what role the long-term providers of capital are going to play.
In terms of our industry what’s fascinating is the increasing irrelevance of ownership — a foreign bank or an Indian increasingly means little. If I was sitting in New York or London running a global bank, it is the leading local banks that I would see as the biggest competition over the next 10 years or so.
Moderator: We have some broad themes on the growth prospects, which look very good. A sub-theme has emerged that says that 2010 will be tougher than 2009. Over the years, we have seen the share of public sector banks falling. But Mr Bhatt and Mr Nair have suggested that may be about to change. Do we see things moving in a new direction?
Davis: During the Asian crisis back in 1997, the situation of the local banks was quite severe. But if you look at the present, it is the local banks which are in a position of strength compared to global banks. The Asian crisis was a catalyst of change for the structure of the local banking industry. What we see in India is what we see in emerging markets — the competition has shifted from global banks to local banks. It makes us re-think and articulate our areas of comparative advantage.
Kochhar: The energy and drive that you see in public sector banks now has not been there in the past. Going forward, the growth will depend on their ability to raise capital and scaleup. Everybody will grow and I don’t see market shares changing substantially.
Sharma: Sitting in India, all of us have an opportunity to participate in the economic growth. Second, these are times of big change and the pace of change is going to accelerate. In such times you may see, volatility in market shares but ultimately it is fundamental strengths that are going to determine long-term market share and long-term growth. The ability to access financial capital, human capital and the strength are going to be the key.
Moderator: Capital-raising is an issue for public sector banks, given the government ownership. How do you see this panning out?
Nair: This is definitely a constraint. Public sector banks would need Rs 200,000 crore of capital. At this point capitalisation is good but going forward, if the government is unable to find the resources to capitalise the banks, then there has to be innovation on this front. The 13th Finance Commission has made a strong case for privatisation, so that’s another perspective.
Moderator: Mr. Bhatt, if you were to go to the government and RBI, what would be your advice on capital-raising of public sector banks?
Bhatt: The government and regulators realise that economic growth cannot happen without the participation of banks. Unless public sector banks that account for about 70 per cent of the banking system are capitalised, the growth will come to a halt. The issue is where does this capital come from? In the last two years, the government has been able to find large amount of money for debt waiver, health mission and NREGA, which adds up to around Rs 200,000 crore. So, it is not a big deal to allocate around Rs 50,000 crore a year to keep public sector banks well-capitalised.
Moderator: How are banks going to deal with issues in infrastructure funding?
Bhatt: Banks will not deal with the issue because they are up against prudential norms. A bulk of the infrastructure projects is promoted by the same set of groups and if they take more and more recourse to the banking system, nearly 75 per cent of the banking industry is chocked. The solution lies outside the banks — either with RBI or with the government.
Solutions are there. We require the ability to raise medium- or long-term resources not only for the banks but for these infrastructure projects themselves to be able to raise long-term debt. May be the banks or other financial institutions will help. We require institutions that will enable this to happen. We require instruments that go to a million people and everyone can invest for funding of infrastructure. We need credit enhancement mechanisms from the banking industry which will again facilitate the process. Right now, with IIFCL the corpus is very small and the parameters under which they can lend are tightly defined. This institution is not going out to other players to tap resources.
Robinson: Some countries have been quite successful in tapping domestic savings to fund infrastructure but it takes considerate effort to sit back and say where the source of long term capital is — retirement money, insurance companies. These are pools of capitals looking for return only after several decades and that is the time cash flows originating from project finance. In essence this issue of getting long term capital from capital providers to the capital users is very important and banks can play a very constructive role but it shouldn’t be with our balance sheet because our balance sheets are funded by short term deposits.
We have the need, we have the projects and we also have savings in the country. It is the development of deep illiquid bond market, regulatory changes that facilitate retirement and insurance money coming into sound projects and viewing it as an important part of investment structure in the country. Banks are not the solutions as capital provider but they are capital facilitator.
Sharma: We will have to look at infrastructure from two perspectives. The infrastructure that India is going to build over the next couple of decades is going to be more productive than almost any other country can build because we are behind the curve. It can deliver a commercial rate of return if structured well. Post implementation for a well structured product pension markets will come in, insurance market will come in and the global market will like to come in, provided we make the regulatory change. Access of capital is not an issue. Right now, it looks like a frightening problem because we are looking at financing structures of 15 years, which you don’t have.
Post-implementation the world will be at a different place and you will have access to very different kind of sources of capital. It is these five years where you have problem of concentration risk. But the only people who can participate in the implementation period are the banks. Because they have the know-how of the risks involved. We can use IIFCL for credit enhancement. Three years later, this will not be a problem because we will have projects which have completed implementation and will migrate to capital market.
Nair: There are a lot of deliberations taking place such as those on take-out financing.
Moderator: Did interest rates fall sufficiently in the last year and year-and-a-half as banks have been sitting on excess cash, instead of lending. Margins are still high. Can I put it to all of you that banking system has not done very well?
Davis: In most countries when the central bank moves its policy rates, it expects the banking industry to move with it but the dynamics are very different in different countries. In India, you have the policy rates but when you look at the structure of the deposit price you have got CRR, SLR and priority sector lending requirements. The other factor is in terms of savings deposits being longer. In many other countries, it is much shorter and the cost of funds comes down and the impact is much quicker. The banking industry has responded as quickly as it could to policy changes.
Swaroop: There are different expectations from different segments. Depositors don’t want the rates to come down while borrowers want the rates to come down. At the same time, we don’t do away with directed lending and we want return on capital for our shareholders. If you look at what happened in the last 18 months, deposits rates were high and came down in the last six months. We have an unequal relation with depositors and we can’t retire deposits. It is a one-way contract. So, we are stuck with high rate deposits. The only way to address this is through competition and there is a fair amount of competition in the Indian banking system. There are structural issues. One is that accretion related to interest rates and small savings accretions are inversely correlated. That needs to be fixed.
Bhatt: These days there are a fair number of newspaper editorials extolling corporate profits but when it comes to banks they are a little suspicious. Banks need to maintain a minimum interest margin of 2.5-3 per cent to survive. When there was a flight to safety across the world, including in India, and banks did not have avenues to deploy their funds, they, particularly SBI, did yeoman service by keeping the funds and allowing people an avenue to invest their money. We did not stop accepting deposits? No. There are certain structural issues which have to be understood. If money comes in we can’t tell people to not put it with us. And if we don’t get money we can’t pay back the depositors.