Six of the country’s leading bankers say policy reforms are welcome but decisions have to be taken at the ground-level, so that projects move faster
Is the worst over?
Pramit Jhaveri: If we were having this conversation six months ago, the environment in general, was very negative. With the change in the finance minister, which happened 100 days ago, a number of things took place. There were a series of announcements in terms of reforms. There was a general indication about the change in the government’s mood to take more decisive actions.
Both of those were greeted by a very significant and dramatic change in the external perspective towards India. That was reflected in the capital that has flown into the country since then. Sadly, the external change in sentiment has not quite been accompanied by a similar change from an internal perspective. If you were to get 50-200 Indian CEOs into a room, I think you won’t see this similar change in sentiment.
When you look at the next 100 days, we really need to see and hope that the change in sentiment takes place.
Debabrata Sarkar: While the sentiment has improved a lot, simply sentiments will not work. Some reforms have been declared. But it should be implemented at the earliest possible time.
Second, inflation is still a concern, which has a direct impact on the cost of deposits and subsequently, lending. At this time, deposit growth has been quite slow because other avenues for saving are there. The big concern, at this time, is that credit growth is not coming. If we go for credit, there are questions on non-performing assets. I am not saying the worst is over but there is a chance to go forward.
Gunit Chadha: It is interesting that global investors are more bullish and positive on India than Indian entrepreneurs. The same is true of the banking system. You’ve got a banking system which gives a 15 to 20 per cent return on equity (RoE) while trading five times the book. And, you have a banking system globally which is running at 5-10 per cent RoE and trading at way below book.
Chanda Kochhar: There are a set of strengths and challenges. We should look at both simultaneously. The strengths of the Indian economy are that there is a movement towards changes and reforms. There is a lot of will and determination from the government’s end to take things forward.
The challenge is while the broad policy reforms can happen, we need to focus on ground-level decision making. Making sure every project moves and sees its logical end and has its backward linkages, cash flows and so on. Ground-level decision- making would be very important to turn the investment cycle.
All said and done, the banking industry has grown five times every decade and will continue to grow at 2.5 times the GDP of India. That gives us a good credit growth rate to go forward.
Pratip Chaudhuri: Banks reflect the collective outlook of our clients. Banks can do only as well as the clients do. In India, different sets of clients are doing differently. The first and biggest advantage we see in India is the high savings rate (28-34 per cent). But while getting the money is the easy part, where do you give it? Money has a carrying cost.
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It is important to kick-start the investment cycle. When we see that happening, I think everything else will follow. The good thing is that the policy paralysis is largely over. Policies are in place and, importantly, there is a realisation that something needs to be done. This is a big transformation.
Aditya Puri: India’s structural story from medium to long term is intact. Do we have problems in the interim? Yes. Are we towards the bottom of it? I should think so. The fact that foreign direct investment in retail was passed and the National Investment Board set up leaves me far more optimistic. Within that, a growth rate of 5.5 per cent this year, going up to six if the investment cycle starts. That doesn’t require political backing and should come about.
It’s not that we don’t have problems. They have been identified. We are better off than the US fiscal cliff. We have also underestimated the changes happening in rural India. Coming to banking, I believe this is the best opportunity for financial services, globally.
Loan dollarisation risk
Chaudhuri: Today, SBI is sitting on Rs 50,000 crore to Rs 55,000 crore of extra liquidity. Though the picture might be completely different for other banks, what do you do with these deposits? They cannot be an end by themselves. They have to be lent. In our asset liability committee, we see little purpose in enhancing or going for an aggressive deposit accretion.
Every time a customer comes, our corporate lending people are in trepidation that he has come to substitute his rupee lending with dollar lending. This being the case there is lukewarm demand from the corporate sector and a real possibility of a large amount of rupee credit getting substituted by dollar credit.
Chadha: The dollarisation of Indian companies’ balance sheets on an unhedged basis, because rupee costs are expensive, could cause more trouble to India Inc and banks than what is probably prudent. We are in the camp which feels that in the first quarter, the Reserve Bank of India should cut rates.
Kochhar: In a way, more and more dollarisation is taking place because there is more liquidity today in dollars. The effective cost of funds in dollars on an unhedged basis is much lower. In a way, we are actually adding to risk more because in the current volatile scenario, it is difficult for companies to take a call on hedging. So, a lot of exposure is going unhedged. The repayment of these loans takes five, six, seven years. Currently, we are sitting in an open position, much larger from what we were used to in the past. That's not such a great thing to be in.
Doorstep banking?
Chaudhuri: At present, if we can put money in the beneficiary account, it will be a significantly large achievement or transformation. For example, four or five years earlier most state governments were reluctant to put salary or pension in banks.
Putting the money in a person’s account should be enough. With 100,000 bank branches, and 600,000 villages, in terms of coverage, there is one bank for every six villages. But there is a distribution divide between urban, metro and villages. A bank in a village need not be open six days a week. So, we have introduced mobile banking and made an announcement that twice a week, this van will be available for two hours a day.
Kochhar: We already have more than 10 million no-frills accounts in the last two years. They are now getting linked with Aadhaar, where electronic payments from the government will be transferred.
There is a huge opportunity if we make the process very simple. Aadhaar, banking account and electronic benefits transfers — if these seamlessly come together, there is a huge opportunity for taking banking to the unbanked on a low-cost basis.
We still need to find ways of reducing the cost of these transactions. We have to find a way of making all these accounts more comprehensive. Only when we open an account on a no-frills basis does it become a transacting account.
Puri: Financial Inclusion is a social, political and economic necessity. Let us not restrict it to cash transfer. We start from the bottom of the pyramid. We have helped 1.1 million people come above the poverty line. We have a target of 10 million over the next three years.
We offer mobile banking on 2G. So, we have a large proportion of growth coming from there.
Sarkar: When rural people are using the latest model cell phones, why will they not adopt banking technology? We are trying to push other retail products through distribution channels. If someone is opening a demat account, he will realise that he must have banking account.
Rating credibility
Chadha: Our view is that the probability of a rating downgrade is low. If it does happen, India has a serious issue in terms of attracting capital. What could happen in terms of a sharply falling currency? Let’s not underestimate the implications of a rating downgrade on India. But I don’t think it is something which is the likely outcome right now.
Jhaveri: I am a little less concerned if a downgrade happens. Yes, it will impact capital that is completely rating driven. When you look at strategic FDI capital, they don’t look at rating. They look at 10-15-20 year opportunity in India. You have to look at other sources of capital. That will remain unchanged.
Chaudhuri: If it were to happen, it would be more a loss of prestige than actual loss of capital. But this fear or likelihood of a possible rating downgrade has spurred a lot of policy action. These have been aired by people no less than the RBI. The rates of deposit on FCNR(B), or rupee deposit rates were brought to more realistic levels because of rating agencies’ possible evaluation.
Puri: The market does not believe the rating agencies. They have a different view. I tend to go with the markets. If you see our credit default swaps and the rates at which our letters of credit are financed, our long-term loans are financed, it is completely at difference with our ratings. That would tend to signify the rating is probably not the best.
The second point is that the probability of default on Indian debt is zero. I disagree with rating agencies.
Kochhar: There are some institutions or financial players who would not be interested in India if it were not investment grade. So, a downgrade would cut some segment of investors altogether. There is another set of investors who would continue to put in money because there is liquidity but rates or costs would go up from current levels. Then, there is a third set of investors who go really more by ground level assessment than the rating. They have built in their assessment both opportunities and challenges.
Customer service
Chaudhuri: The biggest difficulty we came across is that nowhere in the world do banks do such diverse things – lending for small shops, lending for agricultural crops, collecting utility bills, using scholarship money and so on. So, in terms of range, it has very significantly changed. Even on the deposit side, we have done away with the minimum balance. Literally, with $5 (Rs 200) balance in the account, you can run a savings bank account. I don’t think that is feasible anywhere in the world.
Puri: The service standards of Indian banks have gone up. Two, I would like to make it clear that banks are not charitable institutions. If the expectation is that you must lower rates, otherwise you are not great, it does not work out. We give free ATMs. But it would be unrealistic to expect that you must get higher rates on deposit because inflation is going up. You must get a lower rate on loans and everything should come free—that isn’t going to happen.
NIMs higher in India?
Puri: Actually, that's the biggest misconception. The net interest margin being quoted elsewhere is net of provisions. If you take our NIM net of provisions, we will be among the lowest in the world. The lending that banks do here is of a much higher risk and far more costly. Our cost to revenue is also the lowest in the world. So, please remove these misconceptions and some of the issues on service levels will be removed.
Chadha: In terms of cost-income ratios, frankly when the global industry is struggling in the 60-70-80 per cent cost-income ratio, the best of Indian banks are getting into the 40-50 per cent. I think you have to compliment Indian banks for their cost-income ratios.
Sarkar: In the last one year, the cost of deposits has increased by 30-40 basis points. So, each bank has taken a hit. On the opposite side, yield on advances has also decreased over a period of time. The base rate has been reduced once or twice. But in most cases, all banks have reduced their mark-ups and wherever possible, have passed on the benefit to customers.
Investment revival?
Kochhar: The point is that the underlying factor that provides opportunities for investment still exists. First, we should recognise that. The fact that we actually have a young population and they are going to have a higher per capita GDP, it is obvious that there would be demand for products and services and, therefore, the demand for infrastructure.
Chaudhuri: Some things have turned around but the growth has to come in sectors which can absorb capital, such as power, fertilisers, steel and metals. But it is very inexplicable that public sector companies are sitting on tonnes of cash and not investing.
Puri: I agree with both of them that we are seeing change. The stirring is there. But to expect an immediate effect is being a bit optimistic. But brownfield projects are starting off and the consumption dynamic is intact. If the investment board functions properly, you will see greenfield investments.
Chadha: It is a privilege that India is sitting on a supply-side problem rather than a demand-side problem. Those of you who have not experienced demand-side problems can spend a little time in Europe. Structurally, investments have to come back into India, as there is a supply-side gap. PSUs should take that lead, as they should have the maximum confidence in the government. Frankly, corporate CEOs are still not exhibiting the confidence they should. But that will follow.
Banking bill impact
Chadha: It will be positive, as it releases voting rights to a significant extent. But when it comes to subsidiarisation, many regulators in their own resolution and recovery mechanism are looking at it to trap capital and liquidity. The question is that the share of foreign banks in India is less than six-seven per cent. If foreign banks were to reach a fourth of the Indian banking system, maybe, you need to make sure you put walls around it. So, do we need more porous walls right now or do we need hard walls right now is a topic of some debate.
Whether it is India or Indonesia, in any market if regulators were to trap capital and liquidity, it becomes less attractive for any global boardroom to allocate more capital into that country.
Jhaveri: In addition to the Banking Regulation Bill, there is a point about new licences. If you look at the need in the next 10-15 years and at the size of the banking industry relative to the size of GDP, there is no question that the banking industry needs to be larger.
But whether foreign banks increase their branches aggressively is a question. We have 40 branches in India, today in a country that has 83,000 branches. All foreign banks, together, have less than 400 branches. Even if we were to have unfettered access to branch expansion in India, It’s not clear to me that any of us would go and open 2,000-3,000 branches.
Puri: If I put in 20 per cent equity, I want 20 per cent voting rights. I don’t understand what this discussion is about. If you want money to come in, you should give proportional voting rights to equity.
Chaudhuri: Regarding banks owned by industrial houses, there are different rules in different countries. Whether an industrial house would be in the banking business or not would be largely conditioned by their ROE.
There needs to be very strong firewalls between their main business and banking business. Whether they can be effective depends on the extent of regulation and views on that differ.
RBI’s role or the regulator’s role as final arbitrator must stand. Because RBI’s role as an effective intervention has led to a situation where the Deposit Insurance Guarantee Corporation is one of the highest income tax payers. There has been no bank failure and it needs to be kept that way.
Kochhar: On the broader question of more entrants, there is enough opportunity for all. The banking industry has to continue to grow at 2.5 times of GDP for many more years. Existing banks may become bigger and newer banks come into play.
It is not just a question of entrants come or not, banking in India is not an easy business to be in. You need all building blocks in place to scale up.
Puri: Foreign banks haven’t realised it. They will have to put a lot more money into emerging markets. If they want to take RoE from 6 to 12 per cent, it isn’t going to come from the US and Europe. So, they will have to figure out what is their niche but they will have to come here. It takes a little longer to realise because they are very large.
The public sector and private sector banks are offering good service. There will be some change in market share because the private sector share is growing larger. Will it be significant? I don’t know.
