K C Chakrabarty: There is only one challenge, which is NPA (non-performing assets). We must focus on this one challenge, and solve it. What is expected as a change is that the bank balance sheet strengthening process should start, which means NPAs going down, bank capital increasing, and operating income going up.
Chanda Kochhar: Whenever we think of issues, we think of challenges, let us not do that. It is important to also have opportunities at the top of our mind. The entire retail credit growth, digitisation, and technology innovation are big opportunities, because with the formalisation of financial savings and, GST (goods and services tax) and innovation, more people are becoming bankable. While this is happening, one cannot take the eye off NPAs. It is time we all as bankers focus on recovery and resolution rather than only on recognition of NPA. For 2018, opportunities will continue to come — opportunities like inclusion, bankability, retail, etc will continue to grow. But, at the same time we need to address the twin balance sheet issue, NPAs and so on.
The biggest change is going to be across the payment systems.
Rajnish Kumar: Not only NPA, there are other challenges. NPA is a transitory problem, although this time the cycle has been very prolonged. To that extent, managing the NPA, recovery and resolution, strengthening the balance sheet, and high quality of disclosure are important. For PSBs (public sector banks), there are other challenges around managing talent and skills. The entire ecosystem is changing because of technology and digitisation. Technology and digitisation help, but they also pose a very big challenge of cybersecurity and security of data.
Change is everywhere. The business model of banks has to undergo a change and is undergoing one. Artificial intelligence, block-chain, all these concepts appear to be new. The outlook is exciting, promising and at the same time, remaining ahead of the curve would be a challenge for everyone.
Rajkiran Rai G: NPAs are an issue, but we need to look beyond it. I hope the next few quarters should see an end to this problem. One needs to now look forward to the growth story. GDP growth of seven per cent cannot happen without PSBs engaging in a big way. Can we prepare PSBs to participate in the growth story, without repeating the mistakes of the past, can we change the way they really work, underwrite credit, and monitor credit? During the current phase where credit growth is slow, we need to prepare ourselves for the growth ahead.
The change in 2018 is going to be for the MSME (micro, small and medium enterprises) sector. Can we repeat what we did in retail in the MSME sector? If we are able to get our model right and enter the MSME sector with the right data analytics — retail has become competitive; MSME is where the profitability is going to come from.
Zarin Daruwala: Tax-to-GDP ratio, which is quite low at 16-17 per cent, will clearly improve going forward with GST. Other benefits will come in with the informal sector coming into the formal sector. MSMEs today don’t have a track record, but now we will have the GST records and we can bank on that. MSME provides for 40 per cent employment opportunity. So, MSME will provide the next phase of growth. Thanks to digitisation, the cost of cash handling for the banking system and the RBI (Reserve Bank of India) will also come down. At present, the cost is about Rs 21,000 crore. With IBC (Insolvency and Bankruptcy Code), we will hopefully see time-bound resolution for the large (NPA) cases. Japan recovers 90 cents to a dollar because of quick resolution. India recovers 25 cents. Hence, IBC is going to be a big change and effective implementation is key.
Credit to industry and commercial sector declined last financial year. Is there an issue with credit flowing to the commercial sector, because banks are focusing on retail? Has GST brought in the informal sector into the banking system?
Kumar: Earlier, one would multiply GDP growth by 2 or 2.2 and that was the bank credit growth number. It is not the case anymore, which is possibly because the GDP growth is coming from services sector, but not manufacturing. Commodity prices were also depressed. So, the working capital requirement for very large corporates also came down. Better-rated corporate have access to bond and commercial paper markets. Another issue is that deleveraging is happening, and so obviously credit growth will be slow.
Credit growth in the December-March period is generally expected, but for sustainable credit growth for the commercial sector, a large capex cycle is needed. The capex capacity of the private sector is impacted due to the issues over the last four years. Now, it is for the government spending alone, which will revive this investment cycle and only then private sector investment may happen in certain sectors and then we will see the growth in commercial credit.
Isn’t that a contradiction when you say you want deleveraging to happen and at the same time credit growth?
Kumar: If an investment is happening anywhere in any sector — when leveraging was high and equity was at 20 per cent — banks were lending 80 per cent. Now, as more equity is brought in, it means the requirement of capital has not gone down but more equity and less bank credit.
Kochhar: Deleveraging is also related to cash-flows to take care of the leverage and that is why resolution of the larger stuck projects will make a difference there. When you look at credit growth to corporates, while the capital investment is not there, the capacity utilisation for various industries is going up. There are some of these specific data points, which indicate that because the activity is increasing the credit is increasing. For credit growth, disintermediation adds another 2-2.5 per cent, so actual credit growth would be about 12-12.5 per cent currently.
On MSMEs becoming a part of the banking sector, both GST and demonetisation are contributing to a huge formalisation of financial savings. About Rs 25 lakh crore have been added across three industries — deposits, mutual funds and life insurance. With GST, you will start getting so much data that based on just data analytics; it would make people much more bankable. It is too early to expect that all of it has already started showing results, but data analytics is already used for loans now. For the MSME sector, GST will make a big difference.
Do you need supporting infrastructure, like a credit ratings bureau, to help formal credit growth to the MSME sector? Or is that a constraint?
Kochhar: If you look at the evolution of credit in the past, till the time formal credit bureaus came up, even on the retail side everybody built their own proxies for arriving at a credit score for the consumer. This arose out of their own data analytics. So, for the MSME, the entire analytics of GST data itself will help people arrive at some kind of surrogate credit score, even as the rest of the infrastructure becomes strong.
Are banks responding quickly enough to this new situation, wherein there was a huge fund inflow into the banking system, for which the RBI had to step in and neutralise the excess liquidity?
Chakrabarty: Banks have missed an opportunity that arose out of demonetisation. They should have reduced their savings bank interest rates to one per cent. Nothing would have happened, because nobody keeps their money in a savings bank account for interest. Look, it is a credit starved economy and our mindset has to change. Corporate sector is a high risk, high profit business and you have taken more risk. So, your future for some more time will be SME, agriculture, and partly retail. Simply funding the retail without the corporate industry growth, it is very dangerous as it will become a NPA. For SME credit growth, PSBs will not be able to extend unless their branch managers start lending the loan. For the last 10 years, branch managers have stopped lending at the branch level, and unless you create an ecosystem, you will not be able to capture financial infrastructure and corporate (finance).
All data informatics is all humbug, because you have no information. How can it happen that you classify the account as NPA, your auditor certifies it’s an NPA, and then the RBI comes out and says the disclosed amount of NPA is different? These figures vary because we have not defined what is NPA.
SBI led the move to drop the rates of savings deposits. What was the impact? And could you have gone further down the road?
Chakrabarty: That is the most idiotic step. Banks have reduced interest rate for the savings depositor, but (for depositors of) more than Rs 50 lakh to Rs 1 crore, they are not reducing it. A person who keeps Rs 50 lakh to Rs 1 crore in your bank, he does not bother about interest rate. They are all taking anti-customer measures, anti-poor measures. If we made the savings bank interest rate one per cent, nothing will happen.
Kumar: What has to be realised about these Rs 1 crore savings deposits (accounts), is that other than the government departments, nobody keeps such amounts in the savings deposits. Which individual will keep more than Rs 50,000, Rs 1 lakh or Rs 2 lakh in a savings bank account? So first, let us clear the air about the poor versus the rich.
A savings bank is a very big franchise for a bank like us. Because savings is a utility type of account, even if we reduced interest rate it was not going to impact the franchise. To that extent, the customers of SBI continue to have faith in us. Even today, SBI opens 100,000 savings accounts per day. But you cannot entirely ignore the system you are operating in, and nor competition. There are many ground realities you have to consider when making a decision.
It is very easy to change the fixed-deposit rates, but can we ignore completely, the public dependence, public opinion? Many people, senior citizens, are dependent on interest income alone. So, we have to take care of all segments of customers: poor, rich, not-so rich.
So, the interest rates’ role in enhancing investment or credit growth does not seem to have as much correlation as generally thought.
The gap between your cost of funds and lending rates hasn’t really narrowed, so is there a problem with lending rates which is why credit is not growing as much as it should?
Kochhar: Lending rates are more linked to the cost of funds. So, when you say how have the lending rates moved vis-à-vis the cost of funds; and, there is always a debate on how the lending rate moves vis-à-vis the repo rate, and whether there is enough transmission or not? First of all, we must understand that the repo rate change does not automatically change the deposit costs of the banks. Secondly, even in the deposits, part of it is fixed deposits where interest rates can change but part of it is savings banks and current accounts where the interest rates don’t change as much. So overall, the cost of funds of the banks does not move directly in proportion with the repo rate changes. But the data indicates that there is always a transmission of interest rate movement, up or down, maybe with a lag. Over a broader period of time, actually the rates move quite in tandem.
While credit may be expensive, and it is always good for the economy to have lower lending rates, because lower lending rates make loans more affordable, it improves the credit quality. But lower lending rates are just a necessary condition for credit growth, and not a sufficient condition. Credit growth has to come finally out of the inherent requirements.
The longer tenure bond rates have shot-up, is that affecting lending?
Rai: I don’t think it will affect my lending decision. But that the G-Sec yield is going up is a disturbing feature when we are talking about the downward interest rate cycle. Banks were lucky in the last few quarters because the NPA provisioning was going up and a lot of our operating profits were contributed to by the downward cycle and the bond yields going down. That has reversed very distinctively this quarter. So this will have an impact on our operating profits, because we are not sitting on any profits and maybe there will be some minor provisioning requirement for the mark-to-market losses also. If you look at our Yield on Advances, at our MCLR, it is over eight per cent, and Yields are 7 per cent, so 1 per cent is a huge margin for me, it will not tempt me to put in G-Sec.
It is a challenge to really manage the margins, because we need more operating profits due to the provisioning requirements. And the very proactive actions by the RBI have also squeezed the margins, particularly on the MCLR.
Globally, interest rates are going up, what does it mean for us in terms of inflows, when you look at 2018?
Daruwala: I think the FDI flows will continue. It’s the FII flows which obviously have the interest arbitrage in play. Clearly, it’s a function of the relative interest rates, and these are opportunistic plays depending on the arbitrage the FIIs see between the domestic rates and global rates, and it’s also a function of the exchange rates; how those move. To my mind, it is a very dynamic kind of situation. Also the RBI is quite conscious of not having too much FII debt flows so that keeps getting rationed out.
Were banks reluctant to recognise the (NPA) problem, until the RBI left them with no choice? Even today, they are not keen to go into the IBC process.
Kumar: As far as IBC, there cannot be a uniform approach. If I look at the government’s reforms, the IBC is one of the biggest reforms. This is what bankers were demanding. So, to say we are not interested is not right. Provisioning will be there and we are ultimately moving to a system where we, when expecting a loss basis, will have to provide. It may happen in 2018 or 2019.
Regarding NPA recognition problem, between the RBI and banks there has been no divergence of opinion on the stressed nature of assets. The divergence comes on account of certain leeway and policies, which is available. In most of them, the problem is in respect to projects under implementation and there are a lot of issues. When everything is rule-bound, and everyone reads it in a different way, divergences have come. Provisioning, yes, one way is that you take everything upfront, but then what would be the impact on the banking system? Ultimately, we are talking about a banking system which is strong.
But banks were not in a position and are even today not in a position, to take the entire hit in one go. There are practical issues that all bankers face. But, recognition should happen in time wherever there is stress and adequate provisioning for expected loss should be provided for.
Is credit culture improving?
Kumar: The balance of power has definitely changed, earlier balance of power was in favour of banks till such time they have not given the money. Once the money was given, the balance of power was in the hand of borrower.
Do you agree with Mr Kumar that balance of power has shifted?
Kochhar: I would say one thing, something I have said earlier. We do keep debating about recognition, but we all need to realise that let us start working on resolutions. Because, more timely resolutions we arrive at, part of it can be restructuring, part of it can be change in management, part of it can be sales of assets whatever it is. The more timely it is done, better is the recovery and we have to remember that many of these are productive assets and we are living in an economy where demand will keep going up because of our demographics and growth. It is not really correct for us to just keep sitting on decisions and allow the projects to become unproductive. Recognition is partly interpretation of rules. But we are only debating about the recognition, we should act on resolutions-not even debate on resolution, but act on it.
Chakrabarty: The only thing is that, if sickness is not identified early, we will not go for treatment.
Daruwala: I think balance of power is changing. Also, the sense of the urgency is on the side of the promoters to do a resolution quickly, less they will be pushed to NCLT (National Company Law Tribunal) also driving good resolutions. From the bankers side also, and borrower it’s a good thing.