In an interview to TOI, he speaks on why a fresh pile of corporate bad loans is not expected to build up due to the pandemic.
(This story originally appeared inon Dec 23, 2020)NEW DELHI: Veteran banker K V Kamath says that soft interest rates will provide the tailwind for businesses to come out of the crisis. In an interview to TOI, he speaks on why a fresh pile of corporate bad loans is not expected to build up due to the pandemic. Excerpts:
Which are the segments that are bearing the brunt of the economic pain? Is the pain hidden?
Early indications are that larger corporates don’t need debt restructuring support as they have deleveraged. From a debt-equity ratio of 2:1 in 2010, the top ones are now down to 0.5:2. Also, they have got a helping hand because of lower interest rates. It looks like SMEs are also back as they are feeders for large companies, which are now back at 90%. The government measures have made the pain bearable. If we had not opened when we did, the pain would have been very visible.
What needs to be carefully watched are the self-employed — persons working with their own hands and the street vendors. It is for us to look at pockets where pain persists and to provide handholding.
Although only 80-85% of people are back at work, companies are reporting production at 90%, which means there are productivity gains and the people who are not at work are probably hurting. While retail borrowers also benefit from lower rates, in a couple of weeks, we will have a better picture of the stressed borrowers — the self-employed and those employed in stressed sectors.
Which are the companies that are coming up for restructuring?
So far, there is no clarity on which companies are hurting as no names have come up. When we did our sitting (in August), it was clear that the first quarter had gone badly and there was a 20-25% loss in production. It looks like they have made up for it in the second quarter. On the retail side, the banks have opened up their websites for applications. The first half results of the 4,000 companies was a pleasant surprise as it showed an expansion in earnings, indicating that there is improved efficiency, which is here to stay.
There have been concerns over the proposal to allow corporates to set up banks…
What the working group has articulated is three points — the existing structure is not enough to meet our aspirations, the private sector has done well in utilising capital, and internal supervision must improve to support the expansion of banking. Today, the technology to supervise is available. It is possible to get a single view of a customer across all banks, which was not there earlier. What one needs to look at is whether there is any objection (to corporates promoting banks) if internal processes and implementation is tightened.
Is there a case for a bad bank?
The discussion in a way is academic, the last clean-up that was done in end-2019 was deep enough and capital has been infused. The need for a bad bank would arise if there is a fresh pile of bad debts coming up. So far, we do not see that happening and my view is that we do not need a bad bank as assets are on the mend or capital has already been provided.
The RBI has traditionally dealt with bank failures through mergers. Now that branches are no longer attractive, how would resolutions take place?
I must commend the RBI on how it has addressed recent challenges. A theoretical construct has been established that if you move quickly and write down equity and tier-2 instruments, that would be enough as long as there are entities to take over cleaned-up banks. Even if branches do not have the same purpose as before, if there are players willing to induct technology and who find a use for the branches it will help. Today, any player is only as strong as the regulatory shield available.
Is there really a regulatory shield considering there are neobanks?
If you look at any of the payment platforms in China — whether it is Alipay or WeChat, the backbone is the bank through which the money moves. The regulator is comfortable with this as it is possible to set daily limits in a manner that it can be controlled and be in service. Banks are happy to partner with such players as long as they have different revenue models from the banks. The issue will be when they are in competition. We have not seen that yet. Technology must come in a regulated way. Every single player in the financial services must be agile, nimble and adept at using technology.
Is it also time to look at cryptocurrency and things like that?
I am distant from that product. I don’t understand the product or value-creation in the product. Some of the tools, such as blockchain, have got use and it will get integrated into technology practices.
How do you look at the developments at ICICI Bank over the last few years and would you have driven it in the same way as it is running now?
It’s not right for me to comment, but if I go back 20-25 years, we set up the bank given what we had in terms of technology. That was the only way we could have grown. We took product leadership in areas where it looked like pioneering bets. The leadership needs to benchmarked on that basis. If they are continuing to do that, I would be happy. But it is their call.
Do you see some reluctance among bankers to lend? Do the recent investigative actions have had a role to play?
Banks realise that they are not purveyors of long-term funds given the tenor limitations. Second, demand was not at that level because corporate India was going through a churn.
The banker’s dharma is to lend, he will lend but will lend cautiously given that he is conscious of ALM mismatches. The marketplace for long-term is getting active with insurance companies achieving scale.
Is there a need to have DFIs. What are the learnings that will help avoid that situation 15-20 years down the line?
The old DFIs were supported by the government for long-term funding. In a way it looked like venture capital fund as they also provided equity and financed up to 80% of a company’s requirement. Today, markets can provide equity, banks can invest in shorter dated instruments and longer-term must be funded from capital markets. There is a system that is throwing up long-term funding, which did not exist earlier. One lesson from BRICS Bank is that there is an interesting market for these products. The weighted average rating of these five countries is just about investment grade, when they come together, they get AA+ rating, helping access funds at about the finest rates. If you keep yourself lean, the differential in cost is more than made up. The same lesson can go into DFIs. Credit underwriting has become a different game given the improvement in rating skills with the agencies and technology.
Is the deleveraging cycle over?
The cost of debt is significantly lower than the cost of equity. The sheer cash flow generated by Corporate India is self-sustaining to finance growth, which means we are not as debt hungry as in the past. We will continue with this. Debt will be required at the infrastructure-end and retail-end. The retail customer will be debt hungry and retail debt to GDP is quite low so we have a lot of things to do there.