Eight top bankers met at the Business Standard Round Table on November 18 in Mumbai to discuss the topic – Banking in Tough Times. The participants were Citi CEO for South Asia Sanjay Nayar, Deutsche Bank India MD & CEO Gunit Chadha, HDFC Bank MD Aditya Puri, Central Bank of India Chairperson & MD H A Daruwala, State Bank India Chairman O P Bhatt, Bank of India Chairman & MD T S Narayanasami, ICICI Bank Joint MD & CFO Chanda Kochhar and Standard Chartered Bank Regional CEO Neeraj Swaroop. The discussion was moderated by Business Standard’s Editor T N Ninan.
MODERATOR: Are these tough times for banks, or their customers? One of the bankers said during our discussions a short while ago that when everybody is running to you for money and asking for cash, why should it be tough times for banks? It’s an interesting perspective. But at the same time, you see banks’ stock prices falling everyday and there are pressure points domestically as well as globally. Also, when you look beyond the immediate set of issues, do we need to look at banking reforms and regulations in a new light, given the times that we are going through?
Let’s start with Mr Bhatt.
BHATT: It’s not a tough time for SBI whichever way we may look at it. But it is a tough time for many of our customers, starting with the pressure on liquidity for some time in September and October.
MODERATOR: The comment one keeps on hearing is that banks were sitting on liquidity and not lending. Is that correct?
BHATT: It is not correct because if you look at call market data, you will find that there were many days when over Rs 90,000 crore was being borrowed daily. These were record highs.
MODERATOR: That was a passing phase.
BHATT: But the amount was quite high for many days. Any bank, which has liquidity, would like to make money by lending. It’s not possible that banks had money but didn’t lend.
MODERATOR: Has the nature of the game changed? Six months from now, will you find shortage of borrowers because the fizz has gone out of the system?
KOCHHAR: In some ways, the environment is going to change. Indian banks’ fundamentals are very strong and they are very well capitalised. Indian banks’ lending standards have been strong, they have always lent against cash flows and haven’t lent against asset bubbles. The Indian banking sector or the financial services market do not have all the securitised papers that keep moving around, where people apply without understanding what they are actually buying.
The Indian banking sector, after all the reductions in SLR and CRR and SLR, still has 29.5 per cent of its liabilities in the form of SLR and CRR. But for the economy as a whole, we have special rupee liquidity. We have funded our growth in the past few years partly out of rupee liquidity, which is very strong as the savings rate is very high, but also partly on account of global sources of funds.
With whatever is happening around the world, global sources of funding are drying up. So, there is that much more requirement of rupee liquidity, which is creating this apparent illusion that banks have money but are not lending. The release (of liquidity) has been very good and very sufficient to avoid any destabilisation. But at the same time, it hasn’t been large enough to infuse surplus liquidity in the system. So, there continues to be a situation where the demand for credit will continue and in fact get stronger. Customers have more requirements for money than what the rupee liquidity can give. Six months later, I don’t think it will disappear. The demand for cash will stay. And, if we continue to make enough cash available in the system, then the whole economic cycle will also continue to behave in the same manner as it has done in the past.
MODERATOR: Mr Puri, what is the source of the liquidity problem? Fundamentally, it was a regulator and government-created liquidity crisis. Would you agree with this?
PURI: We were going through a situation where the primary focus was the need to control inflation. The central bank had said it would give liquidity backing. Consequently, they had, over a period of time, the liquidity adjustment facility; they kept it at Rs 25,000-30,000 crore. Things changed and the factors that you have mentioned caused the liquidity crisis – there was oil demand, there was fertilizer demand and there was also drying up of liquidity overseas. In our transition from managing inflation to managing growth, we may have had some delays. So is there a liquidity crisis? I think probably not. What really happened was a temporary mismatch.
MODERATOR: Ms Daruwalla, have the authorities done enough to address the issues that the system faces. If they have not, what more would you want to see them do?
DARUWALLA: As of now, the liquidity has been made available. I am sitting between two giants (SBI and BoI) who are really flush with cash. I am still a borrower in the market every day. Although the CRR & SLR have been brought down, there has been release of funds by way of LAF and a repo window for MFs and NBFCs. Central Bank is lending, but what happens tomorrow is unknown.
MODERATOR: The small and medium enterprises in Tirupur, Surat and other centres have laid off thousands of people. They don’t get money from bankers and there is a serious problem out there. Mr Narayanasami, do you share this perspective?
NARAYANASAMI: The Tirupur units face two problems: Power shortage and global demand contraction. The regulator and the government have been taking very proactive fiscal, monetary and administrative measures. I don’t think the financial system has anything to crib about.
The regulator is more than forthcoming. Liquidity per se is not an issue. Interest rates are coming down. I agree banks will have to be more proactive and take a more pragmatic approach towards quickly meeting the needs of the SME sector so that they don’t turn into non-performing assets. Proper mechanisms are in place to protect every sector.
MODERATOR: Mr Chadha, your bank has put a huge thrust on retail customers, credit cards etc. Do you see a problem in these sectors, or are things under control?
CHADHA: There is a slowdown in many of the consumer goods sectors and that slowdown is having an impact. But has it reached a point where there is complete loss of confidence? Has it reached a point where consumers are leveraged way beyond their resources? Has it reached a point where the problem has become systemic? I absolutely have no idea. Relative to where the banks had budgeted their own provisioning on some of these personal loans and consumer credit, broadly we are well within the range.
If the issue is whether there has been a deterioration in credit, the answer is yes. But I don’t think it moved to a point where it has become a systemic issue. Also, delinquencies have not moved to a point where they are becoming a matter of concern for banks’ balance-sheets.
PURI: For every problem in every sector in the economy, banks are not the cause. There must be a reason why we were earlier lending for commercial vehicles, but are not doing so today. And the reason is that there is a slowdown in the economy and there are not enough viable commercial vehicle projects to which I can lend. If there is a drop in car demand, I think they should acknowledge it. As for car finance, we must understand that banks are not only for lenders. I would like my depositors also to sleep happily. We are here to finance viable projects. Flow of credit is a function of both liquidity as well as viability of a project.
On consumer credit, there has been some increase in delinquencies in some part of the consumer goods sector, but I think the overall performance has been reasonable.
MODERATOR: Mr Nayar, you are going to fundamentally resize the bank and its operations globally, but domestically, we are basically seeing an expansionist banking system. Are the two realities completely different?
NAYAR: There is a big difference. In India, and some of the other emerging markets, our firm is pretty well embedded. We have a very large investment banking model cutting across products and customer segments, which keeps us going on a very sustainable basis. Because of that, we are lending both dollars and rupees to SMEs and to other consumers here. As long as you have the risk-adjusted returns coming out here, there is no issue.
In terms of right-sizing businesses, it is happening everywhere because when you do very well for five years, you do develop some degree of hobbies and fads here and there. In the SME segment, from 800, it might come down to 750 people. So it is not the end of the world.
MODERATOR: Is India not going to be affected at all, or will it be affected only to some degree?
NAYAR: You will see an impact on business sizing, or dropping off of businesses and segments in India. This impact will be felt by all banks and all businesses. We should stop blaming banks. Banks are pretty safe and in very good shape. In any case, 70 per cent of banks in India are government-owned. It is the safest system in the world, very insular.
CHADHA: At Deutsche Bank, we have added a thousand people to our Indian operations on the banking side. So, I share the optimism, and we still continue to invest in India.
BHATT: State Bank of India – actually, it’s Safe Bank of India – is going to add 25,000 people.
MODERATOR: Ms. Kochhar, how much of the liquidity problem here is the consequence of money being taken out by Indian banks to support their international operations?
KOCHHAR: Actually, no large Indian bank has really taken rupee out to fund their international operations. We have funded our international operations by raising funds globally.
BHATT: There have been days when SBI had billions of dollars as surplus. Indian banks have managed their assets and liabilities very well. They have also managed their asset growth. In many cases, their asset growth has been stabilised. This is a bogey you must kill. There is no issue in Indian banks’ foreign operations with regard to availability of funds. There is an issue with regard to further growth.
MODERATOR: Exporters are not getting credit overseas and are turning to Indian banks. Therefore India’s international operations are affecting domestic liquidity. Is that a trend?
NAYAR: There is a lot of liquidity, but I don’t know why exporters and importers are paying a massive margin. Our dollar exposure has actually gone up in the last six to eight weeks just to keep the SMEs and other companies lubricated. So we have lesser growth on the rupee side and more growth on the dollar side. So Indian banks have the dollars and they should be lending more to exporters and importers.
MODERATOR: Do you expect to see any significant deterioration in corporate asset quality over the next six months?
NARAYANASAMI: Profitability will come under pressure. Banks will have to take a very pragmatic view on companies which are on the borderline and may slip.
DARUWALLA: Any company which wants to repay, will repay. It all depends on the intention. While it is true that corporate bottom line will be under strain, that is not going to stop people from coming and asking for rehabilitation. We can definitely consider this.
NAYAR: On the corporate side, you will see an increase in delinquency, which I don’t think is such a big deal looking at the cycle before. Primarily this time around, it will not come because of over-leveraging, but from a mismatch of liabilities.
BHATT: Large companies are safe, but there will be stress on mid-corporates and SMEs. Among all stakeholders, there is a better understanding of what is happening and therefore, there is more keenness to hand-hold. If you take SMEs, they have large inventories now and most banks are, on a case-by-case basis, willing to lend more money for their working capital.
MODERATOR: Six months from now, will the balance between demand and supply of money swing significantly?
NAYAR: Where you are going to see demand is from infrastructure projects. There is going to be concerted spending and in that sense there will be shortage because long-term money is not available with banks. The overall structural liquidity for long tenure infrastructure projects is short.
NARAYANASAMI: The exposure to infrastructure is Rs 2,02,296 crore. It has gone up 450 per cent in the last four years.
CHADHA: With a limited ability to de-leverage further, with refinancing which is going to be coming up, with working capital elongation which is happening on all goods, even with shrinking sales or with slowing down sales, the corporate demand for money will still be very strong. On the supply side, while the liquidity-driven supply will ease off with the measures that the regulator has taken and with the global stability starting to come into play, the needle will swing on the supply side. Demand will stay strong for money and supply will get still restricted but for a different reason – risk.
MODERATOR: So, you will be assessing more carefully before handing out money?
CHADHA: It is a little bit like Formula One. It cannot be going on the straight path and not slow down when you reach a curve.
PURI: Demand will exceed supply primarily because of the drying up of multiple sources of funding. If there are no IPOs, if there is very little of ECB and if import lines are not available, all of that (demand) will shift back.
There will be some stress on the economy as happens in any economic cycle which is going from 9 per cent to 7 per cent or 6 per cent. But it is not a crisis of any sort. NPAs and delinquencies do go up in a down cycle, but within manageable levels.
DARUWALLA: Demand will definitely be there much more than supply. We have to become passively compliant. There is going to be requirement for more capital. Today, banks are the only source where people can come for their borrowings. As far as infrastructure is concerned, you have to lend for the long-term but where is the supply for the long term?
MODERATOR: We have a radically different inflationary situation, which means that if demand for money continues to exceed supply, logically interest rates should stay high. Inflation is negative. Real interest rates net of inflation will then become very expensive. Is that the scenario?
BHATT: The economy is going to find a new demand-supply equilibrium if we take the next six or nine months. A slew of measures have been taken for enhancing liquidity. When liquidity is released into the system, there is a multiplier effect. So, there will be even more growth in money supply and in bank deposits due to savings. Whether this growth will be more than the demand six months from now, is difficult to assess. The structural part of whatever is happening today is for the policy makers to deal with. There are several measures and we all keep talking about the unfinished agenda. But one of the most important concern is there are no capital projects. We keep talking about infrastructure and say we will need $500 billion in the next five years and there are a few projects. But to make it happen and to get to financial closure will require work which will take two to two-and-a-half years. Project development or preparation is just not taking place.
If we start having the kind of infrastructure projects that the country needs, we have absolutely no money – medium-term and long-term.
NARAYANASAMI: Two areas need to be looked at. One is credit delivery and the other is credit quality. Both are important in today’s context. Unless pricing is made more conducive, credit will not flow to the common man.
MODERATOR: So do you see interest rates falling?
NARAYANASAMI: Interest rates have fallen and will continue to fall. Demand will get correlated with the momentum seen in the growth of the economy. The absorption capacity will get restricted to the growth of the economy.
KOCHHAR: The structure of the demand will change. In the past couple of years, Indian companies have been using a lot of their own capital and all sorts of short-term funding to meet their regular working capital growth and to fund their growth in production. What the banks have been funding is partly the creation of projects and partly helping the consumers buy assets – homes, cars etc.
In the current scenario, as these short-term sources of funding are drying up, everybody is saving up their cash accruals for running their business; for making sure that working capital is available sufficiently.
Therefore no one is starting projects which have not got off the ground. Companies want to save money right now for survival. Therefore in the next six months, you may not have a lot of funding taking place for large projects.
SWAROOP: We define aggregate demand as the total demand by the banking and the non-bank system. A large part of that demand is met today by the non-bank system. In six months from now, if that does not change then clearly the demand on the banking system will outstrip supply. On interest rates, it is an anomaly, especially if the world liquidity does not improve, and the demand for bank credit exceeds supply from the savings and deposits side. So interest rates may not come down as much as we would like them to come down despite the regulator signalling a cut in rates.
CHADHA: What may happen is that the large corporate credit spread will come down significantly. The other corporates, which on a risk-adjusted basis have deteriorated, may see the credit spreads stay very high. But at least that differentiation which has ceased to exist today will come back into the system which will not be quite helpful.
NAYAR: You don’t have the structural liquidity to provide that. You need capital, bigger rights issues and all that.
MODERATOR: That brings me to the whole issue of banking reforms. Over 2007-08, the debate was framed by two committee reports – the Percy Mistry report and the Raghuram Rajan report. Both had covered a whole range of issues. Given the fact that we all had a cold shower in the last few months, have the perspectives changed on what the Indian banking industry needs?
CHADHA: Frankly my view – not today but over the last many years – has been that the measured and calibrated approach that RBI has taken on the financial services is the right approach. I was not in the camp which said that big banks are good for everything.
Sitting today, the fear that I have is not that there is more regulation but is the regulation going to get even more prescriptive rather than getting more policy-driven? Is the regulation going to inhibit innovation?.
Today, you can’t get a banking company licence, but an entity which is in the corporate sector and probably not of the same pedigree as many of the banks, can very well get a mutual fund licence.
NAYAR: The two big objectives of banking in India are financial inclusion and infrastructure growth. We have a branch network but we don’t have enough capital structure. Two, size matters a lot because you can’t have 87 banks with a total market cap of $140 billion and a total balance-sheet of less than $1 trillion to meet the demands of an economy which has an ambition to grow at 7 or 8 per cent.
So, one, make the Indian banks larger. You have got to do intra-public sector, private banks, or private-public consolidation. We don’t need to have 87 Indian banks – maybe 20 large banks, four big foreign banks and four big private banks. We also need to intermediate the flow of savings into the real sector. While the equity markets are very good and have worked very well, they are very shallow and debt markets are very much non-existent.
BHATT: The Raghuram Rajan committee report does not talk about big banks at all. It is the first report I know of that talks of financial inclusion not in terms of giving credit but in terms of making savings facilities available. Savings is the first important component for financial inclusion, we also need credit and a payment system.
MODERATOR: Should there be a private debt market before the government debt market takes off?
PURI: First, SLR, CRR, priority sector lending norms have to be looked at in terms of pre-empting bank funds. When you do this, you will have a debt market. Second, you need to have a long-term spot debt market and insurance companies and others should be allowed to participate in the debt market before they jump into equity. Third, you need institutional investors in equity markets. Fourth, lending is not the only way to achieve financial inclusion. It is a composite manner in which we bring the balance of the rural population into the organised financial system. It is important that we monetise our gold as well.
KOCHHAR: On one hand, there are banks that accept deposits from the corporate sector and retail customers and then lend while complying with capital adequacy, CRR and SLR norms. You also have another set which again takes money from the retail and the corporate sector without SLR, without CRR, without capital adequacy requirements and without any ALM (asset liability management) issues. So the issue of regulatory arbitrage needs to be handled as a priority item. For the longer-term, we need to look at creating a holding company structure instead of banks promoting other financial services companies. It will be the holding company’s job to see how to allocate capital.
MODERATOR: How do you address the issue of regulatory arbitrage?
SWAROOP: RBI is already looking at it. This could be the time for the government to look at the whole banking structure and I am not pointing at the ownership of state-owned banks but at greater operational autonomy. This will generate more competition in the market.
NARAYANASAMI: There is one more school of thought – because of SLR and CRR, Indian banks are regarded as very safe. A triple-A rated paper may face the risk of default tomorrow, we do not know whether we are professionally competent and to what extent we can manage risk. This is the right time to consolidate your own position. Consolidation of banks is essential but it is beyond our purview.
DARUWALLA: If Indian banks are robust and have not caved in, we have to be very happy that the CRR and SLR were in place. The former Governor had made it very clear that he is going to first control inflation and he is not going to make money available in the system.
CHADHA: While we are more focused on the debt side of the equation, equally India has to grow at 6-7 or 8 per cent over the next 10-15 years. Who is going to plan the equity capital? Structurally, it is also worth considering if we can get more of the household savings into the equity market to fund corporate India even from mutual funds who should be in that role. The tax exemptions are there more on the debt side rather than on the equity side.
MODERATOR: I want to ask you about the system security in banks. If there is more electronic banking, are we secure? Are there shocks that could be hiding in the system? Also, what about the rating agencies?
BHATT: As regards rating agencies, there are not very many of them in India. The amount of investments that have been made on the basis of ratings by these agencies is about 10 per cent.
NAYAR: Operational risk is still quite high. We discover new things every day. Banks like us with limited branch network do a lot of cash management work with other banks. It does give me a few sleepless nights because we always discover something new every six months as we have to use correspondence bank, courier and all that. In terms of other information security, it is not very bad.
KOCHHAR: In terms of technology-driven systems of security, Indian banks are actually ahead. But some small incidents will continue to happen.
DARUWALLA: Your firewalls may be in place, but between a conman and a common man, the formers definitely going to outdo you. You are going to have sleepless nights.
PURI: For HDFC Bank, the systems, procedures and the operational issues are well controlled. There may be some issues in remote areas, but that is just 0.001 per cent of our total presence. So, there is no systemic risk like derivatives or defaults.