It will be a long road to recovery from Covid-19: Axis Bank chief

In a Q&A, the lender's MD & CEO, Amitabh Chaudhry, also dwells on the stimulus package announced by the government, and risk aversion by banks

At a time when asset quality of Indian banking sector was about to peak out, Covid-19 severely impacted the outlook. Amitabh Chaudhry, MD & CEO of Axis Bank, in an email interview with Shreepad S Aute and Subrata Panda, said that the pandemic’s impact across the sector will result in systemic-level stress. He also dwelt on other topics such as the stimulus package announced by the government, and risk aversion by banks. Edited Excerpts:

How soon do you see things getting to normal for Axis Bank and for the entire economy?

There is a lot of discussion on whether we will have an L, U, V or W kind of recovery – we can put all the possibilities on the table, but putting probabilities around them would be hard at this stage. All we can say is that it will be a long road to recovery and may be very different from what we were used to, pre-Covid. The virus is expected to be with us for quite some time and hence there may no longer be a return to ‘normal’ as we knew in the past – a new normal will emerge with its own opportunities.

Most of the stimulus support is through the credit route. What is your reading into this in terms of asset quality going ahead?

The credit support in most cases is to cater to the need to provide greater liquidity, as the government could not have infused this amount of liquidity directly. The idea is to help companies tide over short-term mismatches, for instance MSMEs would get about four years to pay back funds, the time that they may need to tide over this pandemic. It should be a reasonable period for any MSME whose business model has a likelihood of bounce back. The scheme has excluded companies whose conduct in past has not been good. So, overall it looks like a balanced approach. The overall asset quality concerns are expected to remain elevated irrespective of the scheme, as business models would be under stress till the economy stabilises. Accordingly, some cautious dispensations like rephrasing of debt / elongation of tenure of loans/turning interest for one-year into medium-term loan etc, may be useful.  

How comfortable are you to lend to MSMEs without collateral with the credit guarantee in place?

At this juncture, it is a welcome move and will definitely help us finance MSMEs. The key would be to look at the fine print on eligibility criteria and any potential cap on the claims under the scheme. For instance, CGTMSE in past had a cap of 2x of premium for the claims.  

Banks are wary of lending and instead are parking record amounts with the RBI. Do you see this approach changing? And, what is your growth outlook for Axis Bank?

The RBI has provided significant liquidity to the system by reducing CRR (cash reserve ratio) and LCR (liquidity coverage ratio) and through TLTROs (targeted long-term repo operations). As a result, money market rates have come down quite sharply and are currently close to reverse repo rate. So, there is a significant cost to deploying this liquidity with either RBI or in money market instruments. However, banks also have to reckon that more lending in this environment, when economic outlook is very uncertain, comes with higher credit risk. We need the economic activity to re-start for the flow of liquidity to move through the system and risk perceptions to normalise. We do not have a forward-looking guidance for FY21. The trajectory of the Covid-19 pandemic is still very uncertain. We will continuously and cautiously assess our growth trajectory as India opens up.

Has there been increase in proportion of moratorium? How much is currently?

As of April 25, 2020, about 25-28 per cent of our overall loan book by value was under moratorium. The moratorium facility can be availed till end of May, so we expect some increase. However, many customers have also contacted us to withdraw their earlier requests. Based on customers’ profile, we found that close to two-third who have availed moratorium, had sufficient balances in their accounts. The trend among customers seems to be to conserve liquidity and protect immediate cash flows. To that extent, we have not seen any signs of trouble as far as those customers are concerned. However, we are tracking very closely as to what are the differential cash flows that some of these customers will have in the next 3 to 4 months.

How will the NPA (non-performing asset) ratio look like for Axis if the moratorium isn't extended?

Currently, we are not seeing anything across wholesale and retail or our SME (small and medium enterprises) segments, which is telling us that our portfolio is getting worse. However, given the severity and scale of the pandemic and its severe impact on the economy, the businesses across the sectors will get impacted sooner or later, resulting in further stress at a systemic level.

We are better positioned now as we have increased the provision coverage ratio (without technical write-offs) by 900 bps in Q4FY20 to 69 per cent. Considering the conscious portfolio choices we have made in favour of secured nature of lending in the retail and SME book, higher-rated book in corporate, and higher share of salaried and existing to bank customers in the unsecured Retail book coupled with the additional provisions, it does provide strength to the bank’s balance sheet to mitigate the unknown risks emanating from the COVID-19 fallout.

What kind of changes have you done or intending to do in your underwriting practices?

We have tightened underwriting standards across all business lines. Large exposures and drawdowns are monitored closely by the senior management. The bank is extremely cautious on some of the industries identified - travel, tourism, hospitality, textiles, export/import to Covid impacted countries. In retail we have tightened our underwriting criteria across product lines based on profiles, industries and nature of product. We have also re-calibrated scorecards to reflect the inherent risk in borrower profiles. Our incremental sourcing strategy will be now be based on our ‘macro Covid risk model’ and ‘geography micro segment score’. These models factor incremental risk variables like bounce information, moratorium data, Covid intensity in a geography and business impact. These will be used for portfolio action and calibrated sourcing strategy during these times. 

The government has said no fresh insolvency case will be initiated for one year. What will this mean for the insolvency process? Will banks look to resolve the NPAs through the June 7 circular?

Prima facie, it appears that the government is inclined towards suspending IBC (Insolvency and Bankruptcy Code) for fresh cases for the next one year. Whether this is applicable only to fresh defaults (say those defaults occurring after March 2020) or this covers even the previous defaults, will be clear only after we look at the final text of the amendment. For fresh defaults, predominantly occurring on account of Covid-19, this approach would provide an opportunity to incentivise all stakeholders to sit together and find an amicable resolution, as in most of these cases the medium term and long term viability of the business would continue to remain intact. With IBC suspended, banks will mostly use the options available under the RBI guidelines, including restructuring, change of management, etc. for resolution of stressed cases. Creating an enabling environment for restructuring and timely implementation will be critical.