'PSUs must start investing'

The country's leading bankers want cash-rich public sector companies to lead the way and kick-start investments

Is the worst over?
Pramit Jhaveri: With the change in the finance minister, 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 dramatic change in the external perspective towards India. Sadly, the external change in sentiment has not quite been accompanied by a similar change from an internal perspective. We really need to see that a 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.

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.

Chanda Kochhar: There is a movement towards changes and reforms, but we need to focus on ground-level decision making. 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: 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? 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.

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. Coming to banking, I believe this is the best opportunity for financial services, globally.

Loan dollarisation risk
Chaudhuri: Today, SBI is sitting on Rs 50,000-55,000 crore of extra liquidity. This has to be lent. Every time a customer comes, our corporate lending people are in trepidation that he has come to substitute his rupee lending with dollar lending. 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 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. So, a lot of exposure is going unhedged. 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.

With 100,000 bank branches and 600,000 villages, in terms of coverage, there is one bank for every six 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.

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.

Puri: Financial inclusion is a social, political and economic necessity. Let us not restrict it to cash transfers. 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 won't they adopt banking technology? If someone is opening a demat account, he will realise that he must have a banking account.

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.

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. The yield on advances has also decreased over a period of time. But all banks have reduced their mark-ups and wherever possible, have passed on the benefit to customers.

Investment revival?
Kochhar: 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, 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. Brownfield projects are starting off and the consumption dynamic is intact. If the investment board functions properly, you will see greenfield investments.

Chadha: 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. 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: 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. Even with 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. If you want money to come in, you should give proportional voting rights to equity.

Chaudhuri: Regarding banks owned by industrial houses, there needs to be very strong firewalls between their main business and their banking business.

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 may come into play. But, banking in India is not an easy business to be in. You need all the 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 per cent to 12 per cent, it isn't going to come from the US and Europe.