Don't expect unpleasant surprises on fiscal in this Budget: Atul Joshi

Interview with Atul Joshi, MD and CEO, India Ratings

Atul Joshi, MD and CEO, India Ratings talks to Aastha Agnihotri on the banking sector and overall market trends going forward.


A lot has changed in past couple of years for the banking sector. Profitability has slipped, asset quality has deteriorated. How do you think 2013 is going to look like?

The year gone by is nothing but the reflection of actions taken in 2009 and 2010. A lot of restructuring of assets was done esp. in Real Estate. That has still not turned around. Cyclical non-performing liabilities (NPL) risk is now receding with our estimate of NPL peaking out at 4.20% by June or September quarter this year.

After that we expect NPLs to begin to soften but not in a hurry. The risk pricing by banks has been very lucrative and hence the cyclical NPLs was never expected to have a serious impairment of capital for banks.

But the main issue is built of large concentration risk, especially to the top 20 borrower accounts as a percentage of the equity of the bank. Banks need to pro-actively address this risk going forward.  Overall, the profitability should be able to bounce back with receding NPLs. Though we are still not set into a definitive cycle of inflation control and hence reducing interest rates, the overall trend is softening interest rates. This will aid bank profitability.

The concern remains on liquidity and ALM mismatches. Given that banks do not have the option to issue Upper Tier II and Perpetual bonds, they seriously need to weigh the option of making issuance of Senior Bonds in rupee and correct the structural deficiencies in ALM book.

Do you think that private sector banks offer better returns vis-a-vis PSU banks and what are your reasons for this belief/disbelief?

The whole concept of comparing private sector banks with public sector banks is ill-founded. The private sector banks will emerge as better performing on numbers game. But if private banks were loaded with policy execution responsibility, the analysis will be more symmetrical. Thus, a completely different role of policy execution besides the profitability for public sector banks makes the comparison ill founded.

What are your first thoughts on new banking licenses norms by the Reserve Bank of India (RBI)?

The RBI has been very prudent in laying down some strict and conservative entry barriers. If we see banking systems in the advanced economies such as Australia, France, UK, Canada, Switzerland, Singapore etc. the banking systems are large but with much smaller number of banks.

In terms of branches in rural area, so far most banks have seen a negative Ebidta of up to 33% on their rural branch network. A steep challenge for new banks is to have 25% of branches in rural area from the start itself. May be, NBFCs are better placed given their differential cost structure and reach.

A higher CapAd of 13% needs to be maintained for three years from the start of the operations limiting aggressive expansion plans. Mandatory listing in three years is also a stringent regulation. CRR and SLR holdings will also exert its own cost pressure. Inability to operate in same businesses for NBFCs is a major deterrent to my mind. In a way there are sufficient speed breakers in the regulations.

RBI has tried to keep banking sector's liquidity crunch at bay through CRR cuts. Do you think more needs to be done to meet liquidity concerns in the sector?

Our paramount concern in the banking system is ALM mismatch (and not NPLs) which is exhibited in liquidity crunch. It is a structural issue and cannot be addressed by CRR cuts. Banks have 14% of their portfolio in infrastructure having project life of 20-30 years but no liability products of 15 to 20 years exist on their book.

Deposits maturing in one-year-to-total-deposits (outflow) is at an all time high of 49% compared to 27% in 2002 whereas one-year-loan-to-total-loan (inflow) is down to 26% from an earlier high of 37% in 2002. This is what we call the Funding Gap. This is the crux of liquidity problem. As mentioned earlier, banks need to issue senior bonds of at least 15 year minimum maturity without put call options to correct this. Cap on bulk deposits is a step in right direction too.

What sops do you expect from Union Budget for the banking sector? Do you think government will be able to meet the fiscal deficit target or will it deteriorate from here?

It must be remembered that while we have seen deterioration on our central fiscal condition. According to India Ratings' expectation, the government will be able to meet 5.30% fiscal deficit number. The government has already made public its intent to bring it further down to 4.80% for the next year. We do not think that the government will not adhere to this – at least in the Budget announcements. We do not expect any unpleasant surprises on fiscal in this budget.

On the banking sector, some announcement on infrastructure related bonds with tax sops may be expected.

Does India face a rating downgrade threat if Budget turns out to be below-expectations?

The key concern is further deterioration of fiscal deficit which is at a high of 8.7% on a consolidated basis. This compares badly with a BBB median of 2.9%. A concerted effort needs to be made to reign in fiscal slippage at center level. Fiscal slippage with lack of policy initiatives driven GDP slow down continues, the threat of downgrade becomes more acute.