'Risk management is critical'

Q&A: Gunit Chadha, MD and CEO, Deutsche Bank

Foreign banks are often criticised for not lending pro-actively and for keeping interest rates high, despite the RBI injecting more liquidity into the system and lowering repo rates as well. Deutsche Bank’s Managing Director and CEO for India Gunit Chadha speaks to Sudeep Jain and Sidhartha on the reasons for this, the likelihood of banks raising their lending as well as the overall global and local economic environment. Excerpts:

When do you see global markets recovering?
While some green-shoots are emerging, and I’m optimistic about the pace of contraction in the OECD slowing down, the recovery from such a deep and global structural damage is likely to take time. The housing crisis and unemployment in the US and Europe needs to stabilise first, only then can emerging markets recover. Investments will first flow into the US, only after that will they flow to emerging markets. And for sustained growth, emerging markets need the flows — in debt, equity and FDI.

But once global recovery begins, India will significantly outperform the rest of the world, in the medium- to long-term.

According to the latest RBI data, credit growth for foreign banks has dropped significantly, nor have these banks reduced lending rates. Why?
I can’t comment on foreign banks as a whole, but some like us have significantly enhanced their investments into India — in terms of capital, credit as well as people. While nominal lending rates have come off, there is a transmission loss between ample liquidity and credit. There are three reasons for this.

First, global credit markets are still dislocated and credit spreads continue to stay high relative to what the rising equity markets seem to suggest. With credit in the secondary markets trading high as banks de-leverage globally, why would banks lend in the primary market at less than that?

Second, the economic slowdown has impaired corporate credit quality, at least in some sectors, which means that while the risk-free rate has come down, credit spreads may in fact have increased.

Third, the fact that the administered national saving interest rates is fixed at 8 per cent and 10-year risk-free government bonds trade at 6-6.5 per cent provides some sort of a floor to deposit rates — this, in turn, does have an impact on how fast lending rates can come off.

When inflation increased sharply in 2007-2008, bank lending rates did not go up at the same pace; also, till the expensive deposits of the past are not extinguished, this will prevent rates from coming down as fast.

Which of the three is the biggest stumbling block to availability of corporate credit?
The stressed corporate balance sheets due to industry-specific cash-flow problems or company-specific issues like high leverage or refinancing risks. But the stronger AAA companies are getting ample credit from banks and, now, at sharply reducing spreads.

What about Deutsche Bank’s corporate lending and growth in 2008-09?
We have stayed relatively light in the three areas — commercial real estate lending, leveraged finance and consumer finance — that have produced some stress in the industry. This has preserved our capital and risk-limits.

Growth has certainly slowed down in 2008-09. We are now focused on deepening our business with existing clients, in areas where we have a strong market-reputation — foreign exchange, cash management and custody. While banking German clients has always been our top priority for the 28 years we have been in India, we have expanded deeply into local Indian corporates and institutions.

Our risk-weighted assets were Rs 32,500 crore as of December 2008, which is a year-on-year growth of 45 per cent.

What is the size of your consumer loan book and what about consumer delinquencies?
Our total consumer loan book is light since much of this comprises secured mortgages. We have not been badly hit by the rising delinquencies in the overall market in personal loans and credit cards. On retail banking, we were always focused on the mass-affluent —our platinum credit card is often acknowledged as the best in the market — and this is an extension of our top-rated private wealth management franchise.

For example, we got our NBFC licence two years ago; we capitalised it well, but did not add even one branch to the NBFC for consumer lending! So, we stayed light, partly since we saw the headwinds coming, and partly due to good luck.

What should bankers focus on today and where do you expect the future growth to come from?
All bankers must keep a very close eye on risk management — not just liquidity and solvency risk which was tested during the global crises; but equally on credit and market risk, as also on reputational and operational risks. You can expect the business models for banks to get re-defined, benchmarks for capital ratios are likely to rise and regulatory supervision will increase.

As far as growth is concerned, there are secular opportunities arising from the intermediation of savings into investments, especially in a country where the savings rate is 35 per cent of GDP but the market capitalisation-to-GDP ratio is still very low. And there are the obvious retail, asset- and -wealth management opportunities.

Equally, since India does not have the capital it needs to fund its GDP growth, this implies secular opportunities for cross-border debt and equity flows — through FIIs, ECBs, Foreign Currency Convertible Bonds, Private Equity and Foreign Direct Investment. And there are the obvious investment banking opportunities that flow from this.

Growth will accelerate from corporates who need risk-management solutions for their various risks — interest rate, currency and commodity risks. In the near-term, opportunities will arise from re-financing strong companies which are in a transient phase of distress, in both the loan and capital markets. If India grows at over 8 per cent over the medium-term, it creates a good environment for all banks in India to do well!

The RBI has deferred the roadmap for foreign banks and suggested reciprocity when it comes to foreign banks. How does this affect you?
The reciprocity argument is completely understandable from India’s standpoint. Germany has been very open towards Indian banks. We hope to be beneficiaries of this argument as we add new branches to the 13 that we currently have in India.

In the current global eco-system, it would be naïve to believe that the Reserve Bank of India would not re-evaluate the roadmap of foreign banks. Also, some foreign banks may be compelled to partly retract into home markets.