RBI norms potentially allow capital infusion into Axis Finance: MD & CEO

Amitabh Chaudhry discusses RBI's new norms, potential capital infusion into Axis Finance, margin pressures, deposit trends, credit growth and regulatory changes shaping Indian banking

The cut in the repo rate by 25 basis points will delay the stabilisation of net interest margins (NIMs) at a time when margins are under pressure, says Amitabh Chaudhry, managing director and chief executive officer, Axis Bank, in a conversation with Manojit Saha and Subrata Panda. Axis Bank, India’s third-largest private-sector lender, will absorb the likely impact of the proposed expected credit loss (ECL) guidelines in one go and move forward, he says. Edited excerpts: 

How does the Reserve Bank of India’s (RBI’s) removal of restrictions on overlapping business within group entities of a bank affect your decision to sell a stake in Axis Finance? 

Given the way Axis Finance is performing, it is likely to be an upper-layer non-banking financial company (NBFC) by next financial year. Once it is classified as an upper-layer NBFC, we will be required to list it in three years. This circular provides banks the flexibility to decide the nature of business done by subsidiaries. However, before this circular, based on the RBI’s guidance, we had communicated to the RBI we would not infuse any further equity and would instead raise capital from external sources. That commitment to the RBI was made before the circular came into effect, and we have since been transparent that we are in the process of exploring external fundraising, which has been underway for some time. While the new circular potentially allows us to infuse capital again, this would require us to approach the RBI and seek its approval. This option needs to be examined, and it is uncertain how much time the process would take because it would involve shifting from our earlier stance of not infusing capital to seeking permission to do so in the light of the changed regulations. We have been engaging with potential investors who have invested time and effort in this process, and we need to be mindful of that. Internal deliberations are on, and we expect to have greater clarity over the next couple of months. 

How much would you look to sell if you do so? 

This was not being driven by a desire to sell a stake per se. It was driven by Axis Finance’s funding requirements over the next couple of years. Our objective was to raise sufficient capital for Axis Finance, and, accordingly, we had assessed that the company would need ₹2,000 crore-3,000 crore to support its plans over that period. Based on the valuation, whatever stake needed to be sold to raise that amount, we were comfortable proceeding along that path.

 

How will your margins be affected because of the rate cut in December? 

We had indicated there would be a dip in the net interest margin (NIM) in the third quarter, after which we expected improvement, assuming there were no further rate cuts. With the recent rate cut, it will take a little longer for us to absorb the impact because the reduction will be passed on to borrowers. And this will be the case not just for us but the banking industry in general. That said, we are at or very close to the bottom of the NIM cycle. We expect that over the next couple of quarters NIMs will start to improve. We continue to stand by our guidance of delivering a 3.8 per cent NIM through the cycle.

 

How difficult is it to cut deposit rates? 

It depends on liquidity. The RBI has been clear in the monetary policy about maintaining liquidity at a certain level. Once liquidity comes back and stabilises and the rupee becomes relatively stable, we should see deposit rates beginning to stabilise. We are hopeful that over the next one to two quarters, some of these rates will settle. The only way to ensure that NIMs remain at current levels — given that the benefit of rate cuts has already been passed on the yield side — is for deposit rates to come down. Current and savings accounts are gradually trending in a downward direction. This creates inherent pressure on the overall cost of funds. Therefore, overall deposit rates need to come down gradually for NIMs to move back to the levels that all of us are aiming for.

 

In Q2, Axis Bank reported robust growth in its wholesale books. Is the momentum continuing, and does that mean private capex is showing signs of picking up? 

We are seeing continued traction in growth in wholesale advances. We have been seeing several refinance opportunities, along with specific capex activities in certain areas. Private capex, however, is a different dynamic. Despite an environment of strong operating cash flows and lower costs of both debt and equity, private capex has not picked up meaningfully, and most companies are also not borrowing much. As a result, growth in wholesale advances is still some distance away from a broadbased pickup, with much of the current activity coming from specific sectors or refinance opportunities. Our view is that private capex should eventually pick up.

 

How do you look at financing acquisitions? 

We are among the largest originators of loans and bonds, and we believe we can offer a comprehensive solution to companies looking to undertake acquisitions. We would like to be at the forefront of the acquisition financing opportunity. In that sense, we want to support this growth. We have seen significant acquisition activity across sectors such as steel, cement and pharmaceuticals. Invariably, part of these acquisitions is funded through debt, as promoters may not always have sufficient equity. I see no reason why Indian banks should not have the wherewithal and capability to support this acquisition financing, rather than leaving it only to foreign banks.

 

Has the downward trajectory of current and savings accounts bottomed out? 

I do not think so. As depositors become savvy and increasingly invest in various instruments, such as mutual funds and pension funds, and as growth in these avenues continues, funds return to the banking system but largely in the form of wholesale deposits. These deposits, in many cases, carry higher run-off rates or come at higher costs than typical retail deposits. As a result, the nature of deposits is changing, with many customers no longer maintaining as much money in current or savings accounts. Consequently, the share of CASA in the overall deposit profile is declining, and this is a trend visible across the banking sector, not just for any one bank.

 

Are you comfortable with your credit-deposit ratio? 

We are comfortable with our current position. We have maintained it at 92-93 per cent for several quarters now.

 

What are your growth ambitions? 

We have stated that in the medium term we aim to grow at a rate that is about 300 basis points higher than the industry.

 

What will be the hit from the ECL guidelines? 

If the draft guidelines are implemented as they stand then higher provisions may be required in Stage-I and Stage-II, and this would apply across the banking system. However, if the final norms are aligned with what has been implemented in other jurisdictions globally, we believe we already have adequate provisions in place, particularly since we have retained our pandemic-related provisions and have not utilised them. Our approach will be to implement whatever is finalised without delay, absorb the impact, and move forward.

 

There is a tremendous amount of foreign interest in Indian private banks. Has anybody approached you? 

No. We are a large bank. To have any meaningful stake in us will require a very large amount. Overall, this development is positive for the Indian banking system. Hopefully, such investors will help bring global best practices across areas such as risk management, technology, customer engagement and specialised products. Much of this capital has been directed towards mid-tier banks. Building a sustainable, all-weather franchise requires scale. The level of investment needed in areas such as technology, cyber security, analytics and now artificial intelligence means banks need to be of a certain size to manage these capabilities effectively and at scale. The institutions making these investments, and the banks receiving them, are hoping that this capital will enable them to scale up faster than would be possible through organic growth alone. Ultimately, however, the key challenge remains deposits. Capital is important, but leverage is essential, and that comes from building a strong deposit franchise. Mobilising deposits in India is a difficult and competitive process.

 

Would you look to buy a general insurance company? 

We have evaluated opportunities in general insurance, but nothing has emerged that is of real interest to us.

 

How do you see the regulatory environment in the past one year? 

When we had the previous RBI governor, the circumstances and context were slightly different. With the new governor coming in, there has been a stated emphasis on pivoting towards higher growth. The RBI has indicated that it needs to support growth while at the same time maintain a robust framework for risk management and compliance. The regulator has focused on ease of doing business. Much of what the RBI is talking about is aimed at ensuring that banks are given adequate space to grow. Against this backdrop, we have always aspired to be a bank that grows faster than the industry. We clearly see this as a positive development and intend to capitalise on every opportunity that comes our way.