Six leading bankers say the overall mood on economic growth is fairly bright, but the early signs of stress can’t be ignored.
ON RATE HIKES. WILL THEY BE PASSED ON?
Pratip Chaudhuri: Any hike by the Reserve Bank of India has to be passed on because any input prices rise will have to be reflected in the asset side, in terms of returns.
Chanda Kochhar: It will depend on the liquidity situation. In the last two years, all rate hikes by RBI were passed on by banks. But the last one has not really been passed on because of low credit offtake and higher deposit growth rates. The big thing to watch in the coming two months will be liquidity because we are entering the festive season, the rupee-dollar is moving in a particular manner and it is having an impact on rupee liquidity. There is a lot of borrowing in India from the European banks. There could be some liquidity crunch on that account as well.
Gunit Chadha: Historically, the second half of the financial year has always been worse than the first half. Some of the factors that are in the play right now, are an increase in government borrowing, reduced dollar liquidity and cutback in the flows into India. Then, there is the whole issue of transmission. I think there is an inevitability that banks will have to transmit some of this increase into the system.
M D Mallya: Credit demand has continued to be a little muted. We are still to see the normal increase after the onset of the festive season, implying that credit delivery has not taken place substantially.
RISING DEBT RESTRUCTURING
Chaudhuri: Three years ago, there was a situation when the CDR committee said that we are not having any more patients in the ward, so we are closing it down. Now, there is a complete reversal. I think many companies took loans and agreed on accelerated terms of repayment – in five to six years. But they have discovered lately that they need a longer term to repay.
Kochhar: While the number of medium-sized companies coming in for restructuring has gone up, I think the impact is going to be much less than the previous cycle. This is because the value of companies coming up for restructuring are medium and not really the large corporate houses. So, in value terms, the banking sector is actually going to be less impacted than in the 1990s.
Sharma: If you have an environment where rates are going up and growth is slowing down, then there is going to be stress on marginal companies. So you could see both sides of the cycle. You could see general restructuring where companies will come out stronger and you could see marginal companies which are going to be stressed.
| FY12 TARGETS | ||
| Inflation | GDP | |
| Pratip Chaudhuri | * 7.5–9 | 8 |
| Chanda Kochhar | 8 | 8 |
| Shikha Sharma | 7 | 7-7.5 |
| M D Mallya | 7- 7.5 | 8 |
| Gunit Chadha | 7 | 8 |
| Pramit Jhaveri | 7.5–8 | 7.5 |
| *SBI – if fuel rates are adjusted, inflation will stand higher at 9 %. If unadjusted, it will remain at 7.5 % | ||
ON CORPORATE IMPACT
Mallya: In the last one year, banks have raised interest rates by 300 bps which would have led to rise in cost of companies to that extent. But the cash management of many companies would have improved substantially leading the interest paid to bank vis- a-vis the overall turnover not rising significantly.
Jhaveri: In general, with business and sectors where the demand is domestic, companies are able to pass on the inflationary or related costs. But if you take an overall picture, the outlook for sectors like energy and commodities is that demand could soften over the next six-12 months. This would make things difficult for businesses in India to maintain the positive operating leverage that we have maintained in the last two-three years, after growing by 20-30 per cent.
Chaudhuri: The interest rate impact will have to be seen with a lag. You will not see the IIP numbers drop immediately. But that has started happening now. For the last three months, BHEL has not got a single order. If the slowdown continues, it would cascade to other sectors.
Chadha: The question isn’t whether RBI will hike rates by 25 bps or not. I think it is time for RBI to soften its tone so that confidence comes back that the inflation demon is going to be seized. It is our view that India inflation will be at 7 per cent by March 2012.
Sharma: We are beginning to see the first signs of slowdown on housing and auto purchase. So though the sale numbers look fine, there is an inventory build up. From a common man’s perspective and economic growth perspective, in a high inflation environment, we have to continue on the path of growth because already no new investments are happening.
Kochhar: I think we have reached the tipping point. In the first quarter, we saw a dip in profits and revenues compared to Q 4. While this trend is similar every year, this time profits fell more than revenue, indicating that companies will not be able to pass on the entire increase to the consumer. So growth is taking place, the rate of growth has come down.
As of now, there is no visible stress on the retail portfolio because the car loans on fixed rates. In case of floating rate loans, tenures are being increased.
INVESTMENT CLIMATE
Chadha: Monetary policy is not so much of an issue. Three-fourths of the issue is of policy action. That is, clearing of bills in Parliament. The ability to set up a greenfield and brownfield project has its own environmental, land acquisition and mining issues. And that is on the minds of the entrepreneurs.
Chaudhuri: RBI should consider relaxing the cash reserve ratio (CRR). And if that happens, it will inject liquidity into the system which will be a good confidence-building measure. It will also release more cash into the system to absorb the increased government borrowing programme and may not end up being so inflationary. I think no country in the world has a 6 per cent CRR.
Kochhar: Business confidence gets developed on account of three building blocks – the underlying economic demand for products, financial costs of purchasing those products and the policy environment. So, today while there is still a growth in demand, it is getting subdued by the other two factors. To build a new mood and a new round of investments, there needs to be clarity around policies. Companies are worried about things like: when I commit money to a project, will I get land for the project? Will there be some controversy about approvals I get? Currently, companies are focusing on the projects they have on hand, but not thinking about the next round of investments because of the uncertainty in the environment.
Mallya: If you look at short term, the projects in the pipeline are continuing. Currently the growth rate could be reasonably equipped. But the business sentiment is the worrying factor. Companies are not taking decisions that are directly reflected in the number of proposals that one gets today.
RATINGS: INDIA VERSUS THE REST
Chaudhuri: How much ever you may berate the rating agencies, there is no other alternative. People do go to rating agencies by choice. Ratings are like a doctor’s diagnosis. They are reminders that some steps have to be taken.
Chadha: In Europe, many banks are getting downgraded because there is a solvency question. But for the Indian private sector and public sector banks, the solvency question is not even coming up for discussion. So, it will have little impact on the prices at which they access the foreign bond markets. I think we are reading more into it than it deserves.
Jhaveri: In the last banking crisis in 2009, the Indian banking system came out unscathed. Indian banks are better capitalised than many banks in the Western world. We need to look at the regulations that are going to come in over the next few years. This would require banks to add more capital. We need to think about what Indian banks need to do to maintain their position of strength over the next five years.
Kochhar: While ratings are reminders that some steps need to be taken, there is an excessive focus on capital as we move towards Basel-III, which is not correct. Also, sovereign ratings should not be reflected in bank's ratings.
RURAL ECONOMY: OPPORTUNITY?
Chaudhuri: Agriculture is a sector where the investment in infrastructure is far lower than it should be. In the last 20 years, we haven't seen any big irrigation projects. In most of the dams that came up, 80 per cent of the water is used for power projects and only 20 per cent for irrigation. Any prosperity in rural areas gets captured in the urban centres because there is a tendency to buy a house or an asset in urban areas or to move his/her children there. So the spin-off happens in the urban areas. I think the winner in the banking sector would be the ones who capture this and not expect that the rural branch will be necessarily prosperous.
Mallya: Lending in rural sector is a challenge. May be a rural branch takes a bit more time to break-even. One way is to remove the mindset that one goes to the rural area only because of the mandate given by the government.
Kochhar: There are two types of challenges associated with it. One, it is very important for banks to find a viable and sustainable business model. Just looking at it as a mandated level or just as a CSR activity would bring about some limit to the scope of the business. Second, where agriculture has been growing at 3-4 per cent, banks’ lending has been growing by 18-20 per cent. So, there is an issue of lack of absorptive capacity. It not enough to give money just for produce, but create an ability to take that to the market.
Sharma: Rural spending is increasing, but is still primarily based on consumption activity. What we need is rural infrastructure and investments and supply chain system, which would connect rural market with that of the urban consumers. Herein lies the dichotomy. Investment in these sectors does not come under priority sector lending. So I think there is a need for re-definition of priority sector for the banks.
Chadha: Is agriculture the most significant constituent or is it health care, education, infrastructure build-up? Some players in the banking sector like foreign players may be much more adept to finance the infrastructure sector, than financing the agri sector.
Jhaveri: When you think about rural banking for financial inclusion, the question for us is what is the role of technology? We have 800 million plus mobile users against 250 million bank accounts. So it is becoming obvious that technology will play a very significant role in the years to come. It might be mobile banking, mobile wallets so there is a lot of scope.
