Liquidity, asset quality major concerns

As the global turmoil spills into India, eight leading bankers discussed ‘Banking in Tough Times’ at the Business Standard Banking Round Table.

India’s eight leading bankers today appeared optimistic about the medium and long-term growth prospects of the Indian economy, but expressed concern over liquidity and the deteriorating asset quality.

Speaking at the Business Standard Banking Round Table here today, the bankers said the impact of the global turmoil on the economy will be limited due to the strong consumption demand within the economy, the demographic advantage and the strength of the Indian financial system, which has largely been unaffected by the global financial turmoil.

 

Those present at the round table included State Bank of India Chairman Om Prakash Bhatt, ICICI Bank Joint MD & CFO Chanda Kochhar, HDFC Bank MD & CEO Aditya Puri, Central Bank of India Chairperson & MD H A Daruwalla, Citi South Asia CEO Sanjay Nayar, Standard Chartered Regional CEO Neeraj Swaroop, Deutsche Bank India MD & CEO Gunit Chadha and Bank of India CMD TS Narayanasami.

The bankers said that they were continuing to lend to companies given the possibility of the Indian economy still posting a robust growth.

They were, however, worried over the long-term availability of funds, especially due to the global conditions. “How the supply matches up with demand is partly dependent on what happens globally. If the global credit keeps coming back, the supply will get adjusted faster. If it does not, then we have to recognise that the demand for rupee liquidity will continue to go on increasing,” said Kochhar.

While Chadha expected demand to moderate over the next 24 months or so, Puri said that the rush for funds was particularly strong as companies were unable to access money through initial public offers and external commercial borrowings.

“Demand will exceed supply as banks remain the only source of funds. Mutual funds are not lending, NBFC are not lending and ECB has dried up,” added Daruwalla.

What makes the task more difficult for Indian companies, especially those looking for long-term funds, is the absence of a strong debt market in the country and bankers mentioned it as the most important area of reform in the coming months.

Swaroop said that some banks may face capital constraints as credit flow is rising at over 28 per cent and raising equity to sustain this level of growth may mean that more capital is required. This may not be easily forthcoming at a time when equity markets are facing tough times globally.

But the immediate concern for most bankers appeared to be the deterioration in asset quality. “Business volumes, cash flow and the profitability of Indian companies will come down and the slippages are expected to get more pronounced. So, banks will have to take a very measured approach while lending,” said Narayanasami.

Bankers, however, said that the problem was more acute for smaller companies than for the large players.

They were, however, firm on not reducing the credit risk premium, which has been factored into the pricing of loans, with Puri saying that banks are responsible for protecting the interest of depositors as also offering returns to shareholders. “We are in the business of funding viable projects. We are not in the business of reducing risks,” he said in response to a question from the audience.

Bhatt said that in view of the deteriorating environment in segments like SMEs, his bank has already decided to extend a helping hand.

Bankers, however, said that the problem was more acute for smaller companies. “The credit spreads of large companies will come down significantly. For others, which on a risk-adjusted basis have deteriorated, the credit spreads may stay high. But at least that differentiation which has ceased to exist today, will come back into the system and that will be very helpful,” said Chadha.

Though the global financial landscape has undergone a change over the last two months, bankers said that in India, the government and the regulator need to focus on consolidation and bankers need to use the time to consolidate their position.

“There has to be intra-public sector, or private-public consolidation because big banks will help. We need around 20 large banks,” said Nayar.

Financial inclusion was the other focus area flagged by the bank chiefs. But more than lending to the rural and those who are not part of the organised financial system, the idea should be to encourage them to become savers, bankers said.

 

LIQUIDITY

O P BHATT It’s not a tough time for SBI in terms of capital and liquidity. It’s a tough time for many of my customers due to pricing of loans. Banks have been lending. There was a liquidity squeeze as banks borrowed over Rs 90,000 crore on a daily basis (last month). Banks may not lend because of the view they may take on a particular project.

Chanda Kochhar In the context of other global sources of funds drying up, the release (of funds by RBI) was sufficient to avoid any destabilization. But it was not large enough to infuse that much surplus liquidity in the system. But the demand for cash still remains and is getting stronger. So, if the regulator continues to provide for it, things would improve in the next six months.

H A Daruwalla As of now, liquidity has been made available but there are still more people wanting credit and what happens tomorrow remains to be seen.

CREDIT FLOW

Sanjay Nayar We continue to lend to every sector and there has not been any impact on business. But there will be some impact as delinquencies are on the rise. The increased delinquency will come from the mismatch of liability as a lot of them have already opted for convertible bonds while some others have remained very short in search of lower interest cost. This mismatch will create some stress. The demand will come from infrastructure projects and there will be consolidated spending. There will be shortage as long-term money is not available with banks. We are chronically short on the long-term structured liquidity and the reason for that is pretty obvious.

T S Narayanasami Exporters and SMEs are having a tough time in meeting their liabilities. We are taking into account their requirements. Business volumes, cash flow and the profitability of Indian companies will come down and the slippages are expected to get more pronounced. So, banks will have to take a very measured approach while lending.

O P Bhatt The supply chain across industries will be under stress. Large companies have larger capacity to sustain risk. Among all stakeholders, there is better understanding on what is happening. There is more keenness to hand hold. For instance, we are increasing the tenure, on a case-to-case basis, if an SME that has built up a large inventory is in problem. Everybody needs to do something extra.

Gunit Chadha Demand from companies will reduce over the next 24 months in the absence of funds due to the global recession. But that does not necessarily mean that demand for money will fall… There will be some deterioration in the corporate balance sheet. So, the demand for money will remain strong but supply will get restricted, but for a definite reason.

Aditya Puri Demand will exceed supply primarily because of drying up of sources. If there are no IPOs, if there is very little ECB and if export-import lines are not available, demand for bank funds will increase. However, we are fortunate in the sense that the regulator has all the tools intact, in terms of higher CRR and SLR, which could be relaxed if demand outstrips supply.

O P Bhatt The measures (announced) by the regulator will have a multiplier effect and the entire economy will find a new demand and supply equilibrium. With the infusion of liquidity, there will be more growth in money supply and bank deposits. Whether this growth will be higher than demand in the next six months is difficult to assess now. But these are difficult times for policymakers. Project development and preparation is just not taking place. If we start having the kind of infrastructure projects this country needs, there is no long-term or medium term money. It’s a major thing that will kick start the Indian economy in terms of multiplier effect, employment creation and building infrastructure. The toughest time today is for the policymakers to get the right kind of policies and execute them.

T S Narayanasami Demand will not outstrip supply. Credit delivery and credit quality are both important in today’s context. There is liquidity and that will percolate. Unless pricing is made more affordable, credit will not flow to the common man. Interest rates have fallen and will continue to fall. Credit delivery is very important to support the growth of the economy and along with that credit quality is essential for banks. There will be a surge in demand but it will not outstrip supply.

H A Daruwalla Demand will exceed supply as banks remain the only source of funds. Mutual funds are not lending, NBFC are not lending and ECB has dried up. As far as infrastructure lending is concerned, we do need long-term funding.

 

Chanda Kochhar Demand will continue to be high but the structure of demand will change. In the past couple of years, Indian companies have been using a lot of their cash accruals and all sorts of short-term funding to fund their working capital growth and to fund their growth in production. So what the banks have been funding has been partly creation of projects and partly helping consumers buy assets -- whether is homes or cars. In the current scenario, everybody is saving their cash accruals for running their business. Therefore, projects that have actually not got off the ground are not getting started. But demand for credit will be there to meet all the trade credit that has dried up. Banks have a large role to play to continue the cycle but the cycle is of a different form. It’s not for creating new projects. It is for survival..

Neeraj Swaroop A large part of the aggregate demand is met by the non-banking system. In six months, if that does not change, the demand from the banking system will outstrip supply. On interest rates, it is an anomaly, especially if the world liquidity does not improve, the demand for bank credit exceeds supply from savings and deposits, and interest rates may not come down despite the regulator signalling a cut in interest rates. The other anomaly is if the credit growth is 27-28 per cent, where will the capital come from if the capital markets do not revive?

Gunit Chadha Today what is happening is that because liquidity is short, even AAA corporates who would deserve far better credit spreads are facing problems. A large corporate’s credit spreads will come down significantly. For other corporates, which on a risk-adjusted basis have deteriorated, the credit spreads may stay high.

BANKING REFORMS

Aditya Puri First, SLR, CRR and priority sector lending norms have to be looked at in terms of preempting bank funds. Two, when you do this, you will have a debt market. You need to have a long-term spot debt market, and insurance companies and the others should be allowed to participate in the debt market before they jump into equity. Then, you need institutional investors in equity markets. Besides, lending is not the only way to achieve financial inclusion.

Sanjay Nayar The two big objectives areas are financial inclusion and infrastructure growth. There has to be a clearer definition of who are the savers, the investors, the niche players and the large banks that have to do commercial banking. That arbitrage has to be reduced. Second, size matters and it matters a lot. You cannot have 87 banks, with a total market cap of $140 billion and a total balance sheet size which is short of $1 trillion. It’s impossible to have an economy with an ambition to grow at 7-8 per cent with these dynamics. So, one, make the Indian banks larger. Two, we need to intermediate the flow of savings into the real sector. The equity markets work very well but they are very shallow and debt markets are pretty much non-existent.

Chanda KochharOn the one hand, there are banks that accept deposits from the corporate sector and retail customers and then lend while complying with capital adequacy, CRR and SLR norms. You also have another set which again takes money from the retail and the corporate sector without SLR, without CRR, without capital adequacy requirements, without any ALM (asset liability management) issues. So the issue of regulatory arbitrage needs to be handled as a priority (item). For the longer-term, we need to look at creating a holding (company) structure instead of banks promoting other financial services companies. It will be the holding company’s job to see how to allocate capital.

Neeraj Swaroop This could be the time for the government to look at the whole banking structure and I am not pointing at the ownership of state-owned banks but at greater operational autonomy. This will generate more competition in the market.

T S Narayanasami There is one more school of thought that because of SLR and CRR, Indian banks are regarded as very safe. A triple-A rated paper may face the risk of default tomorrow. We do not know whether we are professionally competent and to what extent we can manage risk.

Gunit Chadha Big banks are not good for everything. Sitting today, the fear I have is that is the regulation going to get even more prescriptive rather than towards getting more policy driven? Is the regulation going to inhibit innovation? So, I would hope that India while having measured and conservative reforms continues to allow innovation and probably gets directionally more policy driven and less prescriptive.

On the one hand, there are banks that accept deposits from the corporate sector and retail customers and then lend while complying with capital adequacy, CRR and SLR norms. You also have another set which again takes money from the retail and the corporate sector without SLR, without CRR, without capital adequacy requirements, without any ALM (asset liability management) issues. So the issue of regulatory arbitrage needs to be handled as a priority (item). For the longer-term, we need to look at creating a holding (company) structure instead of banks promoting other financial services companies. It will be the holding company’s job to see how to allocate capital.