Private Banks round table: CEOs see vast scope in consumer credit

Some of the most prominent voices at private-sector banks in India see great growth potential in the sector, particularly from the opportunities in consumer credit. Despite headwinds stemming from geopolitical conflict, bankers remained optimistic about the Indian economy heading towards the $5 trillion mark in 2027. Amid decade-high demand for credit, a key theme was the need for banks to focus more on shoring up deposits to finance loan growth, according to participants in the Business Standard Round Table on private banks, titled BFSI Insight Summit 2022: Can private banks change the game?

The participants included Hitendra Dave, India chief executive officer (CEO), HSBC Bank; Amitabh Chaudhry, managing director (MD) and CEO, Axis Bank; V Vaidyanathan, MD & CEO, IDFC First Bank; Rakesh Sharma, MD & CEO, IDBI Bank; and Ashu Khullar, CEO, Citi India. Edited excerpts:

In making India a $5-trillion economy, private banks have a great responsibility. You are ahead in growth in advances, you have lower NPAs. This puts you at centre-stage. What is the way forward?

AMITABH CHAUDHRY: As we head towards a $5-trillion economy, the banking industry and broadly, the financial services industry, has a very important role to play in supporting this growth. You said that public-sector banks (PSBs) are losing market share, but that does not mean they’re not growing — they’re just growing at a slower pace than what private-sector and foreign banks have delivered consistently over a period of time.

We have had the luxury of being able to pick our markets, customer segments, products, build them up and create decent market share in each of those categories. But, as we drive towards $5 trillion, all of us have to play in almost every customer segment in almost every part of the country, to make a big impact and continue to gain market share.

PSBs are not just waiting for us to take market share — they have become aggressive. Over the last six to eight months, they are back in the markets, especially on the wholesale side. We see them becoming increasingly aggressive even in the mortgage space. So, they are gradually coming back. Some PSBs have been very aggressive from the beginning. SBI is one, followed by Bank of Baroda. So, both have to play a role.

Private-sector banks can do much more, and they are. You can see some government platforms becoming more ubiquitous. As more and more data become available, it will become easier for us all to extend our capabilities and our reach into markets we’ve not been present in. Hopefully, while PSBs continue to get more aggressive, private-sector banks will continue to gain market share, because now we are going to areas where our presence was limited.

I mean the semi-urban and rural markets of the country. We’re also going down the risk curve a little. We are now willing to bank more and more customers. Half of India is still under-served in terms of credit. So, as underwriting standards improve, data improves, algorithms improve, we can underwrite more and more of India. All of us are running projects to underwrite more and more of India, which means that our presence in those markets will also improve.

I’m looking forward to this renewed competition to support the Indian economy — between us, PSBs, and NBFCs, who have also been getting better and better at what they do.

Mr Dave?

HITENDRA DAVE: It’s a great time to be in banking, or financial services, because the pie is growing for everyone. Some might take a greater share of that pie, but it’s much better to be in an economy where the pie itself is growing. The banking system provides the fuel. We have a significant share of cross-border trade. You will find international banks having a market share which is way above that of many, much larger local players.

Similarly, a big driver of investment and growth in the economy has been FDI. International banks play a role there. So, each one will choose a segment. It’s very difficult for a bank like ours to say we will do rural banking. The nearest rural area is 500 km from our branch. Even as international banks, all of us are conscious of the role we need to play to do a real job in a real economy, help real customers, export more, import more, buy more houses or take unsecured loans. And, especially for international banks, the external developments are uniquely favourable.

We have not had an extensive branch network, but now with the technology available, you can access a lot more. In another session, someone spoke about account aggregators. For a bank like ours, that potentially gives you access to a billion people, which there was zero chance we would ever have had. How many of that billion we want to tap is a different matter, but the opportunity is available.

Given the opportunities that are opening up, the kind of growth narrative that India presents, and the kind of excitement there is about the country among senior global stakeholders who can have significant influence, the private sector will play a much greater role in the next 10, 15 or 20 years, than might have been the case in the last 10,15 or 20 years.

Let’s hear from another foreign bank. Ashu (Khullar of Citibank)?

ASHU KHULLAR: The Indian economy’s opportunity for growth is unprecedented. India has capital requirements — Citi research estimates that in this decade, we need $350 billion of foreign capital to meet India’s growth aspirations, because there is a shortfall in our domestic savings. Therefore, the question is not about private banks gaining share versus the PSBs. The pie is so big, the needs are so large for the potential that the Indian economy has, that this is about everybody and more.

Frankly, if we have to get the opportunity, the PSBs have a role to play and I’m very mindful of the constraints which they work under. As international banks, it’s about where we add the most value on a sustainable basis. The reason our CEO decided to exit consumer banking in 14 markets, not just India, was because the view was that we are going to focus on areas where we add long-term competitive value to our customers.

That for us, is the institutional framework, whether it’s getting foreign capital in, FDI, the work happening around PLIs, around foreign portfolio money, whether it’s equity or debt money, helping out on the digitisation front, or in bringing a global lens to issues like ESG, which is very relevant. We are obviously competing, but India’s needs are so immense that we need many more of us

Over to IDBI Bank.

RAKESH SHARMA: India is poised to become a $5-trillion economy by 2027, per IMF estimates. The important factor is, the share of banks in the non-financial private sector in India is around 52 per cent, whereas in emerging economies it is around 110 per cent, and in advanced economies, around 85 per cent. As Ashu said, there is a lot of scope for all banks, and all banks can contribute to the development of the Indian economy. Here, PSBs have certain advantages, they have very good reach, and have done an excellent job in financial inclusion.

But at the same time, private banks also have certain advantages, because they can adopt technology, take quick decisions and work on various products in a proactive manner. That helps in increasing market share, and that is how private banks have almost doubled their market share in the last decade. The important point now is how both PSBs and private-sector banks can work together to make India a $5-trillion economy before 2027 itself. 

Finally, Mr Vaidyanathan?

V VAIDYANATHAN: Of late I am seeing even PSBs doing a great job. Now, when you look ahead to, say 2030, we are talking of India’s economy being $6.75-7 trillion. Just the consumer credit market of the country, just retail credit — which is home loans, car loans, and all that — was about Rs 44 trillion as of March 2022. As we speak, probably Rs 50 trillion, or about $600 billion. This will be about $1.5 trillion in 2030. Just think — a $1.5-trillion consumer credit market in 2030.

Now, extrapolate the story for mutual funds. Again, it’s doubling or tripling. Extrapolate this to insurance companies. Or look at the IT sector. There’s a very massive game coming up, and the private sector undoubtedly has a significant role to play, and a significant responsibility — not only in offering high-end services like wealth management, which we should do, but also taking credit more and more to the bottom of the pyramid. To take credit down will create a monumental shift in the country as we look to 2030.

Now let’s get into some micro issues. Ashu, could you talk about the way forward for Citi in India?

KHULLAR: The consumer business is more visible, just because of the brand. Our institutional business even today is three-fourths of our business in India. The consumer business is relatively, even from a revenue perspective, a small percentage of our business. Let’s say one-quarter, and in terms of profitability, it’s even lower.

Citi today handles 8 per cent of India’s trade volumes, 4.5 per cent of domestic online digital payments, and 50 per cent of cross-border digital payments. Thirty per cent of foreign multinationals in India bank with Citi, 30 per cent of foreign portfolio institutional investors’ custody assets are with Citi, and we are one of the largest players in the corporate Fx market, with a 13 per cent market share. We have consistently been in the top three, whether you look at equity capital markets fund-raising, league tables or bonds — it’s a full-fledged investment banking presence.

So, I want to reiterate that we already have a very dominant presence and, I would argue, no other foreign bank has the breadth and depth of institutional business that we have. Standard Chartered and HSBC are very large banks in India, but they perhaps don’t have the same focus around investment banking which we have had. Similarly, our very able competitors in JPMorgan, Morgan Stanley and Bank of America obviously have a large focus on investment banking, but they are not as large in some corporate and commercial banking activities.

So, having that base, which by the way is very large, if you look at our competitive advantage, what is unique about Citi today? It’s our globality. We are in 120 countries, which is by far the largest network, and that network can be leveraged to help Indian companies who want to grow abroad, whether directly by setting up operations, or through exports.

A lot of banks are increasing deposit rates and advertising it. We don’t see that from HSBC. Give us a sense of deposit rates.

DAVE: We have to play to the segment that wants a bank like ours. You would want a bank like us if you typically either have a certain level of affluence or income; or, second, if you have international needs. Lots of people are sending their kids abroad to study. You’d be surprised at the number of calls that I get only for this. They don’t ask me my deposit rate. They just ask if their child’s account can be opened in Canada, Australia, or the US, and you’d be surprised at how much people are willing to pay for that service.

Banking is more about managing liabilities than assets, prudent bankers say. Does the banking system need to pay depositors more for garnering deposits to support credit growth?

VAIDYANATHAN: No doubt, when credit is growing fast and there is underlying productive demand for credit. On the liabilities side, it can come from three sources. Number one is to raise bonds and fund themselves. It could be equity also.

But, on the liabilities side, once interest rates are rising, then automatically, the deposits of the system will grow. When you raise interest rates, alternative sources of credit — say, money that people are keeping in liquid mutual funds — will move to a bank if interest rates are attractive. Raising money through bonds and borrowing is definitely an option, which will happen, and number two, with rising interest rates, the deposit market will grow. Eventually, equilibrium will be found — I believe, before the end of this year itself. Because, at least on the fixed deposit side, all banks are raising interest rates, and so it will raise the deposit market.

What is your view, Mr Sharma?

SHARMA: Over the last three or four years, my bank was not lending much, we were only doing retail. So, liquidity was very comfortable. In fact, that was my problem. Now, with better management of liquidity, we are able to optimise on that front. Liquidity and capital are both now quite okay and we have been able to manage our assets and liabilities better.

Ashu, any observations, even though it’s not strictly relevant, since you’re exiting consumer markets?

KHULLAR: Our institutional business is very well-funded. So, we were not dependent on the consumer business for deposits. But the way we should also look at deposits is that if you can get them by servicing a customer’s needs as part of the normal way of cash management and add value, then you get liabilities at a much lower cost. That’s a lot of focus for us — to invest in technologies to do that.

Mr Dave?

DAVE: My sense is that new borrowers have been found credit-worthy, so there is an increase in the borrower base, both on the business side — micro, small and medium enterprises — as well as individuals. Plus, the NBFC sector has shrunk a little relative to banks in the last five years.

In a rising rate scenario, mutual funds also compete with you for lending — they get withdrawals from their debt funds. So, for the banking industry, this is a multi-year runway. It’s not a one- or two-year growth, and therefore, all management will need to spend a lot more time on liabilities. Assets are much more business-as- usual now, but after many years, we’ll have to start competing for liabilities. 

Mr Chaudhry, is this the first time you are seeing a fight for liabilities?

CHAUDHRY: Yes, there is a clear scramble for liabilities. You see it every day in the bidding for corporate deposits. Without liabilities, you can’t think of all this asset growth. I agree with Hitendra. It looks as though the runway for credit growth is huge and long, and if deposit growth does not catch up, at some stage credit growth will be impacted.

All of us will have to work harder for deposits. That’s why, if you look at each bank’s strategies, all of us are trying to attack the liabilities side of the balance sheet very meaningfully.