This credit-growth cycle is very different, says Axis Bank MD & CEO

Axis Bank MD and CEO Amitabh Chaudhry says the current credit-growth cycle is more broad-based, with stronger bank capital, improved underwriting and better risk management

The Indian banking sector has growth potential despite its challenges, says Axis Bank Managing Director and Chief Executive Officer (MD & CEO) Amitabh Chaudhry in a conversation with Manojit Saha at the Business Standard BFSI Insight Summit. Chaudhry talks about the need to manage risks, boost the deposit base and enhance profitability while navigating tighter liquidity and rising interest rates. Edited excerpts:

 

Axis Bank has seen good progress including strategic, accelerated digital transformation and a landmark acquisition. What next?

 

I have to first admit that it is very easy to get caught up in the narrative and say, Oh, we have done a great job. Yes I think we moved the needle but, still, that macro objective of being able to catch up with some of the larger institutions has not happened. I see my job and  the opportunity ahead as what more we can do rather than what we have done.  

 

 

What about merger and acquisitions, going ahead?

 

If the right opportunity comes along, either for us or for our subsidiaries, we will definitely consider it. We have looked at opportunities in the past. One acquisition that made sense was Citi; since then, nothing else has made sense.

 

What are some of the gaps that you want to address?

 

The core of any banking franchise is its deposit base, which represents a particular set of customers. When we compare our deposit franchise with the best in the banking system, we still have some distance to cover.

 

I am not saying that our deposit franchise is bad. Around 65 million customers have banked with us in some form. However, we need to improve the quality and granularity of our franchise, make it more premium, and increase our share in the corporate salary segment.

 

Our first priority is to strengthen the deposit franchise. That means working harder to increase our presence, connect more deeply with customers, improve the bank's proposition, and attract more premium and wealthier customers. We have launched initiatives such as Burgundy Private Wealth, which has done very well. We can still do more with the Citi acquisition that was also part of the premiumisation of our franchise.

 

Second, we need to ensure that our relationship with each customer extends across all the products and services that Axis Bank and its subsidiaries can offer. We call this approach One Axis. Our subsidiaries have a range of products, and we can do more to deepen customer relationships.

 

Third, when we look at our return on assets (ROA), return on equity (ROE), net interest margins (NIMs), and the cost of acquiring customers or delivering our franchise, there is still work to do. Our RoA may be lower, and our costs higher, than those of some peers. 

 

We have moved from easy liquidity and lower rates to a very different environment. How difficult will the next few quarters be?

 

There is never a dull day in India, and the same applies to banking. Every day is a new day. After the FCNR(B) scheme, approximately $133 billion came into the system. Many of us thought that this liquidity would remain available for at least a couple of quarters. However, the RBI was concerned about excess liquidity and has withdrawn some of it.

 

There is also an expectation that interest-rate hikes could come sooner rather than later. The market has already started reacting, and incremental interest rates have risen. City rates have increased, and corporates are demanding higher rates on non-retail term deposits.

 

As liquidity has been withdrawn, incremental deposit rates have already increased. Economists and we believe that interest-rate hikes are needed because inflation is rising. As (Kotak Mahindra Bank founder and non-executive director) Uday Kotak also mentioned, the gap between US and Indian interest rates is at a historical low, and something needs to be done about it.

 

We also face risks from developments in West Asia, including supply disruptions and price pressures. Another phase of the war could be approaching.

 

These are interesting times. Interest-rate hikes will be passed on within the framework permitted by the RBI. However, this could push some customers to the edge and reduce demand. Banks must be very careful about where they lend. Some NBFCs have recently indicated that they are reducing lending.

 

At the same time, we must remain mindful of risks. In the last 30 days, there have been many public reports of cyberattacks in which customers' or banks' money has been taken. This is another risk emerging rapidly in the system.

 

The last time we saw this kind of credit growth was after the global financial crisis and we are again seeing growth close to 20 per cent. Is the Indian banking system better placed this time?

 

I would answer this in two parts. First, is credit growth sustainable? Second, is the banking system well-placed to manage a problem if one arises? As far as credit growth is concerned, I do expect slightly lower growth in the second half as the base effect from the first half fades. However, several factors could keep growth high.

 

First, developments around the world and the movement in the rupee have lengthened working-capital cycles. Companies are paying more to buy the same goods, receivables are increasing, and businesses are holding more inventory because of supply risks. As a result, working-capital requirements have increased.

 

Second, RBI data suggests that if all project-finance and term-loan sanctions made in FY2025–26 were implemented, they alone could lead to around 19 per cent growth in term loans. Not all of these sanctions will necessarily be implemented, and I am not including FY2026–27 data. If you listen to what NABFID has said, it also has a large pipeline. Investment activity appears to be moving in the right direction, so demand for term loans could increase rather than decline.

 

Third, large parts of India remain unbanked. As more data becomes available, banks will be able to underwrite more customers, which should continue to support growth.

 

NBFCs are growing at a rapid rate—around 37 per cent year-on-year. Some of the top-tier NBFCs have the ability to raise funds, and they have not indicated that their growth rates will come down. They continue to guide towards decent growth, so NBFCs are also supporting the system.

 

The government continues to invest in infrastructure, which requires financing and supports the broader economy. GDP growth forecasts for India have also been revised upward slightly. These factors should support credit growth, although overall growth could moderate. Rising interest rates may also have a tempering effect.

 

There are four or five major differences between the current period and the earlier cycle.

 

First, earlier growth was driven heavily by lending to greenfield infrastructure projects, where risks were not always adequately covered. Today's growth is much more broad-based.

 

Second, banks are better capitalised. There is roughly a 500-basis point difference between capital levels then and now.

 

Third, provision coverage ratios were around 40–45 per cent at that time. Today, most banks have coverage of around 70–75 per cent.

 

Fourth, underwriting has improved. We have much more data and greater information-sharing. Frameworks have been created so that problems cannot be hidden as they could in the past. Banks cannot avoid recognising emerging problems. Information is available quickly and more universally, so when a problem arises, it must be recognised promptly.

 

The ECL (expected credit loss) norms coming in April will push the banking system further in that direction.

 

In my view, the system is very different today. Banks have a much greater ability to absorb problems and have stronger credit-risk frameworks and more information for underwriting.

 

We did go through a brief credit cycle over the last couple of years, especially on the retail side. Banks absorbed it without too much difficulty. Profits declined, but no bank was in trouble. One or two NBFCs faced difficulties, but the broader system remained intact.

 

Overall, this credit-growth cycle is very different from the past.

 

Talent shortages and high attrition, particularly in branches, are frequently discussed. How does a bank address the talent challenge?

 

Our research suggests—and I am sure other banks and financial institutions see the same—that very few people are leaving the banking sector. Most attrition is of people moving to a bigger or similar job elsewhere within the large-bank ecosystem. Very few people say they no longer want to work in banking.

 

As more banks have emerged and expanded across the country, and as NBFCs have grown rapidly, they have all been looking for talent. When institutions expand into new regions, asset classes, or businesses, hiring people from elsewhere who understand that business is often the easiest way to do it.

 

Leadership succession planning—or the lack of it—is often cited as an issue in private-sector banks. Do you agree?

 

I do not think so. Every Board—and the regulator—expects and checks that succession planning is in place, at least up to a certain level in the organisation.

 

I am confident that every bank has a succession planning document that is actively maintained. Banks assess their talent and ask whether they have people internally who can replace leaders if they leave. If not, they consider what the alternative plan would be.

 

In recent years, many bank CEOs have been appointed from outside their institutions. You are also one example. What is your view?

 

It has happened in some cases, but there are also enough examples of CEOs being appointed from within the financial system. They may not necessarily come from the same institution.

 

Some changes have been driven by factors that were not planned for. In such situations, boards or the RBI may ask whether a sudden change requires a fresh face to lead the organisation or whether an internal candidate should continue.

 

Boards make those choices based on whether an internal or external candidate is better suited. I am not commenting on any specific situation, but such circumstances do arise.

 

Foreign investors have shown significant interest in Indian banks and NBFCs over the last year. Why is this the case?

 

Much of this interest is coming from West Asian and Japanese institutions. It is not that every country in the world is eager to invest in Indian banking. However, it clearly indicates that some parts of the world see significant opportunities in India.

 

There are still institutions interested in India that may not yet have found the right opportunity. This is good for the Indian banking system because the capital strengthens the resources available to the ecosystem.

 

There are two points to make. First, investing in a bank provides equity and a strong partner. Equity is one thing; ultimately, banks need to generate deposits.

 

Generating deposits requires a franchise, work on the ground, and strong customer connections. Many of these institutions do not yet have a brand in India that will immediately attract deposits simply because they have entered the market. They will have to work hard to benefit from the equity and the strong partnerships they have secured.

 

Despite foreign investor interest, governance issues occasionally emerge. What is your view?

 

Ideally, we would like to reach a point where such incidents do not happen. I believe we have an extremely strong regulator that asks the right questions. In my experience, the regulator not only asks the right questions but also has a very good understanding of what is happening across the banking system.

 

Sometimes, however, certain practices do slip through. I believe the banking system is resilient enough to absorb these shocks. We have seen institutions suffer for a temporary period, recover quickly, change management teams, and begin moving towards recovery.

 

How do you view the proposal on insurance distribution norms?

 

Depending on the final regulations, we may sell different sets of products, focus on different customers, or decide not to sell certain products.

 

If the remuneration does not compensate for the time spent selling the product and servicing the customer throughout its lifecycle, banking institutions may decide that the business does not make sense. I am not saying that the regulator's approach is right or wrong. I am saying that institutions will ultimately make decisions based on where they can earn money and will act accordingly.