NPA struggles remain but banks see signs of revival in credit growth
Mumbai: A panel of top bank executives discussed whether the worst of the bad loan build-up was behind them and will the increase in credit growth sustain. The participants were Rajnish Kumar, chairman of State Bank of India; Aditya Puri, managing director of HDFC Bank Ltd; Chanda Kochhar, managing director and chief executive of ICICI Bank Ltd; Shikha Sharma, managing director and CEO of Axis Bank; Pramit Jhaveri, chief executive of Citibank; and P.S. Jayakumar, managing director and CEO of Bank of Baroda. It was moderated by Tamal Bandyopadhyay of Mint. The discussion has been edited for brevity and clarity. Edited excerpts:
Is the worst behind us for the banking sector?
Kochhar: There will never be a scenario in banking where there will be no addition to NPA (non-performing assets). But I think the rate of addition to NPAs has definitely slowed down. My firm belief is that NPA is not just about recognition; we should talk about recognition, we should talk about resolution, we should talk about recovery. As of now, the focus in on resolution and that is the good news. Resolutions seem to be moving forward in a time-bound manner.
Second, this forces all stakeholders to sit together and arrive at a resolution in a time-bound manner. So the delays that were happening on account of non-arrival at decisions—they also move better. For the operating assets, we are actually seeing very good interest both in the number of bidders and type of bidders; you have bidders from the strategic to financial side, to a combination of strategic and financial side, and so on. These are the good signs.
Jayakumar: If we look at the top three public sector banks, slippage is higher than it was in the last quarter. To me, that signifies the fact that recognition probably is happening more aggressively and we might see that flowing in the last quarter. It could also be because some big transactions came along at this point of time.
On the resolution part, we are kind of placed in the middle. There are categories of assets such as real estate, where there is discussion on whether customer interest comes first or bankers’ interest, and that discussion is under way. That we might see things going slower, is my summary of the position. We need to see more examples, we need to see more transactions brought into the NCLT, and that is a process that will take 12-18 months at least for resolution.
As a foreign bank, you don’t have much exposure to those companies. But as an industry, is there cause for optimism?
Jhaveri: First of all, I understand that every time there is a conversation around the banking industry we are drawn into the discussion about NPAs, but I just think it is not necessarily correct to paint the entire industry with one brush. There are many parts of the industry that continue to do well, continue to grow, and continue to take advantage of the opportunities that come along with it.
Second, I know there are times when we get up in the morning and feel not enough progress is being made. But if you really think about the amount of water that has flown under the bridge, you’ll see the progress that has been made—whether it is IBC (insolvency and bankruptcy code), whether it is NCLT (National Company law Tribunal), whether it is the banking regulation act, etc.
Sharma: From a slightly more medium- to long-term view, if you look back 10 years ago when we had the big consumer credit cycle, a lot has changed as far as consumer credit is concerned. And the big change has been the emergence of credit bureaus and the acceptance of credit bureaus. So, the credit infrastructure has changed the way underwriting happens in that segment and it has changed the way collections happen in that segment and it has changed credit culture. With CRILC (Central Repository of Information on Large Credits) database that RBI (Reserve Bank of India) has brought out, we have credit infrastructureas far as corporates are concerned, which is much better.
With NCLT, we have collection infrastructure that is much better and once the NCLT cases end up in the situation where you have a buyer for those assets—I’m sure all investors will tell us ‘look, it’s stunning that in India you are going to have large promoters lose control of assets that they have built’. That is going to be such a strong message in terms of credit culture that I think a lot has changed. I think in the next credit cycle the corporate sector will perform much better as compared to how it has in this cycle.
What’s your take?
Puri: What’s happening now is that most of the recognition has happened. Little bit here and there, because of differences in timing of the economy picking up, could result in things going up and down. But the major recognition of the phenomenon—a business cycle that hit the banks on the wrong side—has been taken into account. The rest of the banking system and products are healthy and moving forward well.
The resolution mechanism will obviously take a little more time to stabilize but for the first time, you have people who know they have to pay the money back and of course that’s a major change. So going forward, banking is in good shape.
Are you seeing a change in the body language of corporate India? Are they coming back to the discussion table, are they willing to pay back the money?
Kumar: Very much. They are coming and we are using this in a very effective manner, let me tell you. I think there was a time when NPA was your problem, not the bank’s problem. At least, that sentence has gone out of the vocabulary of the corporates. It is no more your problem, your NPA, is the banker’s problem. So to that extent there is a change.
So the new (NPA resolution) architecture has made Indian bankers more aggressive?
Kumar: It has made them realistic and more empowered, and less fearful of recognizing a problem account and the fear of ‘this percentage of NPA and what will happen’ is gone, because now in any case you are in a situation where the problem is at its peak.
So now whatever way I look at it, the addition to fresh NPAs in the next 12 or 15 months and the resolution will definitely be high than what the banking system is going to add to the NPA. So at the overall level, also there is going to be a reduction. How much will be the recovery and how much will be the write-off, that will depend upon case-to-case basis.
We are talking about optimism and dynamism. So are you seeing a new cycle now in terms of credit demand?
Jayakumar: We had seen credit growth last quarter also. We were showing a 13-14% year-on-year growth rate. And there are many reasons for it. One is the discussions around the economy and its pickup is inevitable in terms of for credit.
The recapitalization of banks also provides enough headroom for capital from a growth perspective. The third is the number of measures that are there as part of the reform package with respect to public sector banks and ideologies that will increase the quality of banking and the capability of these institutions to be able to compete effectively in the marketplace.
Jhaveri: For the first time in a while (credit growth is), showing a positive trend. Second, if you look at retail credit growth, that has pretty much been intact right through. Third, with a slight uptick in inflation, you will generally see an increase in working capital loans. We are already seeing that—there is an increasing demand for working capital credit. Fourth and most important—about 12-15 months ago, we saw a very significant migration from bank credit to the capital markets to corporate bonds. Today when you look at it, with bond deals having hardened by 120-130 basis points, I think there is a very good case for borrowers to come back to the banking system on either MCLR (marginal cost of funds based lending rate) basis or otherwise. That will, in any case, lend to increases in credit offtake.
Chanda, what’s your take on credit offtake and could you tell us where you see credit growth?
Kochhar: Yes, on the retail side, high frequency macroeconomic indicators...continue to go up. So all that has anyway assured that retail growth continues to remain quite stable and strong. On the corporate and SME side, there are 3-4 areas where the growth is coming from.
First, capacity utilization in some industries like steel and cement has definitely gone up, leading to higher working capital demand.
Second, as interest rates were coming down, some of the higher rated corporates were doing a lot of refinancing of existing loans (thus giving) a new business opportunity for some banks.
Third, as government spends are taking place, there is a second order impact in terms of growth on the SMEs and some of the larger corporates. It’s not just credit, some of them have to buy a few more machines to do more contracting. So I think in a sense, some amount of capital investment also, of a very small kind, is happening there.
Sharma: I would say all segments are showing growth today. The consumer has held steady and grown pretty much through the last several years, and hasn’t seen much of a blip. Mortgages did well as we have seen housing sales slow down a bit, and as prices stabilize and start to recover, mortgages are likely to grow over the next couple of years.
Right now, mortgages are slower than what the normal rate of growth for that would be. I’m also hopeful the NCLT is going to deal with about 25-30% of the NPAs in the banking system. This is a lot of capital that has been stuck there and not efficiently utilized. Once it changes hands and goes to stronger promoters, we are going to see more brownfield investments around that. And we are going to see increasing working capital demand coming from those segments as they improve operations.
Kumar: We have done some analysis of December quarterly data. It is still consumption credit driving growth. There are some sectors in the corporate that are driving but even services constituted a large portion of the guided growth. And services means much of it is of NBFCs too; it doesn’t get excluded in your credit growth.
To that extent, there is some double counting too, because NBFCs are all ultimately lending double to certain sectors. And, about steel, even if there is revival—given that in most cases all the larger ones are in NCLT—so it will be some time before you see credit growth there.
The power sector, I have already mentioned is in trouble. So the sector that can grow is definitely construction. But construction, again, will be around non-funded exposures. Because requirements of the construction sector, and particularly EPC contractors, are non-fund based. Chemicals and fertilizers have seen some action. So, there are certain sectors that are showing credit growth, but it is still not as broad-based as you would like it to be.
Mr. Puri, are you seeing, overall, more demand for credit?
Puri: Why are we so pessimistic? Moody’s has upgraded us, the temporary effects of GST and demonetization are behind us, we are growing arguably somewhere between 7 and 7.5%, and are going forward with the infrastructure funding.
They have changed the method of financing infrastructure. There has been a major formalization of the economy with a large portion of the informal economy coming into the real economy. You have inflation coming in, and you have now the emphasis on semi-urban and rural India because it is important that we all grow together as Bharat. If you take a combination of all this, we are in for great times.