Mumbai: These are not happy times for India’s banks.
Since April, the Reserve Bank of India has raised its policy rate by 125 basis points and banks’ cash reserve ratio (CRR), or the cash that commercial banks need to keep with the Indian central bank, by 150 basis points, making money dearer. One basis point is one-hundredth of a percentage point. Meanwhile, banks’ credit growth, margins and profitability are under pressure. The level of non-performing assets, or NPAs, too is rising. While India’s own public and private sector banks have been vocal about the impact, foreign banks operating in India have kept a relatively low profile in recent weeks. Mint spoke to the heads of three foreign banks on their strategies to tide over the tough time. All three have retail banking in India, which has been affected the most by RBI’s tight money policy. Edited excerpts:
In this high interest rate environment, how will you plan to manage your profitability and balance sheet growth?
Sanjay Nayar, CEO, Citigroup India:
It’s difficult to raise cost-effective funds, more so for foreign banks like us with few branches. Our strategy has not changed much. Our composition of earning does not entirely depend on lending and the major part of our earning comes from a combination of transaction banking, wealth management, capital market, investment banking, foreign exchange and derivatives business. All lending business put together accounts for 25-30% of the earnings. The real earnings are coming from other businesses and not lending.
As money gets dearer, we are becoming very selective to whom we give out loans. The basic driving principle to lend is that the individual has to be a Citi client either today or a client worthwhile for us tomorrow, where we get long-term sustainable revenues.
We also reprice loans. If the customer is a sticky one who uses multiple products, we are going slow on repricing, but for a single product client, the loan gets repriced immediately. The need for credit at these rates has come down. Small and medium enterprises and corporates are borrowing less.
Gunit Chadha, managing director and CEO, Deutsche Bank, India:
I am not in the camp that thinks that gloom and doom is here. The growth parameter still remains strong, though it has come off its highs. Is that growth as profitable as it was earlier? With operating margins under pressure, both clients and banks are becoming more sensitive towards strengthening risk and cost management systems.
The Deutsche Bank model does not revolve around storage of assets or loans. Indian clients still need money for growth and there is good opportunity to match clients’ needs by leveraging our global capital markets businesses to provide clients with senior debt, mezzanine debt or equity capital. Additionally, the bank’s custody and cash management business, distressed asset business, flow foreign exchange business, equity broking businesses are going strong. We are adding people at a time when banks are talking about slowdown. In 2008 itself the bank has added 300 people in India.
Meera H. Sanyal, executive vice- president and country executive, ABN Amro Bank India:
Within the retail business, we have always had a very strong focus on wealth. This strategy has served us well over a period of time as the equity market has done extremely well. Now, the equity market is going through a difficult time but the opportunity for wealth management has not diminished.
The feedback that I am getting from our front-end desk is that investment advisory has shifted from equity to debt-oriented products, capital-guaranteed structured products and gold traded funds.
In the private banking space, ABN Amro has always been the largest foreign bank and now with RBS Coutts we are going to take it to a different level. RBS Coutts is a very premium name in the private banking space, globally.
As we speak we are formulating the strategy. We are going to present RBS Coutts as a luxury product to our customers. The focus will be on the product range and distribution. We are analysing the emerging wealth centres in the country.
The credit cycle is definitely turning but we see our cards spend being robust and we will continue to grow our business. In these market conditions, we will work with our selected corporate clients. We are also focusing on growing current and saving accounts to bring down the cost of deposits.
How do you manage the credit quality?
Nayar: It’s not that all assets are performing badly. Only the unsecured assets have a problem and the delinquency rate in the unsecured book is higher. Delinquencies are also expected to edge up in the small and medium enterprises or SME portfolio because they are the ones who are hit first in a high interest rate and high inflation environment.
I haven’t seen any incremental increase on NPAs on that side. This is because a couple of years ago, we really began to tighten the origination methodology. We were the first to offer dedicated SME banking and over the years have witnessed and learnt from the ups and downs of the economic cycle and its impact on the sector. Accordingly, we are able to advise our clients and help them better manage the situation.
We have taken several corrective measures in the way we originate business volumes. We have reduced the use of direct sales agents and are maintaining a direct, sharp focus on originations. We have strengthened underwriting norms. There is significant emphasis on cross-sell of complementing products and services to our existing set of customers. We always advise our customers to spend within their means and to maintain a good track record in managing their credit.
Chadha: We were prudent in staying with the prime customers—both in the personal loan and credit card segments. Despite the temptation to go for market share, we positioned ourselves in the niche segment. The fact that we are a young player and stayed at the upper end helped us control delinquencies. We are conscious of the rise in delinquencies in the unsecured loan segment and our delinquencies are well below the market. This is largely on account of the composition of our portfolio.
Origination of credit card and personal loans business is being increasingly driven by an in-house sales force which acts as a quality filter. We have also made sure that in the last 12 months our loan approval rates have been conservative compared to the industry.
On the corporate banking side, we have focused on midcaps to provide growth capital. Even while there is stress on operating margins of mid-cap firms, we continue to tap into diversified sources of capital for these corporates, be it debt, equity or mezzanine debt. Additionally, there is a serious focus on providing risk management solutions to mid-cap corporate India.
Sanyal: We were present in both mortgages and auto loan segments. For the past two years, we have been de-emphasizing those portfolios. Today, that has proved to be a right strategy for us.
We were also in the personal loan segment but we are not looking to grow that business now. In times like this, we have to be a niche player. Our base of retail banking comes from the acquisition of Bank of America. The customers were at the top end and our NPAs are the lowest among the industry.
How do you derisk your bond portfolio?
Nayar: We run a well-focused, analysed trading portfolio. Our trading book is always marked to market. We don’t make money out of statutory reserve requirement. We carry shorter duration bonds.
Chadha:We are sitting on tradable and liquid inventory and have tried to shorten the duration of our treasury book. There are limited steps you can take as this is a market phenomenon.
Sanyal: In the declining interest rate regime, we benefited. In an high interest rate environment, we will take a hit. Indeed, we are moving to shorter maturity bonds.
How have you handled the mark- to-market losses that your clients have faced on account of sale of derivative products?
Sanjay Nayar: We are one of the biggest players in the derivatives business in India. Three years ago, we took a clear stance that we are only going to sell derivatives if the client is doing it as a normal course of business. We have several levels of approval for such deals and that has paid off. We lost a lot of business when new players came in sometime back, but now clients are coming back to us. Our salespeople are advising clients on what to do with their current derivatives book and asking them not to do anything hasty, as a knee-jerk reaction in the present scenario.
Chadha: Banks that have been active in the forex and derivatives market will have a fair share of stress in the mark-to- market portfolio. It is important to advise clients when to buy caps or unwind these positions. While it is an issue that has attracted serious attention over the last six months, I do believe that the amplitude of the risk will be significantly lower over the next 6-12 months if clients prudently use the market opportunities to risk manage downwards their mark-to-market position.
Sanyal: We are closely engaged with our clients and all the relevant stakeholders for all their wholesale banking needs. This strong standard applies in calm and volatile market conditions, such as the recent past. MTMs do not imply or constitute ‘losses’, as the question suggests. However, we remain resolute in our focus in engaging with our client constituents with respect to the MTM-related ‘issues’ that have been much featured in recent press.