This seemed to be the consensus among panellists at MintAsia’s first global banking conference in Singapore on 2 October.
The event took place on the heels of a surprise 50 basis points (bps) rate cut by the Reserve Bank of India (RBI), which is striving to lower borrowing costs for companies and consumers to spur investment and spending.
Arundhati Bhattacharya, chairperson of State Bank of India (SBI); Gunit Chadha, co-chief executive officer of Deutsche Bank AG for the Asia Pacific region; Ajay Kanwal, regional chief executive officer for Asean and South Asia at Standard Chartered Plc.; and Piyush Gupta, chief executive officer and director of DBS Group, were on the panel to brainstorm on the topic, Banking In India: Opportunities and Challenges, in a packed ballroom at Fullerton Hotel on 2 October, Friday.
The discussion was moderated by Tamal Bandyopadhyay, consulting editor of Mint and adviser to Bandhan Bank.
Bandyopadhyay: India is in a sweet spot among emerging markets. Look at what is happening with BRICS—Brazil and Russia are in the grip of recession, China is slowing, South Africa’s economy is contracting. India is the only place that offers growth and stability. The macro parameters are good—the fiscal deficit is manageable, current account deficit is low, currency is relatively stable, with low inflation, interest rates are being lowered. India is the place to be in. However, we have challenges—the banking system is burdened with bad loans and many banks need capital; we have many corporate entities that are highly overleveraged, and do not have the wherewithal to service loans. These can dampen your excitement. But look at the banking landscape. In the next 18 months, we will see 21 more banks of different kinds and sizes coming up. At least four foreign banks have applied to the regulator to get locally incorporated. The regulator is planning to convert some of the stable cooperative banks into full-fledged banks. We will see intense competition and innovation. First, let’s hear the bankers on the deep rate cut in India.
Bhattacharya: Lower interest rates are a necessity for two reasons. One is to boost confidence in the economy and for people to start their investment plans. There are a lot of people sitting on the fence, and we are hoping that the lower interest rates will bring back the confidence for them to start getting off and begin investing. It will also help many of the stressed units. One of the industrialists told me just yesterday that he saved ₹ 120 crore on account of the lowering of interest rates—he was all smiles. Low interest rates will help on the retail front. While India has had a good retail story, with both demand and NPLs (non-performing loans) being very much under control, the retail debt-to-GDP (gross domestic product) is quite low—for all countries around us, it is much higher. This is another area where we believe a lower interest rate regime will definitely bring about greater interest in actually buying that first house or changing the car for a better one. Regarding the trajectory, while the RBI governor has clearly said that it would be an accommodative stance, we do believe that if the outcome of the monsoon does not have too much of an impact on food inflation—and we believe it won’t—and even if there are any shortfalls, given the weakness in commodity prices, we believe food inflation will not be impacted. If you see the inflation numbers, keep it as per the trajectory and the RBI trajectory that has been stated—if there is no lift off by the Fed, we believe there could be a chance for one more rate cut before the year is out. Yes, we are looking forward to much better credit growth as the year progresses.
Chadha: The rate cuts that came surprised the markets on the upside. Some of the more interest rate-driven sectors will start to get a breather. It has a significant impact, whether it is on home loan EMIs (equated monthly instalments) or the automobiles sector. The rate cut may not be a sufficient condition to get the confidence of India right back, but it is certainly a necessary condition. RBI has wisely kept Indian rates still at real rates of interest somewhere between 150 bps (basis points) and 200 bps—so we keep attracting financial sector savings into the industry which will go into providing the investment needed for capex creation. (One basis point is one-hundredth of a percentage point). I think the interest rate cut was a very good move. How much headroom is there to do more rate cuts—I think it would be too premature to put a number on that because that will be based on how events unfold in the next six-to-eight months. There are concerns coming from the global terrain, than just from the Indian terrain—globally things are stressed—India just cannot be an island of either opportunity or excellence. I think you have to play the global factor as much as local factor.
Kanwal: We believe in India. We can’t say India is decoupled and definitely not insulated. But considering all the macroeconomic parameters, we are better off than other markets. The past six weeks have shown that our currency was the most stable, at least among the Asian currencies.
If you think of business in India, there are two parts that need addressing so that the country becomes globally competitive. First is the infrastructure piece, and second is the cost of funds. You really can’t be internationally competitive if—among your three inputs—while labour cost is manageable, infrastructure is a challenge, and your financial cost is high. I think the rate cut is very good, but what we should try and think through is, over a period of time, how we tweak these to a level that helps our businesses to be more competitive... Is India in a sweet spot? I certainly think so. We do have much stronger financials, be it foreign reserves, or how people see our GDP. We should not be completely relaxed, but we are relatively in a much better slot than a lot of peer groups. It is not a question of more rate cuts—if you want to compete globally, one of the key inputs is financial costs.
Gupta: The rate cut is good and it will help take some pain out of the system. The notion that this will turn around the fortunes of India, or all of the investments that are stuck in India, is myopic. There is no promoter or investor who is going to make massive investment decisions because they got a half-percent rate cut. I think it helps the process, but some of it is a little bit of a red herring. I think the issues with India are on both the supply side and demand side—structurally, we need to get a lower level of real interest rates, and the real interest rate in the economy is the function of underlying productivity in the economy. So issues around infrastructure and supply-side management are crucial to India’s competitiveness. I am a lot more focused, therefore, on government policies.
We (DBS) have not only recognized our NPAs (non-performing assets), but have also written them off. Our counterparts have not even recognized them. There is an assessment that even to realize and actually recognize bad loans, you need an increment of $20 billion of capital—that is the hole it will create. The government said it will put $11 billion of capital in the next four years—so who is going to capitalize the banks? Where is the money going to come from? And you need another $20 billion on top of that to finance the growth of the banking system. So $40-70 billion of capital is what the Indian banking system needs. The government has allocated $11 billion—how do you square that circle? If you can’t get capital, you will then find high cost of capital, and you will always have a problem on the supply side. On the demand side, there is an issue of confidence. This has two caps—there is the old Indian corporate sector, many of whom have got used to doing business in a certain way—they are extremely discomforted with the new way of doing business and, therefore, they are unwilling to or unable to invest. There is a new Indian corporate who is more willing to invest, but the point is many of these are young and new, and it will take some time for the demand from that sector to come in. Put all that together—the environment is good, interest rates are helpful, but I still think there are some pretty important impediments that need to be addressed, most of it to do with the banking sector.
I told (finance minister) Mr. (Arun) Jaitley that the capital allotted to banks is too less. If you look at the report of the P.J. Nayak Committee, it suggested an important step towards solving this problem: let the (local) ownership of banks go down to below 50%. That allows two important things—it allows you to raise capital in the international market, which is extremely important in a country where we have a capital deficit. Second, it changes the management construct of the entire state banking system—it allows greater efficiency, it allows you to address issues around talent, compensation, competitiveness. It allows banks to be taken out of the oversight of the CBI (Central Bureau of Investigation) and CVC (Central Vigilance Commission). The finance minister said politically it is not tenable. I think there are some opportunities here. We have a fantastic window over the next five years—that window comes from all the things that people mentioned before. At the end of the day, capital is in a competitive race—people worry about the Fed hiking rates in the short term. Go back to history, and it is quite clear—if rates are hiked for the right reason, which is that the US economy is doing well, then, frankly, money flows back to emerging markets. Look at the data points in the mid 1990s, look at data points in the post Internet crisis—as soon as the US economy starts doing well, money pours into emerging markets, Right now, $130 billion is lying trapped in the coffers of banks, not put to work. US corporates are sitting on trillions of dollars not put to work because of lack of confidence. Once they are confident that the US economy is doing well, they will be ready put the money to work. In the next five years, the money has every possibility of coming to coming to India, but we need to do a few things right.
Let’s talk about the opportunities that India presents.
Kanwal: 40% of India is unbanked so there is a big opportunity. Retail will be a big business. Payments banks are very interesting—the technology element is changing the face of banking. Many countries have jumped from no telephone straight to mobile, and we will see that in India—from no bank account to having a mobile banking account, leapfrogging having a physical bank account. Eight million smartphones are being sold in India now—China at its peak was selling 15 million smartphones. All banks are investing in technology—so big opportunities are there for that to breakthrough. If you add what we are doing around financing for houses and cars, there is an automatic demand we will create, which will push the economy. India is one of our largest geographies in the world—there is more in our minds on what we should do in India as a bank and what we should do in the Indian capital markets.
Chadha: There are not too many economies in the world which are over $2 trillion or are growing at around 7%. The government with a reform agenda has been very strongly aligned with their intent and commitment—there are uncontrollables out there in terms of the political process and it will take time—it is very clear that reforms that are controllable, there is a very strong agenda—if that takes us to over 8% or 9% growth, that will be fantastic for banking. Whether it is for banking global Fortune 500 companies, whether it is the Indian corporate sector, which has many entrepreneurs, whether it is SMEs (small and medium enterprises)—these are huge opportunities. In the near-term, as there are global headwinds, not just for capital, but equally on the demand side, there will be a time period for adjustment, where excess capacity will have to be taken out of the system. We do think Europe and the US will surprise us on the upside, rather than on the downside—the big question is China, and that impacts Asia more than anything else globally. India will be in a sweet spot. The role for public sector to fund that opportunity is important; but, equally, there is a role for international capital markets to fund the growth of India, there is a role for private sector to fund it. The world’s best banks are trading at around 1.5 times multiples—India is the only place I know where new banks are trading at multiple times that, where banks are still coming up. In the West, banks are getting closed. There are very big opportunities in the next 5-10 years, but there will be pain in the near term. If we can absorb that pain—here is where a partnership is needed between regulator and market participants.
Gupta: The financial sector tends to grow 1.5 times to 2 times nominal GDP—if the nominal GDP growth in India is 12-13%, this will lead to 20-25% growth in the financial sector. India requires $750 billion for infrastructure over the next five years—total debt requirement is $150 billion a year, and on top of that, there is consumption credit and corporate credit; it could easily be over $200 billion a year in terms of credit requirements. The Indian banking system with the capital available today is at $100-120 billion—so there is a massive supply-finance gap that anyone can plug into. If 10-20-30 new banks come in, and we open up the capital markets, there will still be enough demand from the growing Indian economy. From a micro standpoint, there are multiple segments—the corporate segment is good and as they start internationalizing, there is a big opportunity in cross-border activities. There is also a big opportunity in cross-border activity of foreign companies coming in—when Foxconn or GM invests in India, there is a massive ecosystem that gets created around it. There is a big opportunity in MSMEs (micro, small and medium enterprises) that are currently poorly financed—you can build a whole ecosystem around financing MSMEs. Retail credit in India is extremely tiny—there is going to be a massive explosion of consumption credit in India over the next decade and that is a large opportunity. India is a tremendously large geography and, therefore, this whole notion of ease of facilitating payments, and the whole payment mechanism is another big opportunity. There will be opportunities around new digital models, new data analytics driven models, new risk intermediation models, and much bigger opportunities in the capital markets.
Bhattacharya: When we began, 97% of the Jan Dhan Yojana bank accounts had zero balance, and today 49% of them have balances—we completed that programme with 17 million accounts—and we are still opening on a daily basis 75,000 such accounts and these are no longer zero balance and we also charge a minimum amount to open these accounts—that has not dampened enthusiasm... We have entered into MoUs (memorandum of understanding) with various e-commerce platforms in order to look at SMEs—the last census said 90% of SMEs source their finance from unofficial banking channels. This is another huge opportunity for us. If you look at infrastructure itself, it is yet another huge opportunity—the reason why we are seeing low credit growth currently is that once things get jammed, there is an inertia at rest, and it takes time for the whole wheel to get moving again. It is not only a question of bringing back confidence, but also about putting together several pieces that were missing from the earlier cycle, to enable the people who are going to put in the money to do it efficiently—the rate cut has solved one of the pieces of that puzzle. The next 10 years will be exciting years. The youth of India are the future—they are comfortable with screens, and all they need is the banking system to provide them with platforms that will enable them to avail of various products the banks offer on their mobile. This is why over the last one year, all banks have invested heavily in technologies—to capture this market.
Incidentally, the foreign banks always talk about opportunities in India, but have done very little on the retail front.
Kanwal: We are present in 43 cities in India. Our exposure to retail and SMEs is bigger than our exposure to corporates. We bring the best products we can, we bring our risk systems to India and I am happy that we do everything we do globally, we do in India, too. The perception that we do only high-end banking is not correct—it is also true that we do not do financial inclusion as much as SBI. You have to decide if you want all banks to do everything, or foreign banks to do what they know best, which helps the economy and the consumers.
Chadha: Is there an opportunity in retail, rural and SMEs—yes. Yet you have to look at your own business model—Deutsche Bank is a global investment bank. We don’t do SME and retail in most markets—but we help corporates raise money internationally, we help global companies get confidence to invest into India, we help to build the foreign exchange and the derivatives market and we help build capital markets. The fact that something is attractive does not mean that we have to go against what is Deutsche Bank’s global business model. We are not going for local incorporation because we do not believe we have the competitive business model to go ahead and bank rural, SME and retail India, nor do we have the capital that is required to build a greenfield business in the country. We hopefully will fund Indian banks and Indian corporates which are penetrating into rural markets.
Gupta: It is very hard for any cross-border bank to be a meaningful retail player in a brick and mortar world—there are no successful examples in the world. A brick and mortar approach takes 25-30 years to build a branch network in a retail system. In today’s day and age, nobody has the pockets to create this. M&As (mergers and acquisitions) are also very difficult in most countries to do, partly due to regulation, partly due to capital issues and partly because it is not very practical. I think digital presents a new opportunity—nobody knows how successful it will be, but it gives you a start—we are trying to see if we can use digital to access the retail footprint in India. In SME and MSME space, we are very keen to build out this business. We do SME banking in China, in Taiwan, in HK (Hong Kong) and we would love to do it in India. We are not looking at M&As—we tried to acquire a bank in Indonesia a few years ago, and after that we’ve articulated quite clearly that the future of banking is likely to be digital than brick and mortar. We don’t want to exercise out energies to build out brick and mortar business in these countries.
In digital, there is a lot of possibilities around alliances. The challenge with telco alliances is they have not been easy around the world because the value exchange between the two is obviously difficult to get. Telcos feel they have all the customers, and so they want a bulk of the value, which banks are reluctant to give, but deals will be negotiated.
Bhattacharya: There are sufficient number of players in India who are interested in the retail game. India’s private sector banks and the new banks coming in are all looking at this space, rather than the large corporate sector. I have a feeling that some of the foreign banks, once they feel that the digital piece is working well, they will definitely be looking at the B segment in the retail segment.
And on the challenges…bad loans, low capital and human resources (HR)…
Chadha: Some of the Indian corporates are highly leveraged. I think the key thing here is to get the bankruptcy code done, and if there is one reform we hope the government gets done, it is this. This gives confidence not just to the domestic banks, but it gives confidence to global banks, gives confidence to global capital market investors, including unsecured investors. This is my request to the RBI governor—this will help ensure productive assets that are not stuck get released into the system.
On the HR challenge, having worked in a public sector bank at some point in my career, I can tell you two facts—being the CEO of a public sector bank is incredibly tougher than being the CEO of a private sector or foreign bank. I think we need longer duration of CEOs in public sector banks—they should have opportunities to run it for 10 years, which is what we see in private sector banks.
Digital is happening not just in retail end of banking, but also in institutional and capital markets. Disruptions and opportunities will lie is both spaces.
Gupta: Half the problem is that when you see the promoter getting away scot-free, then that does not sit well with the banks. You want to ensure that equity suffers before debt suffers. I think we need to try and create a good bank-bad bank construct—but to do this, we still have to be able to capitalize the losses. These are not separate issues—to resolve the asset problem, we’ve got to resolve the capital problem. And to resolve the capital problem, if you create a bad bank—the only means to be able to do that in a capital short situation is bringing in foreign capital—the Chinese did that in 2000, when they created AMCs and absorbed $600 billion of bad debt because they had the resources to do it. In India, our fiscal situation is not strong enough to do it directly—so, we have to bring in foreign capital and that is the only way we can solve this issue. We need bankruptcy code, we need special courts and need to have a judicial mechanism that cuts through the problem—these have to go hand-in-hand.
Bhattacharya: On the NPA challenges, I have my own ideas, especially on the good and bad bank concept. I have said this publicly as well as to Indian regulators—the slash and burn techniques of the western world is not something that India can do, mainly because India is not China, and we do not have that kind of resources. Not only that, for a resource starved country like India, where the amount of infrastructure that is built is pitiful, the fact that you create bad assets and throw them away for pennies to the dollar, is not something that is doable. Even if you say, look at the power plants that are 85% completed, to do a replacement of that same power plant will cost you 300% more. Why should a bank throw it away for pennies to a dollar. We should instead try and ensure that the power plant gets completed, so that it can become a revenue generating asset. Therefore, we are trying to distinguish our approach—not as slash and burn—but as pulling chestnuts out of the fire. It is doable—we’ve done it in half-a-dozen such cases already, and we are hopeful that going forward, we can do it in many other cases. Of course, there will be haircuts, there will be pain, but that does not mean it has to be something that you simply write off and start with a fresh book—I would like to do that, but it is not a luxury that I can afford. On NPAs, corporates now know I will get them—it may not be in one year, or two years, but they know I will get them. We are to be given credit in that. RBI has helped strengthen our hands.
Gupta: There is upside in thinking about what Singapore did with DBS. Global Finance rates us the safest bank in Asia, and that comes to a large extent due to government ownership. We are 30% owned by the government; but the Singapore government, in its wisdom, distinguished the question of ownership from the question of management. They allowed the management to run it like a professional private sector company, compete independently, buy my own technology, hire whoever I want—those are important impediments that state banks have in India.
Kanwal: There are two kinds of promoters who have challenges. One is those who genuinely have an economic issue, versus people who have actually not done good financial management, or have taken money out of the company. What we really need is to distinguish between the two and take tough action. It is also about setting the standards for the future—if the next 10 years are going to be bigger and better, we need to set the standards of what to expect in the next 10 years. We need to be a little harder on key promoters and industries that have not done the right job.
Kanwal: What will be very interesting to execute is to creating an ecosystem around the company—all companies have got suppliers and buyers and the challenges are around cost of working capital. Fundamentally, if you link all of them up—build an ecosystem where everything is transparent, so credibility is there—it will help get money back faster, it will help drive more investments into the ecosystem. We don’t have to find something that has not happened before, but what we need to do is take existing problems and solve them—that will be innovation.
Bhattacharya: It is not true that there is no innovation—we are innovating on a daily basis. There are a lot of things we can do even in corporate finance—the entire corporate finance can be on a digital platform. We can put it all on a digital platform and banks that are interested can look it up, do due diligence and then come back and bid. Everything can be done very transparently and quickly. This will enable smaller players to be part of the system. If we don’t innovate, we will perish.
Gupta: More innovation will come out of India than any other country, because of both the availability of technology and talent and the capacity for jugaad. Mobile changes the nature of banking—in the old concept, you went to a bank, and that made the location very significant; but no longer so. RBI has been very forward looking in terms of the payments banks, the KYC (know your customer) regime, coupled with the Aadhaar card that has been set up puts India at the cutting edge of capacity to do stuff digitally. The other big area is big data and analytics—credit underwriting mechanisms are going to change quite dramatically in India.
Chadha: Some of the biggest innovations will happen within the banks themselves, and that is the place where I think people who have a very large surface area in India and, as a result, economies of scale, they have huge opportunities for innovation from within. They can do it at much lower costs. The biggest beneficiaries of e-commerce will be banks.
Identity three sectors where you see maximum demand for capital
Chadha: Consumer space, government and SMEs.
Gupta: Energy and automobiles are the large industries globally, and it will be the same in India.
Bhattacharya: Renewables, defence, railways and SMEs.
Kanwal: Infrastructure, e-commerce and logistics.