Mumbai: With the accretion of non-performing assets (NPAs) slowing down and growth picking up, banks are looking at resumption of capital expenditure on the private side. At a panel discussion moderated by Mint’s consulting editor Rajrishi Singhal as part of the Mint Annual Banking conclave, bank CEOs discussed the challenges and risks for the industry over the next two years.
To a question on growth opportunities for banks, P.S. Jayakumar, managing director (MD) and chief executive officer (CEO) of Bank of Baroda, said, “As far as growth is concerned, it will be a lot of the same we saw last year. One of which is the infrastructure spending that the states and centre are doing. Growth continues to come from consumption driven expenses and the focus on growth in retail segment remains. With all of this, I’d still think a 12-15% of domestic credit growth is likely. As far as capital is concerned, PSU (public sector) banks have to get used to the idea that they have to get capital. We have some runway left. By the third quarter of 2019-20, we would be able to raise money from public markets."
V. Vaidyanathan, MD and CEO of IDFC First Bank Ltd, agreed, saying that large corporate credit demand is set to pick up in the coming months, “If you see the structure of Indian corporate credit, close to ₹40 lakh crore is large corporate credit. If you see the small entrepreneur credit, it is close to ₹8 lakh crore.
Micro entrepreneur credit is ₹7 lakh crore, mini entrepreneur credit is ₹2 lakh crore and nano entrepreneurial credit is ₹75,000 crore. With the ability of digitization in India, that is completely inverted which is why we are seeing small corporate credit growing at 15-19% per annum and large corporate credit growing at 5% last year. In the next three-four years, large corporate credit will start growing again, investment demand will be back. Together as an ecosystem, it is set for growth."
While the growth momentum continues, the banking sector is beset with challenges and banks are looking to minimize the risks. Zarin Daruwala, CEO (India) of Standard Chartered Bank, said, “Risks I would split between global and domestic risks. Globally, slowdown is happening. We see a lot of trade tensions. If you look at the domestic side, you see volatility on rupee-dollar side. Clients, exporters are seeing the volatility. The second biggest risk is oil. One dollar of increase in oil per barrel is $1 billion trade deficit. Clearly, some of the risks are something banks can look towards mitigating. I think the RBI (Reserve Bank of India) window which has come up of $5 billion has helped to bring down the rupee-dollar premia and it’s a great time for importers to be hedging."
She also added, “If you look at credit risks, that is part and parcel of what banks do. But thanks to digitization, we are seeing a lot of credit risk monitoring that is much better than three-four years back. The other thing is commodity hedging. RBI has allowed clients to hedge commodities, not onshore but offshore. That is the other place we are working to minimize risk."
For foreign banks, the issues are slightly different. While RBI has allowed these banks to convert into subsidiaries, many have not come forth.
“The real issue in the context of operations is we need our retail operations to be far more stable and accretive in value to the franchise to justify us to be able to move towards a subsidiary model. Between wholesale and retail business, it does balance out in favour of retail business to go down the subsidiary route versus the wholesale business. We are primarily focused on international corridors of business with our wholesale customers. The branch model tends to be more effective (in case of retail business)," said Surendra Rosha, CEO of the Hongkong and Shanghai Banking Corp. Ltd, India.
Even as digitization has helped improve the credit monitoring, banks are pinning their hopes on the Insolvency and Bankruptcy Code (IBC) to improve the repayment culture among large borrowers. Rajkiran Rai G., MD and CEO of Union Bank of India, said, “When we talk of NPA customers, there are two categories—customers who have resources to pay and customers who have real difficulties. What IBC addressed is the first category. The 12th February circular, which forced banks to declare a company as an NPA even if there is a one-day default, also addressed that.
The CRILC (Central Repository of Information on Large Credits) database, where we started reporting one-day default, has put a lot of sense in corporates who were using this 90-day window to handle their treasury better. The pain was always on me. That has changed with IBC and 12th February circular. The second category (of customers) who have real difficulty may (be due to) from external reasons like regulators, land issues, currency risk and internal risk. They are not able to raise enough capital. They need to be addressed differently. We are on the way to creating a public credit registry. It’s only the execution risks. Ecosystem is evolving, banks are also evolving. We will see qualitative credit growth."