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Business News/ Industry / Banks sector on the cusp of a change
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Banks sector on the cusp of a change

The new entrants in the banking industry are spurring innovations even as they work through stricter guidelines

(Left to right) Sunil Kaushal, Chanda Kochhar, Tamal Bandyopadhyay, Arundhati Bhattacharya, Aditya Puri, and Shikha Sharma, during Mint annual banking conclave 2015 in Mumbai on 29 January 2015. Photo: Abhijit Bhatlekar/MintPremium
(Left to right) Sunil Kaushal, Chanda Kochhar, Tamal Bandyopadhyay, Arundhati Bhattacharya, Aditya Puri, and Shikha Sharma, during Mint annual banking conclave 2015 in Mumbai on 29 January 2015. Photo: Abhijit Bhatlekar/Mint

The Indian banking industry is on the cusp of a change with new entrants spurring innovations even as they work through stricter guidelines. However, existing problems like a slow judicial process and delayed macroeconomic recovery continue to plague the industry. A panel consisting of Arundhati Bhattacharya, chairman, State Bank of India; Aditya Puri, managing director, HDFC Bank Ltd; Chanda Kochhar, managing director and chief executive officer, ICICI Bank Ltd; Shikha Sharma, managing director and chief executive officer (CEO), Axis Bank Ltd, and Sunil Kaushal, regional chief executive, India and South Asia, Standard Chartered Plc, and moderated by Mint’s Tamal Bandyopadhyay, discussed the new landscape at Mint’s Annual Banking Conclave (ABC) on Thursday. Edited excerpts:

Do you feel the Reserve Bank of India (RBI) and the government are serious about walking the talk on possible changes in banking?

Sharma: Times are challenging and times are exciting as well. Banks will have to cope with lots of demand whether for financial inclusion or priority sector lending, for infrastructure funding, compliance, regulatory demands for a stronger financial system or demands from consumers. India is in an attractive place right now. Post the new government, there’s a lot of expectation about changes that will likely come in the next couple of years. A pro-growth, pro-employment environment creates more opportunities. Demands like Jan Dhan and the desire to say that we are going to do direct-to-consumer subsidy also means we are going to see many more people coming to the banking system. This direct subsidy scheme can dramatically change financial inclusion more than any regulatory changes that happened in the last couple of years.

Sunil, you are a foreign banker and your model is different in that you don’t want to go to rural areas, and priority sector is not your focus. But as an observer, how genuine is the feeling things will change?

Kaushal: Last year, in this event, we were discussing whether mobile banking or payments banks will become a reality. They’re soon going to be a reality. I think the banking landscape is going to change quite dramatically. It doesn’t mean opportunities are not there and earnings are going to come off. But the banking landscape will change because RBI has set a road map. It could test in the beginning, but it will accelerate in a geometric way, going forward. But there is a big change that is going to test the regulators. Banking is going through a profound change globally and, as far as regulation is concerned, which then is going to test the returns because the capital requirements are going to double and which will lead to a review of the business models of banks. In the banking sector globally, the highest price-to-book ratio are of banks that have a large single-country presence. And the one which has a universal banking presence actually is not sitting at the top. This says a lot of things about the universal banking model and the complexity it creates. It is a very challenging time, but very exciting time for our country.

Puri: I think we are being too pessimistic. Fundamentally, if you look, India has an opportunity. Sixty per cent of India lives in semi-urban and rural areas, which will not be touched to a large extent by the new advances that we are talking about. We have a young demography and we obviously have to move to a new digital model. Will there be changes in distribution system, access devices? Will there be new players? Frankly, it doesn’t make a difference if you have the brand, the right product, you have it at the right price and you figure out how to use your technology.

Kochhar: If you look at the current situation, we are sitting at a point where opportunities are immense. If you look at India per se, there’s never been a time when we had the country opened up to foreign direct investment in defence, insurance and construction and then the government is saying we will do ease-of-doing business. We know that the demography is anyway here as an opportunity. The fact that we have not really touched the semi-urban and the rural market, which are here to grow, points to a huge amount of opportunity. There are certain facts that are going to bring about the change. Those facts are technology, digitization, social media and mobility. The way each one of us lives our life is changing and, therefore, not just for banks, but every firm will have to adopt their business. It’s absolutely very exciting moving forward, reinventing yourself, reinvent your business model to make full use of the opportunity.

Bhattacharya: I have been on various panels in various deliberations. What I have noted is that this government is very open to listen. At the Gyan Sangam, I did the presentation on behalf of the banks and the kind of things I said to the Prime Minister, I do not believe in the past 200 years anybody could have said those things. Of course, that’s not my credit. The credit is of the government to allow people to speak. They allow people to speak so that they understand what really is the pain. For instance, I talked about recruitment. I was telling them the taxpayers’ money goes into forming institutions like the IITs )Indian Institutes of Technology) and the IIMs (Indian Institutes of Management). The banks themselves have created an institution like the NIBM (National Institute of Bank Management), IFCI Ltd funds Management Development Institute (MDI), Gurgaon. But from all of these good institutions that actually nurture the talent of India, the public sector is barred from recruiting. Now, what kind of a country spends taxpayers’ money and then stops the public sector to hire talent? And why are we barred? Because in all of these institutes, students get campus recruitment, which we in the public sector are not allowed to do by the Supreme Court on account of the fact that it is stated that every particular vacancy that I have, the entire country should know about it and be able to participate in getting that job. These are the kinds of barriers that are created that ensure we are not on the same platform. I have said many other things and I literally said at the end of it that if with one hand tied behind our back, the public sector has been able to deliver so much, imagine what we would have delivered if were allowed the freedom to be on the same platform. I spoke about the CVC (Central Vigilance Commission), I spoke about the CBI (Central Bureau of India), I spoke about the RTI (right to information). I also mentioned the structure I have in order to address RTI, I could just as well run a small bank with that much number of people. The fact is that they not only allowed me to speak, even in Vibrant Gujarat, when there was a question of public sector, the finance minister again invited me to speak in front of almost 300 national and global business leaders as what the problems are. He gave me the permission to speak about these things in a public forum. Therein shows the intention of the government to be able to work on this. At this point of time, in the last six-seven months, whatever they have done, they have ensured they get the right feedback and then, they are going to take steps on that. We need to keep our faith that they do understand what is good for the country, for industry and they will deliver on that. So, I think, at this point of time, we are extremely hopeful.

You have a very cosy relation with companies, no particular reference here. You give them a kid-glove treatment like loan restructuring, because you don’t want to show higher NPA (non-performing assets). Or may be that’s the legal system. Do you wish to change the legal system, bring the bankruptcy law to tackle those kind of firms?

Bhattacharya: I don’t think the government and the regulators are not talking about these changes. In the first interaction with the new FM (finance minister), there were a lot of us bankers, we were allowed to speak about one thing that we needed, to do something about the wilful defaulter law and not merely the regulation of RBI. I know for a fact that a team is already working on this in the law ministry. Two meetings with us have also taken place on this. There has to be proper understanding of what is preventing an early resolution and get along and do that quickly. I am told may be in this budget or may be immediately thereafter, they will be trying to create a separate wing for commercial matters in the entire judicial system. So that it doesn’t get mixed up with other kinds of cases that come up, so that there can be early resolution in these cases. Not only that, there can be subject experts who will sit on these, and therefore, the quality of the judgements will also reflect the kind of expertise they have. They also know it is not only the banking system, but if you are talking about ease of doing business, then there will be disputes, not necessarily between banks and promoters but between suppliers and manufacturers. Between consumers and the people who supply consumers. Between various people in the entire area of commerce and even those things need to get addressed as quickly as possible. There is an ambition that India will become a global financial centre. But today, most of the arbitration, even between Indian firms are finding their way into Singapore. There is definitely a crying need to ensure we have the right kind of infrastructure. In fact, you will find that many of the people in these firms are Indians. So it is not that we don’t have the laws, or not have the talent, but what we don’t probably have is the right kind of processes. And that is something we need to address very quickly.

So, will you say there will not be a repeat of the Kingfisher Airlines experience for the industry?

Bhattacharya: The fact of the matter is we have to find a way so that legal challenges can be restricted up to a particular level and should be disposed of within a particular period of time. It is difficult to say whether there will be a repeat of this or not. Five years down the line? I think not.

Puri: Firstly, let us not make bankers the whipping boys. If there is a cosy relationship, there has been a cosy relationship in India. There is nothing particular about bankers here. And secondly, I agree with Arundhati that we have to understand that banking is a trust business. We have money from the depositors and we have lent it out, but we also have to give it back. We are trustees and we have to make sure this particular paradigm is maintained. I think DRTs (debt recovery tribunals) have to be staffed appropriately. There is a provision where if you have to appeal against the order, you have to deposit 75% of the loan amount with the court, but it is always waived of by the judge. So, even if we take our existing procedures and implement them properly, the fear of the promoter that he will be thrown out of the company will force him to come to a compromise. If you look at it, there has been a lot of positive movement and I think we would be seeing a lot more clarity as it comes along.

Do you see the psychology of the corporate borrowers changing, where they are realizing that they cannot get by without paying their loans back?

Kochhar: First of all, if there is a loan taken, it has to be paid back. So, let us not say there is some new realization that loans need to be paid back. I would say that in the current cycle, the realization that it is important to deleverage the balance sheet is much more. The openness of some corporates to look at their own assets and to believe that if some assets need to be sold in order to deleverage the group’s balance sheet, I think there is a lot of that. If we look at the current situation, we can understand it has arisen because many of the assumptions that were used for getting the loans and advances for setting up the projects have changed. The time taken to implement the project is much longer. The time taken to get the linkages for the raw materials required have been much longer. When the assumptions get changed, the cash flows get delayed. Along with that, what has happened is that as assets are being put on the ground, debt has to be taken for them, but those assets have not been generating cash flows. In a way, the step that some of the corporates are taking to sell some of the assets to leverage the group’s balance sheet, is a step in the right direction.

Do you see some of firms being hugely leveraged at this point?

Kochhar: As I said, the leverage is actually because of the projects that have come up but have not generated cash flows. So, if you look at the current leverage levels vis-a-vis the cash flows that have been generated, we see them at high levels. But if the same projects were to generate cash flows as predicted, those levels would be normal.

Kaushal: Clearly, the narrative and the tone from the regulators has helped in terms of going after errant borrowers. On the NPA classification system, there is a realization that they want to pay up before they hit certain triggers. We are seeing that behaviour change. We are also seeing that on restructuring, there is a bit of reluctance, we also understand that the regulator is very serious when they are talking about recovery as well as the promoters losing control of the business. I think that has had a positive impact. So the rules of regulation are there, but when you talk about judgement, it is not coming in a time-bound manner.

Sharma: I think two things need to be done soon. One is bringing in the bankruptcy law. But the second is capacitating the existing legal infrastructure. What is happening is we have the DRT structure here, but in many cases, DRTs are not functioning as there are not enough people. So, once we capacitize it with the number of people required and also capacitize the understanding of commercial issues in the legal system, things would move faster. The third is we make sure we implement the rules that exist.

I think the process of tightening the restructuring practices has been going on for a while. It’s not like it has been happening this year because restructuring will stop after this year. I think the regulator has been pushing for it for some time now and the banks have been pushing as well. Some of these leveraged companies have been in conversation to sell assets as well, but there was a big gap between what the buyer was willing to pay and what the seller expects as a price. I think the optimism that growth will come back has pushed those prices to match. So, a lot of the deals that are happening today have all been in discussions for a long time. Those deals are not being cooked overnight, some of them have been cooked over almost two years. We will see a lot more of that in the next couple of months.

Puri: The feeling that all of corporate India is highly leveraged is incorrect. There is only a small section of it that is highly leveraged which is facing difficulty.

Let’s talk about the new players coming in to the sector. This year, we will see two new universal banks coming in to play after RBI gave them a licence last year. Also, we will see some small and payments banks. Over and above that, in the media, we have heard discussions about consolidation in the banking sector. We will start with Sunil. So what is needed more? More banks or consolidation in the system or do we need both?

Kaushal: I think in terms of landscape, perhaps it will take a long time. Two universal banks is not going to change the landscape of the banking sector in India. In terms of future licences, the regulator has indicated that they will be on tap. So, that is a welcome move. Why should banking be a sector where the entry barrier is so tightly regulated? You put the parameters in place and just ensure that they are followed. In terms of the small banks and payments banks, our sense is that it will initially be an experiment. So, you are not going to see dozens of licences being issued in that segment. Once they seem to be successful, it will open up in a larger way. Having said that, there is clearly a lot of room for both, small and payments banks in an economy like India which is so under-penetrated. Clearly, there are areas where none of us have got presence. There is a very live example in what the retail sector has done. They have gone in to villages, towns and cities where penetration of a brick and mortar presence would be very limited. They have gone there and given them a choice of products that in a brick and mortar presence would have been very difficult to take there. So, these smaller banks will come in and mature over a period of time. I don’t think it will be disruptive in the near term.

Over the consolidation bit, we would welcome it. But I think it is a broader issue over which Madam Bhattacharya would be the best person to comment, because it starts at home for her with SBI’s own subsidiaries to start with.

Chanda, your bank has grown inorganically over a period of time, taking over a number of banks. So give us a sense of what will take banking forward? Is it consolidation that will play out with larger banks taking over the smaller ones? Or is it that we need more number of banks coming up? Is it either, or is it both?

Kochhar: I don’t think there is a paradox in this because I believe that the Indian banking industry has to growth at least two and a half times the GDP growth rate. There is so much of growth possible and that has to happen. Plus, it is not just lending, we also have to make banking more inclusive, given that, there is just enough for the banking sector to do. Which means we need both. We need many more banks and we also need the existing banks to become much bigger. Plus, we must also remember that banking is not a very short-term business. To grow and scale up, to stretch your business models, to grow your brand and develop your distribution networks, it takes a long time. Therefore, it is not very easy to disrupt the existing players. I think the impact of the newer players will actually be that they will bring with some newer business models, new payments systems, some of them will work well while some will be experiments. In a way, those will create new ecosystems for the industry as a whole. That is how the whole banking sector will evolve. The evolution will really come from learning from the new players, it will not come from shaking up of the existing players.

Do you still have an appetite for a takeover?

Bhattacharya: I think for a large player, there should always be an appetite for takeovers. But the takeover must come at a right price, should make meaning in terms of synergy and not just be addition of a balance sheet.

Arundhati, RBI is talking about new banks and on the other hand, we are also talking about consolidation...

Bhattacharya: If you look at India, we are still very much in the growing phase. We definitely need three or four large banks and the size of the banks currently is not sufficient. Whether we grow large organically or inorganically will have to be taken by each bank. Just merging to get topline is not in anybody’s interest. The talk about us is what about subsidiaries, why are we not merging? Frankly speaking, the subsidiaries are considered a part of the group. I am considered the group, so in every which way, we are considered together and the group gets valued as one piece. Merging will only reduce some overlaps, nothing beyond that. It is not something so huge that we need to put aside everything else. But I do believe that there should be consolidation and in the public sector also; there are a lot of small banks, there are some weak banks. I don’t believe it is always the case of putting the strong with the weak because it could also weaken the strong ones. There could be a case to merge three weak banks to make a strong bank. How consolidation happens we will see in the next two-three years but till then, people have to find their best fit and get on with it. I don’t think this can be directed, it should be left to the players to determine whom they want to go with and how they want to do it. But growth is a must; otherwise, you will not be able to support the requirements of the economy of this country.

Puri: India is an under-penetrated financial market. Consumer lending here is about 10% of GDP; in most advanced countries, it is between 50% and 100%. Total lending to GDP is 33%-34%; in other countries, it is 75%. Now, to put it into perspective, if India grows at 6%, there is a major possibility of growth for banks. We will need to have a debt market, you need multiple payment banks, you need small banks, you will also have e-commerce coming in. The more the merrier, we don’t need bank failures but the fact is that we need more banks. On a slightly different note from my colleagues here, big is no longer beautiful. China may have a lot of big banks but 70% is with the public sector. Here, if we take all our public sector banks with one owner, we will have a very big bank. I was surprised to note the other day that our market cap is more than Deutsche Bank worldwide. So, it’s more profitable that you define your business and understand where you are going.

Sharma: We should probably see consolidation in public sector banks. In terms of new banks, how many do we need? I think we have lots of banks in India so I am not of the opinion that we need a lot more banks, but the new format will spur innovation and you will see markets expand, which will be good as it will lead to a competitive response from existing banks as well.

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Published: 02 Feb 2015, 01:28 AM IST
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