Economy slowing down faster than expected: DCB

Gautam Vir, MD and CEO, DCB feels that the economy is slowing down faster than expected. It is a challenge to have 7% growth this year, he told CNBC-TV18. He estimates FY09 GDP growth rate at 6.5-7%. Small and medium companies may relook at expansion plans, Vir said. Larger corporates are going through with capex plans that are already in the pipeline, he added.

The credit growth is likely to be 20-22% for the banking industry, Vir said.

Excerpts from CNBC-TV18's exclusive interview with Gautam Vir:

Q: What’s your take on how fast this economy is slowing down?

A: I think the economy is slowing down faster than what we expected about two months ago. I believe that this year is going to be a challenge for India to have a 7% growth. That’s the way I see it and there is more and more news which keeps coming everyday and I do not see this ending whether it's in the form of an oil price hike or inflation in India, which is going to create a situation where businesses are going to postpone decisions to invest, I think that’s going to have an eventual effect on the off-take in banks and for the industry as a whole.

Q: What’s your own best guess of what we may end up with? It’s ranging wildly from 6.5% at the lower end to 9.5% at the top end?

A: I would say that 6.5% to 7% or probably closer to 7% would be my estimate and I think if we make 7%, we should pat our selves on the back and say three cheers.

Q: Are you seeing at the ground level, because at the macro level, we can see the numbers, but as a banker, are you seeing it in various sectors materially?

A: At a slightly lower level, there are two things happening. One is lending institutions, credit institutions, banks are being more and more cautious about all the credit they have been extending and at the same time institutions are probably differing their decisions to invest as they are not quite certain about the continuity of demand. India is different from the other parts of the world and would have less of an impact because of its demographics.

The demographics in India still continue to be favorable in terms of the break up between the older and the younger population, which is not quite the same in other parts. But I do believe that a slowdown in China is also going to eventually result in a need for them to offload some of their production, which will find its way into India. In light of the high degrees of inflation, there is a good chance that India would open its doors for cheaper goods, so these are the kind of issues that we will have to deal with as we enter Q3 and Q4 of this fiscal.

Q: Typically in such conditions, a lot of companies’ sentiments get hurt to the extent that people just go into a bit of a spending shell. Have you seen that happening from a large number of companies where they postpone or differ in their investment when they are not feeling good about the environment?

A: I think that’s definitely happening. Normally, when you have slowdowns, I think there is an opportunity for you to step-up. Stronger brands and stronger companies will see probably increase their ad spends or maybe come out with certain things where they can probably increase their market share in a declining market place.

But that’s not quite the case with the mid-sized corporate and small and medium enterprises; for them survival is the number one factor and caution cannot be blown to the winds at this particular time. They are definitely relooking at their expansion plans and going ahead with it. Larger corporates, to some degree, have a lot stronger financial position and they see this as an opportunity to build capacity if they can absorb the interest cost and the cause to see the benefits of their growth coming a couple of quarters later.

So the reaction of people is definitely different. Whatever capital investment has already been committed by larger corporates, they are going through with it, smaller organisations are definitely differing whatever they can, but larger corporate are not going in for further expansion in the way that they had originally planned if they have not started the process at this particular point in time.

Q: Those days of more than 30% credit growth are history right now for the moment. What is more realistic - credit growth or credit offtake target for a bank such as yourself now?

A: 30% for a bank like ours is not unrealistic; we have a small base and I think if we micro manage, we can buy in good opportunities to grow our credit base at those kinds of levels. But for the industry as a whole, if we can achieve 20-22% in India, this particular year is going to be a challenge in its own right. I can see that itself coming down as demand continues, if interest rates continue to go up, the profitability and the feasibility of projects are going to change.

DCB has grown 44% in the last two years YoY (year on year) basis, obviously those numbers are not what we are going to see. 30% seems feasible however for the industry as a whole, I see it at 20-22%, which itself is going to raise challenges for the industry a whole.

Q: Do you think interest rates will surprise on the way up? Most bankers are still reluctant to talk about much higher interest rates from here, but is there a risk that we move sharper with a nearly 9.5% yield?

A: I see absolutely no solution to India’s inflation problem in the next 60-90-120 days as a result of which I do believe that there will be an interest rate increase and I don’t believe it would happen immediately. But I do believe, it will happen probably towards the end of this quarter or towards the early part of the next quarter because the inflation numbers are not going to get any better for at least some period of time as a result of which, we have to be seen taking some steps. The silver lining hopefully which we believe is that the food production in this particular season is expected to be pretty buoyant and that might mitigate some of the inflationary pressures.

Q: What about NPA’s, both for yourself as a bank and for the industry, because this kind of a environment typically ends up with higher NPA levels than what you saw in good times; is that a genuine concern?

A: There is an absolutely perfect analysis of the situation; the NPA’s are already showing a certain tendency to increase and that tendency is not going to come down all of a sudden. So banks that have taken the pre-emptive action in terms of not being so aggressive will definitely see a deterioration lesser than the ones which have been growing pretty aggressively. But I do believe that the stress on the retail side is going to be slightly higher than on the business side. Obviously the SME’s affected by the exchange rates and the oil prices, are going to see higher impact of NPAs.

Q: A while back, mark-to-market (MTM) was the favourite fear of the private banking space and we saw HCL Technologies last week unveil a fairly significant MTM loss. Is that an issue behind us or do you expect it to show up in the coming quarters?

A: For us an institution, we are not in that space. But definitely the whole litigation situation is there. Bankers are closely watching the outcome of some of these litigations which are still pending and for which decisions are yet to be taken. I believe those are going to be the key components as to what the things are going to move in our favour.

But I think a couple of things in the environment is that some of the customers are waiting and watching what happens with the court judgement before they decide as to how they are going to deal with their obligations and also the whole farm subsidy and the farm waiver are environmental factors, which are going to have an impact on the performance of the bank’s assets, not because of real concerns, but because of environment concerns which move the dice in favour of the borrower vis-à-vis the lender.

Q: As a bank, your lifeline is capital. How apprehensive do you feel about availability and sourcing of capital over the next year or two, both because (a) cost of deposits are bound to go up in this kind of an inflation scenario and (b) the equity markets not looking great for raising capital either?

A: There are two things; we as an institution have a lot of room for tier II. This is not a good time to raise tier II, because you will end up having high cost for a long tenure. So that option doesn’t prevail. I do believe that what is there on the tier I situation is valuation; raising capital at a price is never an issue irrespective of whatever the situation is and there are always people looking for value. So if one needs capital, one can always raise it at a price.

It depends on the valuations, which one believes are appropriate and create value for customers. So as we continue to grow as we need capital, I can see banks raising smallest sums of capital; capitals which they normally would not have raised in such smaller amounts to overcome immediate requirements and I can see that as a way forward in this particular fiscal. But I think the credit growth is not going to be that aggressive and as a result, the concern about raising capital should not be that much of a problem.

Q: You are going to raise capital in the next four quarters through any avenue?

A: We should be requiring capital towards the last quarter of this fiscal or the first quarter of the next fiscal and depending on the market condition, we will raise a minimum amount of capital, which we require and do not see will be a problem. At worst, we will have to price it in an attractive manner to customers.

Q: So it will be equity capital?

A: Yes, equity capital because unless interest rates do not show any signs of softening up, it doesn’t make much sense to raise tier II capital.

Q: Any ballpark idea of how much capital you will end up needing by the end?

A: You have to raise a minimum chunk; we will probably raise around Rs 100 crore. Normally I will prefer to raise capital in blocks of Rs 300-400 crore, but taking into consideration the fact that the markets are not good, we will be looking at the market for Rs 100 crore to see us over better times.