MC Exclusive | We aim to maintain our NIM at 3.8% in long run: Axis Bank chief Amitabh Chaudhry

Amitabh Chaudhry, MD & CEO, Axis Bank

We want to be seen as a bank that allows investors to sleep well in the night, said Amitabh Chaudhry, MD and CEO of Axis Bank, in an exclusive interaction with Moneycontrol.

Cautioning that tough times are ahead for the banking system, he says that the stress in retail loans, particularly in the unsecured space, takes a few more quarters to play out. Guiding for the bank’s profitability to settle around 3.8 percent in the long-run, Chaudhry has some interesting commentary on the bank’s asset quality in this interview. Read on:

Corporate loan growth is continuing to depend heavily on government capex. The trickle from private players is thinning. Does this worry you?

The government is the one who's been spending money. My worry is that the government cannot spend more. Ultimately, the incremental capex has to come from the corporate side. We have not seen too much growth on the private side, it's more refinancing. Now everyone is talking about India spending close to Rs 19 trillion on power over the next five years, of which Rs 10 trillion will be in renewables. It will reflect in credit growth over time. There’s also the same thing in construction and real estate. The capex cycle should come back now. We've been saying that for quite some time.

The layer below the large conglomerates seems to have become non-existent. Do you see that getting built again?

As a bank, we were not that focused on that segment to start with. When I joined, we set up the mid-corporate group all over again, and we started investing much more in it. Our size of the business has gone up four times in the last three years. Our market share in mid-corporate has gone up by 800 basis points. This is a very important segment of the Indian market. We find real gems there in terms of the kind of business they're doing. This book will keep growing. Our incremental market share in this business has been 12.5 percent, while the advances market share is only 6 percent. We are growing faster than the industry in this area. I would expect to maintain similar growth rates.

You were one of the first bankers who turned cautious on retail. What are the pockets you would continue to remain cautious about?

We see signs of distress on the unsecured side of the retail portfolio, which includes personal loans, credit cards and now on the MFI side. I think this will continue for some more time. Banks like us sit on the lower end of the risk curve, so the impact will be much lesser. But, some of this is because of the over-leveraging that has happened in an extremely rapid fashion and it is flowing through our books. We've seen that in Q1 and Q2 and you'll continue to see in the third quarter, which seems to be a bit enhanced because of the agri-portfolio. We have priced for credit losses of this nature in our loans. Within 90 days, for example, for unsecured loans, we write off the loans. We have also seen some NBFCs (MFIs) reporting numbers, which are scary. We have to be very watchful of what could be the impact of this flowing into some companies or institutions. On the NBFC side, we have lent only to very high-end NBFCs. So we're not too concerned, but it's something to watch out for.

Second, we also call out the fact that the credit costs are at historical lows. It cannot remain there forever. Ultimately, we're in the risk-taking business. We do take risk and so this credit cost does need to move towards some kind of normalisation. It might never go back to the numbers which the industry has seen in the past, but it does need to move from the comfort zone. Our historical average credit cost for last 15 years has been close to 1 percent.  Today we are operating at a very low 30-35, basis points of credit cost. It will move somewhere in between over a period of time, but definitely not 1 percent again. I'm not trying to guide to a number on this front.

Given these uncertainties, how big would you want the Bharat Banking book to be? Are you happy that in the hindsight a large MFI you were scouting for acquisition didn’t come through?

Bharat Banking for us was not just about loans. Its about bringing the bank to Bharat, which includes liabilities, assets and all kinds of solutions. Also, Bharat Banking on the asset side, is not just MFI. It is gold loans, tractors and commercial vehicles. We also support enterprises which are operating in that market. We strongly believe that our proposition and our intent to become really big in Bharat made sense, and will continue to invest as you move forward. We are undertaking a transmission project in MFI. We started sometime back. It’s the perfect opportunity to invest and get your platform right, so that when things start looking up, your platform is ready to get a disproportionate share of the market. There was a rumour (on MFI acquisition) which came about at that time and we had indicated that there was no conversation which happened. But we will never say no to acquisitions which come our way, though we are not evaluating any MFI acquisition at this stage.

What would be your projection on margins?

We keep telling the investors not to look at NIMs on a quarter-on-quarter basis, and evaluate it on a year-to-year basis. When a rate cut comes, we have been saying it quite openly, a lot of the loans will get repriced immediately, and that would mean a reduction in our NIMs almost immediately, because we cannot get the compensation. We cannot reduce our cost of funds overnight. Over a cycle, as loans get repriced and hope that the deposits will get repriced, and NIMs should again stabilise within a defined time period. It was proved right when the interest rates are going up, so why should it not work when the interest rates are going down? Second, we have also said that in an overall cycle period we would like to maintain margins at 3.8 percent. Right now we have 19 basis point cushion question over it. We would like to maintain the cushion.

Is the bank plateauing on its NPA numbers and a new normal is being set?

The credit costs are rising on the unsecured side. It will take some time for it to settle, hopefully in the next couple of quarters. We have demonstrated to the market that we can hold our credit costs even lower than some of the peers they've been comparing us with. Our policies on making provisions and write-offs have been more conservative than some of the others. We have retained the Covid provisions  without tinkering with it in any form. Maintaining a certain asset quality consistently is good for the bank in the long run. We want to be seen as a bank which will allow investors to sleep well at night and allow us to sleep in bed at night.

Project finance circular, LCR circular, or ECL, which is still awaited, what are the three worries for you when it comes up, and how prepared is the bank?

All the circulars you mentioned have a negative impact. We need to be prepared that this will just keep coming. Second, as more and more of these changes come, it will only make bigger banks stronger, because they are the only ones who can afford all of this and continue to manage their balance sheet,  specifically on project finance side. If it comes in the current form, it might impact the ability of banks to support project finance. As far as LCR is concerned, part of it has already come through. If the other part of it comes through could take away Rs 4-7 lakh crore of investments in some other areas, or money being put in other assets to high quality, liquid assets. This could have 5-15 basis point impact (on financials).