Finance Minister Arun Jaitley in the Union Budget 2015 proposed to remove distinction between the foreign direct investment (FDI) and foreign institutional investors (FIIs). The move is likely to benefit private sector banks like Axis Bank and YES Bank.
Speaking to CNBC-TV18, Axis Bank MD and CEO Shikha Sharma said the bank needs shareholder approval to raise FII limit to 74 percent. As of now, private banks have a total foreign limit of 74 percent, of which FII limit is 49 percent. The current foreign holding in Axis Bank is 52 percent whereas foreign limit is at 62 percent.
On Budget, Sharma said focus on fiscal discipline was a pragmatic move. Simplification of tax code, processes and approvals is a big positive for the industry. According to her, infra-related sectors should benefit from the Budget with focus on affordable housing being of great significance.
The country’s third largest private sector lender maintains its guidance for stressed assets for this year at around Rs 6,500 crore.
Below is verbatim transcript of her interview with Latha Venkatesh on CNBC-TV18.
Q: Were you impressed by the Budget. If yes, what impressed you?
A: The first thing was fiscal discipline without getting wedded to a particular number. Having the flexibility to say that we need to kick start investment and therefore, instead of 3.6 percent we go for 3.9 percent number. I thought that was a great pragmatic move, one.
Related to kick starting investment in infrastructure, recognising that private investment would take some time to come back given that there are projects that were stuck and need to be taken to closure and companies are leveraged therefore may not have the capacity to kick start investment.
I think that was a great positive too. Third, a lot of steps were around simplification and taking away all items of friction. So whether it was simplification of tax code or it was simplification of processes and approvals required to start a business or even things like fungibility between FDI and FIIs which all of us have talked about for a long time was an unnecessary inefficiency in the market.
We saw lot of steps towards simplification and rationalisation. Therefore, those were the three strongest things from the Budget – (1) pragmatism of fiscal deficit (2) kick starting the investment cycle and (3) removing friction wherever there was an opportunity to do so.
Q: What is the current position of limits available?
A: Our total foreign holding right now is around 52 percent and once we get shareholder approval for going up to 74 percent – that does give a lot more headroom for FIIs to buy Axis’ stock.
Q: As a banker what sectors do you think will benefit the most post the Budget?
A: I think infrastructure-related sectors should definitely benefit. If the government is going to kick start investment through doing more roads, privatising ports then that will help feeder sectors like cement, steel, the construction industry and that in-turn should generate employment. The focus on creating affordable housing should be a positive on jobs and some of the core sectors. Therefore, the recovery will start from there.
Q: Coming to the non-performing loans (NPL) issue. You had guided for a stressed loan amount of Rs 6,500 crore for the current year. Now having seen two months of Q4 do you want to lower this guidance?
A: We haven’t reduced our guidance for the year. If you look at our numbers, we had guided at the beginning of the year Rs 6,500 crore of gross NPA plus restructured assets and we had said less than half of that will come from NPAs and little more than half will come from restructured assets.
While our NPA numbers are broadly inline with what we had guided, the restructured numbers that are significantly lower is because a lot of that is impacted by lenders coming together to come up with resolution plan or a corporate debt restructuring schemes (CDR) and therefore, it is difficult to predict the timing.
We may see some restructuring come through in the last quarter, so we are not changing our guidance for this year but as far as asset quality is concerned, we stand by our guidance that we think things are beginning to improve and therefore we expect that next year should look broadly better than what this year is in terms of credit cost.
Q: You now have 5:25 rule; you can lend, you can change an old loan to re-lend it only for five years. Have you done any of that?
A: There is some conversation going and some infrastructure projects should get refinanced under the 5:25 rule.
Q: Nothing has been done already?
A: I think there is something in the pipeline.
Q: When are you likely to drop base rates?
A: Our ability to cut rate with the base rate formula is very dependent on what happens to our cost of funding and that in-turn depends as much on liquidity in the system as the policy rate. If liquidity eases as government spending starts next year then that will give an opportunity for cost of funds of banks to come down.
Q: What are you expecting from the Reserve Bank of India (RBI)? When is the next cut and how many are you expecting this year?
A: We can never predict what the RBI is going to do but the general consensus amongst economists and banks is that all things remaining the same, we should see another 75 bps cut during the year. It is difficult to predict the timing but frontloading it will be good from a growth perspective.
Q: For the banking system do you think base rates will fall in April when the slack season starts and maybe another rate cut comes from the RBI?
A: It is very difficult to predict either for our bank and therefore not for the banking system because banking system book even less than I would know about what is going to happen to our cost of funds. But if there is liquidity improvement then cost of funds will come down and that will give an opportunity for banks to bring down base rates.
Q: If the cost of money is anyway falling, you are only unsure about the pace then what about your net interest margins, you would think that your NIMs in Q4 will be better than Q3 and Q1 will be better than Q4?
A: On margins a lot of things go into play. In addition to cost of funds and comparative situation in the market place, the product mix also leverage comes into play. How much of a capital is being leveraged. All of those factors go into NIMs and as we leverage capital actually NIMs will begin to come down and not go up.
Q: You told me in the beginning that you need shareholder approval to raise the foreign ceiling to 74 percent, right?
A: We currently have shareholder approval to go up to 62 percent and we would have to go back to our shareholders to take it to 74 percent.
Q: When will you take this to the board?
A: We will have to discuss this at the board but the new regulation definitely provides an opportunity to have that discussion.
Q: Can we expect the board will take this up in a month or so?
A: I cannot answer that question.
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