Eyeing for gains post tie-ups with payment banks: IndusInd

The government on Tuesday relaxed Foreign Direct Investment (FDI) norms in various sectors to boost investments in the country. Romesh Sobti, MD & CEO, IndusInd Bank says that relaxations of norms will help raise market sentiments. Speaking to CNBC-TV18, Sobti says demand in the credit business is picking-up gradually. Retail demand, both in vehicle and non-vehicle segment was good in the July to September quarter, he says adding that demand is visible even in brownfield expansion as well. Sobti says that in the vehicles segment, demand for small and light commercial vehicles (CVs) has lagged in the Q2. The bank aims to balance out its retail and corporate business in next six to nine months, Sobti says. Even the non-vehicle and vehicle segments will be brought in 40:60 ratio in next three years, he adds. On the subject of payment banks, Sobti says that impact of these banks has been overplayed so far. He believes that collaborations and tie-ups will aid payment banks and even help small banks sustain business. IndusInd has tie-up with an online partner, Sobti adds. Below is the transcript of Romesh Sobti’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: You got this bunch of FDI relaxations or tweaking from the government fungibility of the foreign institutional, foreign portfolio and foreign direct investment. Does that make a difference? I guess your weightage in the indices like the Morgan Stanley Capital International (MSCI) increase?A: I think each one of them does make a difference, because the general tendency in the market is that if you do not have these reforms, then they are very critical; but when they happen, they become hygiene. So, it is very critical, each one of them is a very good move. And of course, their headlines about who is the big gainer and where are the big ticket reforms, but the most salutary message coming out of this thing is that the government is intent on reforms, close on the heels of the Bihar voting patterns. I think it is a very salutary message for the market.Sonia: What really enthused the market, not just this quarter, but for the last many quarters is the way your consumer loan book has been growing; more than 20 percent once again and a big chunk coming in from commercial vehicles (CV). But, I also wanted to ask you about the growth in the other sectors like utility vehicles and two wheelers that you finance too, that growth has been quite muted. So, just wanted to understand when you expect a pick-up in loan financing ex of CV and also for the CV sector what the growth is looking like.A: The retail portfolio that you see upticking for the last few quarters, is both in the vehicle and the non-vehicle. Within vehicle, of course, you can see very clearly, the headline growth is around CVs which is really the high value stuff out of there. The other parts, the light commercial vehicles and the small commercial vehicles, do lag behind. That is the general phenomenon we have seen that whenever you see demand picking up, these are last mile deliverers of cargo and passengers, so they also always follow.Two-wheelers have been a little flat, but within two-wheelers also, you find two discordant notes. You see scooters doing very well – they have grown almost two and a half times in the last 15-18 months, but motor-cycles have actually slumped. So, there seems to be some sort of a behavioural change even in two-wheelers, etc.Cars of course, have started doing quite well. So, it is a mixed bag now. I would expect that small commercial vehicles (SCV) and light commercial vehicles (LCV) will start picking up in the next three to six months as well. And of course, there is the other part which is the non-vehicle finance, which has really picked up very nicely and that is growing at 60-80 percent, so about 8-9 products including loan against property, loan against shares, personal loans, credit cards, all that stuff has really started picking up. So, that is fuelling our credit growth.Latha: it is so good to hear about growth, that has become a rare word these days when CEOs come to our studios. But, we still got tepid numbers in the index of industrial production (IIP). Consumer non-durables not doing well. Would you say that we have troughed out that urban discretionary demand is rising?A: I think so. There also you are seeing a mixed bag. The barometer for us is to see really how working capital picks up, because clearly, the Greenfields are still very – the pipelines are absolutely dry. We are seeing a little bit of the Brownfield stuff coming up because I am getting some term-loan applications which means capacity expansion. But the real indicator of how secular the growth is, is working capital. And working capital, we have started seeing pick-up in demand. Of course, if you see our growth rates, our growth rates have also been fuelled by the fact that a little bit of shift is happening within consortiums. That is about it. But, I think it is now beyond that green shoot sort of scenario. So, demand is picking up.Latha: That is nice to hear Brownfield expansion, which sector?A: Spread out, people who had held back. For instance term-loan sanctions three years ago were never drawn. Now, there is a requirement to draw. I cannot really lay down a sector. It is so dispersed. So, it is not sectoral in that sense. I can even tell you that somebody is partly in the steel industry, but not directly steel, one of the by-products which is steel wires and something like that, are certainly saying now, okay, reviving plans to start the capacity expansions. And it is not just capacity expansion, it is also some balancing equipment, etc. So, that is all capital expenditure (Capex) related to Brownfields.Sonia: A couple of weeks ago when we had the State Bank of India numbers that came out, Arundhati Bhattacharya made a comment which really enthused the street where she said that the worst of the asset quality pressures for PSU banks is now over for the worst is behind us. IndusInd Bank has never had a problem with asset quality, but just as a banker, who has been interacting with so many banks for years, do you get a sense that perhaps the worst is now behind us and it is only looking upwards from here even for the PSU space?A: I can say with certainty only in one sector which is really the retail sector. The retail sector certainly did not first of all show as much stress except for the commercial vehicle sector and the commercial vehicle sector certainly is showing reduction in the credit cost. I mean we are seeing it in our books and we are a large player in that sector. As far as the corporate side is concerned, there the only uncertainty is that comes to my mind is about infrastructure projects where the commissioning date is well-passed due now – more than two years ago. And then you may see some of that stuff surfacing. But I really do not have a good sensing on the infrastructure side, on whether the worst is over, but certainly, we have to take the word of Mrs Bhattacharya on that.Sonia: So, just a follow-up to that, you said that the retail sector, the worst seems to be over. And you were telling us how your non-vehicle retail book has grown quite a bit. It currently forms about 28 percent of your total retail book - the non-vehicle side. In the next say, one to two years, how much do you think it could grow?A: I think there would be a large balancing happening within our retail book also. First of course, there is a balancing between retail and corporate, which we hope to take back to 50-50 in the next 6-9 months. And then within the retail to de-risk the cyclicality that you see on vehicles, we started building the other portfolio. And if you look at it about three years down the road, about 40 percent of our retail book should be non-vehicle and 60 percent of course, will remain vehicle, because we really like that business and we have some domain expertise there.Latha: 6-9 months, we could see the firs of the payment banks beginning operation. Will that be a big impact? I mean I think Paytm said that they will start operating probably by March or June and maybe Idea follows in September. That is the early timelines we got. Will that be a strain on current and savings accounts?A: I have pretty strong views on this whole subject of payment banks because I think that the impact is being overplayed. The impact on commercial banks is being overplayed. And you have to really start with the regulatory intent behind these banks. The regulatory intent was very clearly driven by financial inclusion to widen their reach and of course, to reduce the cost of delivery. So, in the next whatever 6-12 months, first of all, business models have to develop, viability has to be crystallised and I have met a lot of payment banks and a lot of them have viabilities predicated on collaboration and not really competition. So, I think you are going to see a lot more collaboration. Thirdly, I think that the commercial banks themselves are not sitting tight – waiting for something to happen. So, you are seeing so much vigorous activity now happening on this front. So, net-net, in terms of impact, cost will go down, but efficiencies will compensate that to a large extent. So, I do not see that this is going to be a real game changer as far as banks profitability is concerned.Latha: Do we hear about IndusInd tying yup with somebody? Vodafone?A: No, I think there are tie-ups in the pipeline. For us, it is both offline and online and we have chosen a partner online, which we will announce very shortly. And of course, we also want offline parts, so those who did not get licences also interests us a lot, because we want to proliferate our business correspondent network and those people will help.Sonia: Just one follow-up to that. I mean for big fish like yourself, maybe the payment banks or small banks may not impact much, but what about a whole host of the smaller private banks that are struggling? In fact, even public sector banks. Just to take her point forward, I mean would you not believe that midcap old private sector banks and more importantly public sector banks should see some winding down?A: If they do not do anything, of course, there will be a massive impact. But, I think small or big is not just a function of how many branches you have today. It is a function of the collaborations that you have managed to tie up. The sooner you do that, the better, because that space is going to shrink very quickly. So, it is all about being fleet-footed, bringing about a slew of propositions yourself and also tying up collaborations. Collaborations are critical. It is not about competition, it is about collaboration.