HDFC Bank's Sukhthankar says the cyclical factors for creation of non-performing loans may have played out, but some borrower-specific issues still remain. On the entry of small banks and payment banks, Sukhthankar says the market is large enough to accomodate additional players.
There is room for lending rates to reduce by 25-50 basis points, but that would depend also on the liquidity in the system, credit growth and growth in deposit base, says Paresh Sukhthankar, Deputy Managing Director, HDFC Bank in a panel discussion on CNBC-TV18.
He says there are signs of a pick up in demand for credit, but one has to see if it sustains after the festive season. Demand for retail loans in urban pockets is seeing a better pick up compared to rural areas, he says.
Sukhthankar says the cyclical factors for creation of non-performing loans may have played out, but some borrower-specific issues still remain.
On the entry of small banks and payment banks, Sukhthankar says the market is large enough to accomodate additional players, and says that adapting to changing demographics will be important for banks.
Speaking in the same discussion, Dipak Gupta, Joint MD, Kotak Mahindra Bank says the impact of payment banks and small banks will vary across markets, and they could have a greater impact in specific geographies.
Below is the transcript of Dipak Gupta and Paresh Sukthankar's interview with Latha Venkatesh, Sonia Shenoy & Guest Editor, Adrian Mowat on CNBC-TV18.
Sonia: I am going to start off with the discussion with regards to the onset of the payment banks and small bank and how disruptive it could be eventually be in the longer run for many of the legacy banks. In a year’s time, there will be 11 payment banks and eight small banks. So there will be a 45 percent increase in the number of banks in just 18 months. What could the changes be in market dynamics and how disruptive could it be for legacy banks?
Gupta: The impact of the payment banks will be very different from the impact of the small banks. If you look at the structure, the small banks in terms of width of products can practically do everything which a commercial universal bank can do. So, the impact of the small banks in specific markets and geographies will be far more significant when you compare them with the conventional universal banks.
As far as payment banks are concerned, they are still very specialised product plays. Now, to what extent they can expand their width and get into other areas of banking is still to be seen. But initially, they will impact only the payments part and customers and businesses related to the payments part, really.
So, yes, one year later you will see all of these 18-20 players, but to what extent they impact conventional banks is still to be seen.
Latha: It is true that payment banks cannot give loans, but this is the first time, that the Indian banking sector is going to face real competition. I mean look at the kind of guys who have come, Mahindra Group, Aditya Birla Group, Reliance Group, Vodafone, people with real technology proven entrepreneurial talent and loads of cash. You have never seen competition like this. In any industry, if four players become six or seven players, margins will thin. In your case, again, as Sonia said, 50 percent rise in competition. Will margins not generally thin?
Sukthankar: It goes back to the question on what impact it would have on what you call legacy banks, because to broad-brush existing banks as players who would be hurt by what is introduced by the new payment banks, assumes that the new players come in with different products or better levels of technology and convenience, which the existing players will not be able to match up to which I think is a bit of a myth. Certainly, the market is large enough to accommodate many more players, especially if the key focus of the newer players is to enable higher levels of inclusion.
However, existing banks or what you might call legacy banks, who have their product range already rolled out in terms of the entire digital space and there are quite a few of them, I do not think they will be necessarily hurt. Players who do not recognise the changing demographics, the changing needs and the way customers want to transact with banks, they might certainly see some erosion in market share.
Adrian: If I could ask the question in a different way, how have you changed your strategy in the last three or four years to reflect the change in technology?
Sukthankar: It is not just the last three or four years, but for the entire 20 years that we have been around, we have always seen technology as a key business enabler. Therefore, as a continuing execution on that strategy, we have used technology not just in terms of improved efficiencies at the backend, but using technology for instance in terms of the data warehouse, the analytics to reach out to our customers with more customised offerings because there has been this entire piece on the use of analytics, which has been a huge game changer.
We have cut our turnaround times on various products, so it is not just a servicing or an alternative channel usage, it is now a question of reaching out to customers for loan products. We have for instance something called a 10-second loan, which obviously feeds on the information we have on our existing customers to not just extend and approve, but actually disburse loans within 10 seconds.
On the payment side, again, everything from person-to-person (P2P) payments to enabling person-to-merchant (P2M) from apps, so, virtually the entire range of banking services that we offer are now available across channels which are the choice of the customer. So, we certainly, continue to expand our branches, but also have significantly increased our presence on the digital side.
Latha: I guess always some people will stand out and be able to brave the competition better but, let me pose it this way to you. Think of the coming generation of 20-25 year olds who will have to open bank accounts. Staying wherever, outside the four metros, why would they want to open a bank account in a Corporation Bank or a Lakshmi Vilas Bank or a Karnataka Bank or even for that matter a Kotak Bank when they have an Airtel phone with them or when they have a Vodafone with them?
Gupta: I do not think it is exactly that kind of a problem. Even today, if you look at most of banks, close to 25-30 percent of customer acquisition which happens is from the segment which you are talking about.
Again, it depends on what your market segmentation is. What part of the market do you want to cater to? You may want to cater to a market segmented along income segments or along generation segments. So, if you choose to segment your market across generation segments and you want to cater to the Generation Y then you need to invest in technology.
Mind you, it is not appropriate to say that even the banks which you have named have not invested in technology. All of them are putting in a hell of a lot of money n technology. And like Paresh Sukthankar alluded to, there are 2-3 aspects of technology. Are you investing in technology to improve your efficiency? A lot of banks are at this stage, putting in a lot of technology inputs into improving efficiency – reducing cost, increasing your service capabilities, reducing time to service customers, all of that. Or are you putting in technology inputs into acquisition of new customers?
So, to some extent, for an existing bank, it has to do all of these on an ongoing basis. It has a limited set of resources so, it distributes them, but it does stay reasonably online. Now, when you try and counter this with an onslaught of technology supported by an onslaught of money and deep pockets, then probably the equation becomes slightly unequal and that is what all of us as existing bankers really have to start worrying about really. I do not think there is any problem on the technology input side. It is really the deep pocket which one has to worry about.
Sonia: The topic of discussion in the studio is why have banks not passed on the rates to the same effect that the Reserve Bank of India (RBI) has cut rates. What is your own view on this issue and how much more in terms of rate cuts do you foresee from the banking industry?
Latha: More in industry perspective, though we know that you were the guys who first moved on rates?
Sukthankar: When you ask why have the banks not passed on the rate cuts, that suggests that the assumption there is banks have reduced their costs or their deposit rates and then not passed on the benefits of the lower deposit rates to customers on the borrowing side through lower lending rates. The reality of course is that there is a gap between the cut in policy rates and the actual reduction in deposit rates and then of course, the transmission from deposit rates to lending rates through the base rate system works at least once a quarter.
So, clearly it implies that the reduction in deposit rates so far has not been to the extent that policy rate cuts have been. And I am sure you have heard this before that clearly on the way up as well, banks have not raised both deposit and lending rates to the same extent and as far as the impact on costs are concerned for banks, their funding costs, the policy rate really does not impact even half a percent or 1 percent of the total banking system liquidity.
So, to the second part of your question, is there still some room for further deposit rate cuts and therefore lending rate cuts, I think there is probably, to my mind, somewhere between 25 and maybe even 50 basis points over the next few months. Of course, that is a function of how liquidity remains in the system and how the actual growth in both deposits and loans pans out for the system as a whole.
Adrian: So, if we look at price of money and maybe move on to RBI policy here, we are sitting in an environment where consumer price index (CPI) is positive although it has come down a lot, and wholesale price index (WPI) is negative, presumably for many of your corporate borrowers, WPI is more appropriate. So, we are probably sitting with some of the highest real rates we have seen in India for many years, would you agree with that analysis?
Sukthakar: We have seen now more than 10 quarters of negative WPI and this obviously is linked also to what has happened to the commodity cycle and therefore a lot of the input costs for a lot of our corporate customers have also come down. But yes, rates in terms of real rates, they have certainly been higher than they have been in the past, although they have come down, especially in the market.
So, apart from bank lending rates, if you see what has happened to commercial paper rates or bond rates, those have certainly come off as well.
Adrian: How much do you think the non-performing assets (NPA) cycle is a function of this issue of real rates for the corporate sector and also real rates discouraging an increasing corporate capital expenditure (Capex)?
Gupta: If you break it up into stock and incremental NPAs, and you first look at sort of the stock of NPAs, I do not think the rate structure has much to impact that position because most of these stresses were created for reasons beyond just interest rates. Or even if they were created because of reasons related to interest rates, the stress really happened a couple of years back and then all other factors put in has ensured that the stress is sort of reasonably permanent.
Now, for some of these to come out of the stress position and I am not just talking about NPAs per se, but in general, stress per se. You need policy and parameters and factors significantly beyond just interest rates to correct and as and when some of those fall in place, you will probably see people coming out of them or probably getting deeper into trouble.
However, when you look at incremental stress accretion, yes, a downward interest rate cycle helps to some extent though it creates other problems for corporates related to their cost of production, their margins, their operating leverage, all of that, which can still continue with the stress. Net-net, I would say, the relatedness of lowering interest rates to either the stock of stress or incremental stress is very marginal.
Latha: Are you seeing any improvement in credit offtake at the consumption level? You are best placed to tell us whether consumer has started borrowing more. Is there a consumption led growth that we can expect?
Sukthankar: We have seen some early signs of higher momentum on the consumption side and this is probably a little more urban-centric rather than rural. Of course, this is the start of the festive season, so it is still early to figure whether this is purely seasonal or there is a more secular uptick in consumption. But we have certainly seen and that has been evident in some of the retail loan products. So, some of the cyclical factors have played out.
And for half a minute if I was to just jump back to the NPA issue, because that again relates to partly cyclical and partly, as Dipak Gupta said, customer specific issues; the cyclical elements there not just on growth but even n the non-performing loans (NPL) piece , might have played out. The borrower specific, or customer specific issues, that is a mixed bag where some things are improving or some with fractured balance sheets is probably a protracted issue.
Sonia: Just a follow up question to that. Some of your peers like Axis Bank have seen a lot of stressed asset formation problems in this quarter one by. HDFC Bank does not have that issue just yet, but for the industry as a whole, do you think that we are not out of the woods as far as stressed assets are concerned and it could perhaps get worse from here?
Sukthankar: Like I said, those concerns or pressures which were coming because of just the lower growth rates and the business cycle, those are less of an issue. For instance, if you look at a product like commercial vehicles and so on which goes through a typical business cycle, those kinds of concerns are probably, we have seen the worst.
But when it comes to borrower specific issues, where there were issues of projects getting stuck or mines being revoked, depending on what happened in those particular cases, maybe things have bottomed out. But there are several other borrowers where their balance sheets are still under severe strain and even if there is a slight uptick in their operating performance, it is clearly not adequate to pull them out of where they are in terms of the debt servicing needs that they have. So, I would say things are not necessarily getting much better for a certain segment of borrowers. But overall, perhaps, it is going to be a mixed bag.
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