SDR, 5/25 should not be treated as NPAs: Shikha Sharma

Restructured assets are not equal to non-performing assets (NPA), said Shikha Sharma, MD & CEO of Axis Bank in an interview to CNBC-TV18 on Thursday.

Sharma pointed out that while strategic debt restructuring (SDR) is done in companies that are stressed and therefore banks need to convert it to equity to take more active steps, 5/25 is done purely to fix the disparity in the financing structure.

Historical evidence suggests that about 25 percent of restructured assets slipped into NPAs, she said, adding, that while there could be relatively more slippages in SDR but in 5/25 it will be limited."Our contingent provisions would work across this pool of assets where we think there could be potential stress," she added.Below is the verbatim transcript of the interview..Q: You said that your fresh slippages were Rs 2,082 crore. Your strategic debt restructuring was Rs 500 crore and Rs 1,600 crore of loans given the 5/25 refinancing. Will it be fair to say therefore that otherwise your slippages would have been Rs 4,000 crore this quarter?A: Just as earlier we have talked about this whole issue of non-performing asset (NPA) and restructured and trying to clarify that restructured is not equal to NPA because restructured is typically when you want to give accommodation to a company where there is a cash flow mismatch and you hope that they will come out of it and all the historical evidence is that about 25 percent of restructured has slipped into NPA. I would argue that similarly Strategic Debt Revamp (SDR) and 5/25 should not be looked at as NPA. SDR of course is happening in companies which are stressed and therefore we need to convert it to equity to be able to do more active stuff but 5/25 really is a case of mismatch in financing structure. So, I wouldn't put 5/25 in the bucket of stress.Q: The analyst community has repeatedly looked at some part of 5/25 as stressed assets because many of these companies, the interest cover is less than one for the past many quarters. Some 4, some 8, some 12. So, would it be legitimate to say that a third of that or a quarter of that also may slip?A: That is not our understanding as of now. So, it is a little early to figure this out but we are looking at the data to try and see what the slippage could be but our understanding is not that it is going to be around 20. On SDR we do think the slippage could be higher but not on 5/25.Q: Have you also provided for the SDR since you said that there is a chance of SDR cases going back?A: No, we haven't because that doesn't come into the NPA category but our contingent provisions would actually work across this pool of assets whether it is SDR or any other asset where we think there could be potential stress.Q: You have said in the past that your total exposure to the highly indebted group have come down from 12 percent to 8 percent. Does it still remain at 8 percent?A: Approximately, yes.Q: So, 8 percent of your total book would be around Rs 24,000 crore. How much do you think more stress can come over the next one year? 1.68 now, should one be prepared for 2?A: We actually do this whole exercise of looking at the book towards the end of the financial year and try and give guidance number or what the numbers could be like for the next year. Frankly we haven't completed that exercise. So, I would hesitate to give a guidance number for the next financial year just yet but all I can say is that the economy is what it is and it is improving only slowly and of course we have seen global shock coming from the slowdown in China and there could be stresses coming from the system. As I said we will come and try and give guidance to it early next year.Q: But the analyst community, the investor community does discount the price one year forward. There are people who are looking at 2.4 percent as the maximum by FY18 when the stress is recognised, that is their base case, it is not their bear case. Do you think they are on the ball?A: I will still say hold it, we will come back with a guidance number next financial year but you have seen our numbers. Despite the fears around the whole asset quality review and what impact it would have on banks you have seen what it has meant. Yes, there has been a higher slippage than it has been normal but it has not been anything very dramatic and while the regulator did give us dispensation to do this by March 2016, we have actually taken it all in this quarter. So, there is no surprises coming from the AQR stuff next quarter.Q: That is very positive but you normally give us a guidance in terms of stress for the full year and you had originally given us that Rs 6,000 crore. Would you want to revise that number for the last quarter?A: For the next quarter it could be another Rs 1,000-1,200 crore but for the full year of next year we will come back with numbers early in the financial year.Q: So, what would this do to credit cost? Should we say it would be 90 bps?A: It kind of depends upon the definition that we want to use and if we use the definition that we want to look at everything that we dipped into contention then the number could be different. So, if we just look at without the dip into contention it is probably around 90 but if you look at the dip in contention then it would be higher number of about 120 to 130.Q: Would that be about the worst or do you think next year we should be prepared for a slightly higher credit cost?A: I will be surprised if it would be higher but as I said please wait for us to come back on that specific stuff early next year.Q: You have increased your retail portfolio. What does it stand at now?A: Retail is 40 percent of total portfolio now. So, it has actually grown pretty well.Q: And where do you see it going by next year, what are your self given targets?A: It kind of depends of what growth opportunities there are outside of retail. Retail is growing at 27 percent and we would hope that will continue to grow at 25 percent kind of number but in the last few quarters we have seen opportunities in corporate credit growth coming from refinancing opportunities for projects which have got completed. So, we are not actually targeting a mix any more. It was important for us as a strategic imperative to have a more balanced book when we started out the whole journey of trying to balance out the book in 2009 and that is we had said we wanted to increase the proportion of retail.At 40 retail, another 15 Small and medium-sized enterprises (SME) we have a reasonable balance in the book. So, we will just look at where growth opportunities come. I would think that retail should continue to grow as a proportion of the book but I couldn't give you a specific number.Q: What is the regulators advice for next year? Have they given you any broad guidelines in terms of recognising stress because the RBI keeps on talking about March 2017. So, have they given you any guidance of how much you will have to recognise or how.A: RBI spoke to some of the media and the media has written up a whole lot about the annex 1, annex 2, anex3 the three lists that RBI has. The first round looking at accounts which may not be 90 dpt but have shown frequent delay in payment. Then those where there could a delay in commencement of commercial production which they have carried banks to say that may be you need to recognise that as NPA. Then there is another list of restructured cases which they feel may not go well and they are asking banks to start to provision for that and saying that if you don't see positive signals on these then by 2017 you have to recognise it as NPA which is legitimate.Q: Are you exposed to accounts like say Essar Steel? This is a repeat defaulter, are you exposed to that and therefore will you rethink the 5/25 for that company?A: We can't talk specific names and specific cases and we have never done that in the past. We will look at what needs to be done based on the stresses that are emerging in the system and look at either strengthening the balance sheet or see whatever needs to be done.Q: Is it that the regulator is even asking you  whether the cases that have been given 5/25 ought to be reconsidered?A: We are not aware of any such conversation.Q: Is there any self regulation or advice by the regulator that plants which were given say Rs 40000 crore assessment in 2008 should now be written down because steel prices what they are and possible over invoicing  in those times. Have they asked banks to write down certain loans simply because they are not worth the number that was put up in 2008?A: What would be prudent for banks to do is to look at these assets and try and see if there is any need for creating some kind of rolling provision around that.Q: You are doing that?A: We have been doing the contingent provisions which were intended towards companies that we saw incipient stress coming through and there may have been certain kind of companies in the past, there could be others in the future.Q: Do you see scope of further base rate cuts in the next quarter or so?A: As benefit of cost of funds flows through there could be reducing base rates out in the future, I don't think anything dramatic because of the net 100 basis points cut through repo we have already passed through 70 basis points. So, there is a little bit of a residue left there but there is not a lot. We will have to see how much time it takes  for that to.... (Interrupted)Q: The new MCLR kicks in marginal costing, so because of that will new loans be cheaper? If yes how much 10-25 basis?A: That is what I am saying, even if we looked at the average cost system then there is just residue of about 30 basis points left. So, that kind of provides a cap to how much rates could go down but it will depend upon what the markets are like because on a marginal we have to look at what the liquidity situation is at that point of time and therefore what happens to rates in general.Q: So, therefore margins, there is obviously that trimming of margins in Q3 because the base rates came down, how much should we be prepared for in Q4, another 10 basis?A:  Our margins come down a little bit because we leverage up the capital and we have always indicated you lose a bit of margin because we have excess capital and as that gets levered up, that comes down. The whole base rate has also meant some reduction in margins but not a lot and product mix changes also have an impact on margins.So, net-net we don't expect big drop in margins from here but there could be a 5-10 basis points.Q: Finally loan growth number?A: Loan growth is linked to what we see in the economy but we would expect that given our size, we are still only about 3.5-4 percent market share. We should be able to grow at may be around 18-20 percent led primarily by retail. Q: Now the terrain changes, probably in the next 6 months or probably even earlier when some of the payment banks will start implementing their licenses. How does life change? Do you think that current account might shrink or savings account more importantly might shrink?A: We have had wallets around for a while now and wallets have been used by customers. However they haven’t had any dent on savings or current accounts at all. So, it is too early to call. I think we have to wait and see who comes in, what offering, what the acceptance rate by customers is and what customers choose to do. If it is used primarily as a transacting account then it doesn't actually dent savings or current account very much, a little bit on the margin but not a lot.Q: Say if you are looking a year down the line or two years down the line, there are a lot of telecom companies which have got licenses. So, do you see any of your fee income or transaction income getting trimmed?A: I genuinely believe that as these players come in and there is more innovation there are two macro themes we would hope to see. We would hope to see customers who are currently not coming into the formal financial system come in. Two, as convenience of all these instruments gets established we should probably see cash moving to digital money. I think just as it is an opportunity for the new banks it is equally an opportunity for incumbent banks who have created this capability, who have the brand, who have the convenience, who have the understanding of a lot of these  solutions for customers. We would hope that our customers will like the innovation they are seeing from us and prefer to do more with us and new customers would come to us as well because of the brand, the trust, the convenience, the distribution, the full range of products we can offer them.Q: They may still prefer you for some of the products that you offer and the payment bank doesn't and cannot offer. However they may still takeaway some of the work from you, say remittance work or credit card payments if the NPCILs payment network comes in, do you see definitely fee income and margins because of some lose cash going away, margins under threat for the entire system?A: We see ourselves actually positioned well in the payment space with a lot of the investments that we have made around that. We would hope to be a beneficiary of the market expansion.Q: Do you see yourself buying up some payment banks, buying a stake in any payment bank?A: We are open about that and we will evaluate it as it comes along. If it makes sense just as any other acquisition we have always said that if it is going to be value creating for shareholders or it is going to bring a huge strategic capability which we can't do ourselves we would of course be open to any such transaction. We would evaluate it at that point.      Q: It is some peoples assessment that a lot of the old Indian private banks have not been responding  to this situation at all. Do you see inorganic opportunities there?A: We would love to partner with them and see if we can take some of our capabilities to them. On acquisition I would give the same answer, it needs to make money for our shareholders.Q: What about opportunities in digital marketing, until now I have been talking to you about challenges, has the digital market place opened more opportunities for you? For instance we hear many of the big banks have tied up with Amazon and are loaning to people who supply to them, carpet weavers who supply to Amazon or  basket makers. Have you tied up with anybody?A: I will give you a couple of statistics there, our credit card spends have grown around 50 percent, our digital card spend shave grown around 60 percent. So, our customers are going e-commerce and that kind of flows back to us as business and customer relationship deepening. We have looked at a lot of the players to see whether we can  do  rule based lending. We have tie-ups with a couple of the digital players. It is very small right now but we are looking at partnerships and see how we can work together and use that data analytics for lending.Q: Is it game changing you think?A: Not in the immediate term, it is very small but it is an important capability and we are clearly invested in that and we would hope to be one of the leading players in that space.Q: Budget is round the corner. What do you think should be the government's thrust? What are you looking forward to from the Budget?A: Clearly in this environment where we know there are areas where spend is required it would be great to see the government pushing ahead and spending and providing the fillip to investments that the country needs right now whether it is in road, railways, defence. All those sectors that we talked about earlier, even health and education and infrastructure. So, that is important, but at the same time people are going to be watching for what the fiscal discipline line is going to be about and so getting that balance is important which means the government probably has to push ahead with some kind of divestment agenda. So, I would love to see a focus on productive spend coupled with fiscal disciple coming from a realistic but ambitious divestment program and outside the budget we have seen the government do not so interesting policy changes whether it is around the power sector, availability of coal, this whole UDAY scheme and how that pans out, the incentives for renewables, focus on renewables to make sure that people have power and we still have clean power.Q: Have you lent to discoms?A: No, we haven't lent to discoms.Q: That is why you are praising it, some of them who have lent I have seen their margins or will see their margins getting trimmed.A: Yes, but I am talking about it from a macro perspective, that if you need to fix a sector then you need to fix the supply side as well as the off take side and the government's focussing on that and power becomes an ingredient to so many other businesses. If you want to focus on entrepreneurship the whole start-up Indian initiative then this is basic infrastructure you need to provide.Q: The government started giving private sector bank licences to the likes of erstwhile UTI Bank, 1994. In these 20-22 years private sector has garnered about 30 percent, not a very grand number. But now there are 21 new players. Three years down the line what will be the share of the private sector in terms of the total banking business?A: I wouldn't say three years is very hard to predict but over the next 10 years I definitely think that the market share gain could be as much as 30 percent that you have seen in the last 20.Q: Ten years to overtake the public sector share?A: Likely.Q: I was hoping that you will give me some more aggressive targets but let us see.A: No, I think there is distribution, there is credibility, there is customer base there and it takes time for new franchises to get built and grow.