HDFC Bank doubts recovery, SBI bets on credit growth

With cost of funds increasing over the past 6-8 weeks, there is certainly a case for more base rate hikes, says Paresh Sukthankar, executive director, HDFC Bank. Many banks, including ICICI Bank, Axis Bank, among others, hiked base rate last week.

Also Read: Nifty may slip to 4800; bet on fixed income: Ridham Desai

In terms of recovery, there is no immediate visibility, Sukthankar told CNBC-TV18. The liquidity crunch further exacerbates the issue of non-performing loans for banks and the broader macro, he adds. Most people now believe that 5-5.2 percent growth in the economy is more realistic than 5.5-5.7 percent which was thought earlier, he says. He also does not see a sharp spike in retail NPLs or delinquencies like in 2008-09 and 2009-10 period.

For State Bank of India (SBI), credit growth year-on-year has been very steady at 20 percent on the back of the lowest base rate among Indian banks, says Pratip Chaudhuri, chairman, SBI.

SBI is seeing a growth in deposits just like it did in the aftermath of the global financial crisis in 2008-09. the bank has witnessed some inflows from people coming in from liquid funds and parking it in banks as a safe haven, in terms of return, not in terms of capital alone, says Chaudhuri. Deposit growth year-on-year has been about 15.4 percent, he adds.

Below is the verbatim transcript of Paresh Sukthankar and Pratip Chaudhuri's interview on CNBC-TV18

Q: What is the sense you are getting, you all did go ahead with one small dose of base rate hike. Are you getting the impression that the banking sector is going to see a few more base rate hikes before things really come back to normal?

Sukthankar: If you look at the working of the base rate, it is linked to what happens to deposit costs. You have several elements to it and each bank has its own formula but clearly deposit rates are an important element in that calculation. And there is no doubt that in the last six-eight weeks there has been an increase in virtually the entire range of deposit rates. So whether the shorter end it has clearly gone up much more sharply but even at the one year and slightly longer tenures, deposit rates have gone up. We have once again started seeing this divergence between retail rates and bulk deposit rates. So if you were to look at just deposit cost, that would certainly drive an increase in base rates.

Of course each bank has to review their base rate calculations at least once a quarter. So whenever banks tend to do that review, there is a case for an increase in base rates. Again the sensitivity might differ from bank to bank so while we had dropped our base rate in the last couple of quarters, so it was reacting to what had happened to deposit rates that time. Clearly this time around there has been a very small increase. But is there a likelihood of some more increases in the system? I would think so.

Q: Do you see the situation reminiscent of 1998 when non-performing loans (NPLs) in the system were high and interest rates had to be lifted because of the Asian financial crisis and rates remained high for quite a while. Do you see that we could go into that type of a situation?

Sukthankar: In some ways it is a bit different this time because you have seen slowdown in the economy as a precursor to what has happened in terms of the measures taken across a much more extended period of time so you have already seen growth rates come down gradually to sub-5 percent. Now there really isn’t any immediate visibility about when you have recovery. Clearly therefore this liquidity crunch only exacerbates the issues that you have in terms of macro. What impact that has on asset quality again?

You have seen an increase in non-performing loans and restructured loans at a system level last year or so and if there was an expectation that this was going to flatten out and perhaps over the next 12-18 months things could get better, that was clearly predicated on the economy going back from a 5-6 percent to a little higher growth rates.

_PAGEBREAK_

This tightening of liquidity and higher interest rates and the negativity in the sentiment which goes with that, probably pushes that timeline a little further and most people now believe that if 5-5.2 is more realistic than a 5.5-5.7 percent which was thought of earlier. So we are going to asset quality concerns remaining for sometime. Will they deteriorate substantially from here? I don't think so.

Q: The concern about large assets indebted companies, infrastructure companies, power companies is all digested by the system. Do you think we could also get to a point which we got in the early 2000 about retail assets becoming NPLs because we are seeing job cuts in the industry and it is at that time that EMIs are rising? Will there not be retail assets also joining the NPL list?

Sukthankar: You are right, so far, impact on asset quality pressures on retail and perhaps even small and medium enterprises (SME) has been somewhat low. The concerns have been much more on large projects and on all the stuff that we have already digested. On the retail side I think what could hurt is job cuts and perhaps the double digit wage inflation that we have seen in the last couple of years. So even if there wasn’t an increase in the number of people being hired, clearly existing people were getting wage hikes. And despite therefore higher inflation they were surplus enough to meet their obligations.

I would believe that even today other than mortgage most of the retail loans are fixed rate loans so there may not be an increase in the need for servicing by retail customers. So it is more likely to perhaps at the margin impact demand than asset quality. There have also in the last couple of years been other structural changes in terms of use of better data from the bureau, the level of aggression that we had seen five-six years back in retail lending that has been a little lesser.

So there is a slightly better and higher level of prudence that has been there in retail lending. So while you cannot rule out some increase in delinquencies and pressures on the asset quality on retail, I don't think you are going to see a sharp spike in retail NPLs or delinquencies like we saw in 2008-09 and 2009-10 period.

Q: We have seen a lot of banks hiking their base rates like ICICI Bank did recently, in general, how much do you think this hike in lending rates could really impact credit growth in the system because a lot of analysts now believe that credit growth for the entire banking industry could come down to as low as 10-12 percent. What is your assessment on how much credit growth could slide?

Chaudhuri: Different banks are positioned differently so since we have the lowest base rate among Indian banks, we are attracting a lot of interest from top corporates. So for State Bank of India (SBI) the credit growth year on year has been very steady at 20 percent. Even till yesterday, growth was 20 percent.

Q: How is deposit growth doing, are you seeing an increase in the market share in deposits?

Chaudhuri: Yes a significant one and we are seeing anecdotally some inflows from people coming in from liquid funds and parking it in banks as a safe haven in terms of return, not in terms of capital alone. So we are seeing a lot of inflows and our deposit growth on a year-on-year basis is about 15.4 percent. And deposit growth is so robust that we don't have a single penny of wholesale funding either in bulk deposits or in terms of CTC.

_PAGEBREAK_

Q: Do you think an increase in interest rates at the shorter end of the curve may be more durable than was expected earlier and that may lead to more base rate hikes in the system?

Chaudhuri: The way the base rate mechanism works you cannot distinguish between a short and a long. So if you increase the base rate it affects the short end, the short-term loans as also the long-term loans. So this will depend on the Asset-Liability Committee (ALCO) position, on the net interest margin position of each bank. For us the net interest income in the month of July has been 10 percent higher than that of June because in July we made a net interest income of approximately Rs 4200 crore compared to Rs 3900 crore.

So what we are seeing is that many corporates who had gone to the CP market are now coming back and borrowing from the loan market. So our return on the CP market which was 8.25, even if it moves to 9.75-10, we see an increase in our margins and net interest income. But we didn’t expect RBI to hike the repo rate by 300 bps, having done that they should have at least been transparent that I have hiked the repo rate by 300 bps.

Q: You had this meeting with the finance minister. Do you think that something concrete will come out of that foreign currency non-resident (FCNR) deposits with RBI taking the exchange rate risk. Of all the instruments that you all may have presented to the finance minister which do you think is most likely to happen?

Chaudhuri: I cannot comment on that, because it was more in the nature of consultation. That was the FCNR non-resident external (NRE) scheme, the country was taken for a ride that people are getting rupee interest rates and having their deposits in pound earned dollars. I think that is pretty atrocious to think of. Foreign Currency (Non Resident) Bank Accounts (FCNB) deposits if they are encouraged that would help, but FCNB deposits in a way do not add to the country's reserves. They help to cushion off credit demand in some ways, that some of the demand in credit instead of hitting the rupee counter hits the dollar counter.

We are looking at various options. The thing is that RBI has allowed rupee rates to be increased for three year and beyond. So what we said is that we need dousing the fire at the short end. So if you want them to be affected please allow the NRE rates to be raised at the short end, because at long end banks would not be very keen, except for some banks from Kerala which are overwhelmingly dependent on NRE deposits.

Q: You mentioned about Net Interest Margins (NIM) going up month-on-month. How are the Non-Performing Loans (NPL) doing? What is the situation with Non-Performing Assets (NPA)? Are you seeing changes there? Do you think that you may end up with 4.5 percent for the system, as well for your bank what is the situation?

Chaudhuri: I cannot comment on the system. There is a wide divergence in the system. I have been a strong advocate in saying that RBI should take up 200 top NPLs and give a uniform prescription from provisioning as also for the classification. Now there is a huge divergence. Like in the US, the regulator says that these are nationally-accredited accounts, nationally important accounts and they go to each bank and see these accounts and prescribe a certain amount of uniform provisioning.

Today there is a huge auditor arbitrage. If your auditor says this asset requires 40 percent and another bank has a more benign auditor who says 20 percent, so 40 percent goes, 20 percent goes. That is the micro part of it. The other part is that in asset quality now the prescriptions have become more reasonable and more attuned to Indian standard.

Earlier anything that missed the date of commercial production became NPA. I am happy that RBI has recognised that need not necessarily become NPA so I cannot talk about the system, but the NPA status gets known by about 20th or 22nd of the month, but as of now the NPA numbers of June are holding. We have not seen any increase in the month of July.