The one bastion which Indian women have definitely stormed into and conquered is that of ‘money’. The pun is intended. The top Indian bankers today are all women.
One such woman is Zarin Daruwala, who is not just a top Indian banker but also at the top of the biggest foreign bank in India. She is the MD and CEO of Standard Chartered India.
Daruwala in an exclusive interview to CNBC-TV18’s Latha Venkatesh touched upon many aspects of banking - bad banks, monetary policy, interest rates, loan growth, credit growth, GST, capex, digitization etc.
Below is the transcript of her interview
Q: First up, we are looking ahead into a monetary policy, so let me start this interview over there. The RBI has said that it is at neutral levels, so they perhaps will not cut. But what about money in the system? Do you think the cost of money can get cheaper, rates can fall?
A: I agree there is a lot of cash in the system, but if you look from a banker viewpoint, we are paying 4 percent for the savings account. If you take cost to serve of 2 percent and then add the regulatory cost of Cash reserve Ratio (CRR), Statutory liquidity ratio (SLR) of 0.4-0.5 percent, you are already at 6.5 percent. And then if you take the credit cost which is 0.5 percent, you are already at 7 percent. And you see the prime lending rate of most banks, it is hovering around 8.2-8.3 percent. So, clearly the headroom now, to reduce is very low.
The second thing is if you look at the government's small savings schemes, if you take the post-office five-year scheme, it is at 7.8 percent. Recurring deposit is at 7.3 percent. SBI, five-year fixed deposit is 6.5 percent. So, clearly, already bank deposit rates are much lower than government scheme rates. So, my personal view is the headroom for banks is very low now.
Q: I take you point about the costs, but incrementally? You are saddled with a lot of deposits, I guess about 40-50 percent has gone back after the withdrawal limits were removed. What do you do with so much cash? Deposit growth is still running after the withdrawal at 12 percent and loan growth is 4 percent. So, incrementally, at deposit rates, do you think they will fall?
A: Deposit rates, again, unless we look at the savings rate coming down, really as I said, bank deposit rates are really low. But yes, there is excess liquidity and credit offtake has slowed down. So, that is the causing a bit of an issue. But also, RBI has just lifted the limits on individual withdrawals recently. So, one has to see whether some more money will flow out. If you look at pre-demonetisation, there was Rs 18 lakh crore of money in circulation. Today, I think it is about Rs 12 lakh crore. So, one has to see whether some of this lifting of the withdrawal limits, whether that will translate to some more withdrawal of deposits from banking system into cash.
Q: So your sense is that bankers will take a call on the cost of money, term deposit rate or lending rate only perhaps, a month down the line? When can we expect a change, if at all?
A: I would say, I see the room for change very little. As I explained earlier, the flexibility or headroom is very little for the banks now.
Q: Let me come to loan growth and economic growth itself. One of the big changes in India has been the political stability and the state elections have reinforced it. Do you think that could be a catalyst for loan growth?
A: Loan growth is a function of many factors. One is how much excess capacity do we have in the country. Today, we have 72 percent capacity utilisation if you take the core sectors like steel, cement, power. And if you look at 2008-2009, before we saw the whole capital expenditure (Capex) cycle come, it was at 82 percent. So, clearly the imperatives for Capex are low. Second, if a company wants to do Capex, they might as well buy a stressed asset at some good valuation, if there is an asset available rather than take the Greenfield route.
The other thing that is there which can spur Capex is the public sector enterprises, they are sitting on Rs 3 lakh crore of cash. And if you were to even lever it one time, you can actually have a momentum of Rs 6 lakh crore of Capex happening. So, if you look at a gross capital formation ratio, it is really low. It has come down, about 5-6 years back, it has come down by 7-8 percent. And if you look at China, it has more than 45 percent. So, clearly, there is headroom to do Capex, provided the public sector expenditure precedes private sector Capex.
Q: Speaking about public sector itself, the Budget has been restrained in its fiscal deficit and perhaps rightly so, good for the bond markets. But, do you see signs of more roads getting bid out or railway orders? Do you see a public sector push to Capex?
A: Actually roads we have seen very good momentum compared to two years back. The other good thing in the road sector, two good things that have happened in the roads sector, one is that a lot of the stuck projects have been resolved to the satisfaction of most stakeholders and wherever they were not moving the government has taken the option of rebidding those projects.
For the engineering, procurement, construction (EPC) companies, one very good thing that the government did was that wherever money was stuck and there was an arbitration award, actually the government said if the banks gives a guarantee, the money can get released, 75 percent of that. So, that is another very good thing that has happened which has enabled EPC companies to get cash flow. It has started, early days, but some of them have started getting the cash flow to be able to re-bid for a few of the projects because earlier the issue was that while you will bid out the projects, there should be enough EPC companies to do the projects. So, road sector I would say great momentum coming back.
Railways again, clearly, where we see two years back, there has been a great move. To my mind, a lot more can be done because the multiplier effect of roads and railways for the economy is very high.
And the third sector where public sector spending can really give a good momentum is defence. The public private partnership (PPP) which can really give a big fillip. That kind of spending and all these sectors, the numbers are big which can actually kick-start.
And when I was talking of public sector spending, even the public sector undertakings (PSU), if you take the oil companies, they are sitting on a lot of cash. Really that can be leveraged to have a lot of transmission effect.
Q: In 2007, we were looking at the roadmap opening up in 2009 and foreign banks allowed to either buy Indian banks or not have any controls on branches. Now, what is the growth scenario? Are you really that dependent on branches? Do you think growth is better or is it less?
A: As foreign banks, we hardly get branches. Maybe amongst all foreign banks about 20 branches are given so that really does not give us many branches per year.
Q: But is that a constraint now?
A: I would say thanks to digital, it is much less of a constraint compared to a local bank, but then you are competing with banks who have 1,000-3,000 branches. So, it is clearly not an equal kind of competition, but having said that, digital is really helping us as a foreign bank. We are working on the entire end-to-end digital journey. We will be launching it this year and where it will be virtually real-time on-boarding of clients. All this is enabled because now we have a lot of digital infrastructure created by the government. So, we are able to do a lot of things at the backend where we can scrub the CIBIL database electronically, we can do the Aadhar verification electronically. So, you can actually on-board a customer very quickly. And to that extent, for asset acquisition, branches are no longer needed.
Q: Even very retail customers?
A: Yes, retail customers. Yes, you will need an underwriter for a mortgage in a particular location to be meeting the customer or doing document verification. But for personal loans and credit cards, you really can on-board a customer very quickly. On the liability side, I would say, is where a customer still wants to see a branch. So, while you may not need a huge number of branches in a city, you will need a few branches because a customer, at a time of crisis, wants to see a branch. He may never come for 2-3 years but in that, once in 2-3 years, he will want to come to your branch. He will need that safety or assurance that you are there physically.
Q: Do you think that this digitisation is all set to take a leap? We have a large amount of illiterate population and not too well-off as well. So, do you think in two years from now, you will expect digital to be big?
A: I certainly feel so. If you see the way the public is embracing digital, whether you take IMPS or Unified Payments Interface (UPI), despite UPI just being 2-3 months, we have seen I think four million transactions or something. So, it is massive volume of transaction that we are seeing. Adaptation by customers is very rapid with India having crossed US in terms of smartphones. To my mind, it is going to be a game changer.
Q: The banking sector is now I understand going to need 36 registrations because of GST, how do you see this, do you think this can be extremely disruptive? What would you want from the government?
A: Most countries, whether you take Australia, New Zealand, Malaysia, Singapore, they have only central registration and GST is only on fee. So, when you look at India, if you take SBI alone they have two crore transactions a day and the banking industry has 10 crore transactions a day. So, if you take a month, the size is mind boggling.
Second issue is that the whole banking system, the core banking systems that have been developed is with the understanding that customer has to be agnostic, he can be serviced by any branch, it does not matter. So, the whole way the banking technology is built is on the premise that he can be rendered service anywhere. It is anywhere banking.
Now in GST you are actually wanting to know where has the service been rendered. The other problem for the banks is that you can recover from the customer once. If two states claim, suppose the regional office claims that this is where is given and the head office claims in some other state, you will getting into endless litigation about - and you can't go to the customer and recover the money, you can't debit him twice. So, the banks can really run the risk of either litigation or going out of pocket and the multiplicity of transactions. Also till now we were just subject to service tax which was one point tax. So, it just makes the whole thing very complex.
One more thing is that public sector banks have to do an request for proposal (RFP). For them just doing an RFP is a 30-40 day process and we are talking of July 1.
A lot of the things are still not very clear, some clarity is still coming. So, till you have the full clarity, getting your systems designed……
Q: In the very least before April 30 you should have your fitment and rates and the details in place.
A: That is really worrying for the banking industry.
Q: Do you think we are going to see some big loans say in steel or in power getting resolved in 2017? I know these take time but this is a long time.
A: In certain sectors like steel I am aware that the government is very proactively working on some of the large cases along with banks. They are working towards a resolution. I think if you just take the steel sector and some 5-7 cases, it can solve Rs 1 lakh crore kind of problem size of NPA or restructured assets. So, it is really good that this progress is getting made. Having said that I think the big issue for banks, public sector banks especially is, the January 23 episode has put a little bit of a dampener in the decision making. Also we need more overseeing committees because it is just one committee and I think the number of cases that are there, I think we need more committees.
Q: How forthcoming has the reserve bank been, Arundhati Bhattacharya told us that you all have gone to RBI with some tweaks in the corporate debt restructuring mechanism. Are you seeing any early resolution, improvement in the resolution or changes to the resolution mechanism?
A: If you take the three schemes of restructuring - SDR, S4A and CDR, SDR you can do change of management. S4A has restrictions. So, if I have to look at sustainable debt and unsustainable debt, the sustainable debt is linked to last six months cash flows and next six months. Sometimes in stressed company that doesn't stack up, though actually on a steady state it would. The other complexity in CDR mechanism is, you can convert debt to equity only of 10 percent. If theoretically I want to do a debt to equity conversion of more than 10 percent, I can't do an SDR if it doesn't stack up, the cash flows don't stack up, neither I can do in CDR. I may not want to do SDR where I change management, I may just want to do it with the existing promoter and I wanted to convert 25 percent. So, the issue is that if you want to do a resolution which is tailor-made, sometimes it is not falling within the scheme. That is when Arundhati Bhattacharya has alluded to that point about a bit of tweaking.
If you look at the last cycle, CDR mechanism, although restructurings were very tailor-made to the situation.
Q: The other parallel solution that people have been talking about is bad bank. It has got strong proponents and strong a pragmatic opponents as well. You think we should go down that road?
A: Before we get to bad bank, we should step back and see what is it that is causing the issues? I think 2-3 big issues, one as I mentioned January 23, the CVC, CBI, all that is I think having a big bearing in the decision making of bankers in the public sector. The second issue that has been plaguing a lot of the decision making is very often in a large case you have more than 20 bankers. Just to bring consensus amongst all banks, is becoming an issue.
The third problem that you face is that for every asset that you want to sell, the buyer would be looking at 10 such assets. So, there are very few buyers and more sellers. So, this is the scenario today.
Having said that I think a bad bank works if we do certain things. One is that we have to quickly do it. If we take one year to setup the bad bank, what will happen is the clients will suffer because for that one year decision making may get slowed down. The second thing is where do you get the capital? Suppose theoretically the bad bank has a structure like a ARC where they issue security receipts (SR), then you again have for the bank 150 percent risk weightage on the SR. So, you are not in a way then solved for the capital problem of the bank. Unless you empower this bad bank with legal and whatever teeth that they want, it is not going to happen. Then the whole essence of doing in a time bound manner if it is not happening then even the bad bank will actually sort of go down the same route. So, if you do some things, it can be successful.
Q: You have so much of rich banking experience, you were in an Indian banking setup, Indian private bank in ICICI at the helm and now you are absolutely at the top of a foreign bank. What is the difference? Is it a big difference?
A: Standard Chartered has been in the country for 160 years and everybody is an Indian who works here. To that extent culturally it is very much like any other Indian bank. Having said that I think there are one or two differences. In ICICI we had one regulator - RBI. Here I have dual regulators. In a foreign bank like most foreign banks you have a matrix structure of reporting where most people have dual bosses, though I have one boss. However a lot of my people have dual reporting. So, that adds to the different style of functioning of two different banks.
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