Recapitalisation good for PSU banks; it will increase competition for credit: Edelweiss

He also expects the economic recovery to help expanding the overall credit pulling the economy.

Economy like India needs 17-18 percent credit growth for normal functioning, said Shah.

Will see aggressive provisioning in PSU banks for the next 18 months, he further mentioned.

I do expect a lot more momentum on bank provisioning and resolving the bad debt situation, which should help corporate activity in India, Shah said.

Below is the verbatim transcript of the interview.

Latha: Do you think now the tables are slightly turning and the hay day of NBFC is over?

A: NBFCs and private banks have been doing well for last about 25 years if you go back and see from 1994 onwards when the private sector banks opened up. So I think there are markets for all of this, but first of all, this recap is very good for the economy as a whole. I would believe that once the economy as a whole starts doing well, there will be opportunities for everybody.

You are very right, the competition for credit will increase because the private players, both the private banks and NBFCs, did not face as much competition from the PSU banks up till now, but I think this recap, at least half the money will go towards just the provisioning that is imminent on their NPL books and all, and the other half which will start coming to them for growth capital. So I will see this Rs 2,00,000 crore, about Rs 1,00,000 crore will go towards just the provisioning that was there.

If you see, after asset quality review (AQR) process, there has been a wave of provisioning that has been coming. I think this year the banks were facing a large amount of provisioning requirement. So this will obviously offset that requirement, and another Rs 1,00,000 crore will come towards growth of credit books in the PSU banks and for that obviously there will be competition, but hopefully economic recovery will also help in expanding the overall credit pool in the economy.

Anuj: We were just having a conversation with Vaidyanathan, because I am just trying to understand that whether the pie is large enough for everyone to still do well if the PSU competition is back because in terms of margins and in terms of the rates that PSU banks will offer, that will of course put some of the company’s like yours in a bit of a disadvantage. I want to understand from your point of view the kind of momentum that you have seen over the last three years, do you see that continuing?

A: I think it is a good question; all of us are trying to grapple with that estimate there, but I think there are four or five things that we should keep in mind. One is if you look at the last three years, the total credit in India was growing at about 12 percent. If you look at the last 20 years, the average credit growth has been 17-18 percent. So last three years we were growing -- for the system as a whole, the credit was growing a lot below the average of the last 20 years. So first I am hoping that this will restore the average back to 17-18 percent because in economy like ours where the nominal GDP growth is 11-12 percent, it does require 17-18 percent credit growth for the normal functioning of the economy. So one was below par will come back to normal.

In terms of I think pricing, I do believe that a lot of NBFCs, especially housing finance companies, and the private sector banks will face some pressure on yields and all. Our estimate very off the cuff initially is that the NIMs should come down by 10-20 basis point for the private sector players, but as I said, what was a 12 percent credit growth, if it goes back to 18 percent credit growth, the pie will also grow because the government banks will also coming back to the credit market, they will also expand the pie.

Thirdly I think we should keep in mind that this will also result in a lot of opportunities in resolving these assets because the biggest constraint for PSU banks up till now has been that they did not have capital to provide aggressively and then resolve the assets. So that is why there was a slow burn, a very slow drag kind of an approach because they were doing little by little. Now I think in the next 18 months, we will see a lot more aggressive provisioning and you know what happens once the banks have provided their ability to resolve, it becomes much stronger. So I do expect a lot more momentum on bank provisioning and resolving the bad debt situation that is there, which will also help corporate activity in India.

Surabhi: Getting back to the point of different type of NBFCs, would you expect, let us say much higher competition for housing finance companies, and consumer finance companies because that is where a lot of the banks perhaps would get aggressive. Do you expect that and if that were to be the case, then is margin compression something that might be inevitable?

A: I think on housing finance, I would agree with you. Housing finance companies will get aggressive, but the good news of that is State Bank of India (SBI) was always aggressive. SBI always has been a big player in housing finance and as you know, the capital adequacy of SBI has been very healthy. They just raised, about a year ago they raised about Rs 15,000 crore in a QIP issue. So SBI was never starved of capital. In the PSU bank universe, SBI is almost 35-40 percent of that universe.

Also, if you look at banks like Bank of Baroda (BoB), also did not face a capital constraint up till now. Punjab National Bank (PNB) and Canara Bank have their own housing finance companies which were also doing well. So four of the large PSU players were already aggressive in the housing finance space up till now. So how much more aggressive will they get for the private sector housing finance companies, is what we have to see. However, overall I would expect the larger competition will be in housing finance companies for auto finance, not all of consumer because the other parts of consumer, especially personal loan, credit card loans, and consumer durable loans, I would off the cuff not think there will be a lot of competition from the PSU banks.

However, auto loans, I think there will be a lot of competition. PSUs will step up a lot more aggressively on auto and auto market is coming back and I think PSUs will have an advantage on that. I would think things like rural finance and micro-finance is where also all the PSU banks will come very strongly. So it will depend on pockets-to-pockets, but things like consumer durable financing, things like structured credit, things like distressed credit, I don’t expect the PSUs to very aggressively come there. So the NBFCs which were more leaning towards these areas, will continue to do well.

Even SMEs I think will continue to do well because most of the SME opportunity was on top-up of what the SMEs were getting from the banks. So I don’t think that will get affected a lot more. However, housing, auto, micro-finance, rural finance, I think all this should see a much higher level of competition from the PSUs and some competition of NIMs will happen which will be good for the consumers and for the growth of the market.

Anuj: I want you to also wear the hat of a market expert. What does this mean for the market because we have seen Larsen and Toubro (L&T) for example for last two days seeing a bit of a re-rating, PSU banks have done well, but on the other hand we have seen a bit of a profit taking in the large private banks. Do you see this move having a larger market impact? We have already seen a big rally but could the economy facing stocks now start to do well?

A: I think as you guys have been saying, I think tactical reallocations will happen because you would have seen about a couple of months ago, the market cap of HDFC Bank became larger than the market cap of all the PSU banks put together. HDFC is about 5 percent of the banking universe and all the PSU banks put together are more than 60 percent of the banking universe. So obviously some reversion to mean from the private sector banks and NBFCs, back to PSU banks, there is such wide disparity of investment positions. So, I think that is part and parcel of the market – tactical reallocation, what experts call an overcrowded trade, that long private sector banks and short PSU banks. So that is what we are seeing.

I think on the short term, this is a good fillip to the market because it normalises the market. It is very good for the economy, I think this entire booster for the economy both, the recap as well as the highways investment plan that the government has unveiled is very good for the economy. We needed something as a catalyst to get the economy galloping away because I think after August onwards, economy had been coming back and this is a shot at the right time for that.

However, as again you guys have been saying, just the recapitalisation is only one of the many requirements that the PSU banks need. I think governance change and management compensation, incentive and all those are the changes that be should be followed. Those may be harder to do, this was also not easy to do, but this at least has been done very well. So I hope that this is a first step in the amongst many steps to really get the Indian banking sector on a strong footing because I think then the credit growth can go to 18-20 percent per year and that is the kind of credit growth this economy needs. Last three-four years we have been working at 11-12 percent credit growth which is not enough.

Latha: Is the market discounting this growth that it is inevitably seeing or is the market poised for much higher highs as the growth actually comes in?

A: For the last few months, there was this concern about slowdown and all and markets were reacting to that, but we saw the August numbers were very good, the September numbers were very good, the export data came out very strong and I think all the investors started getting convinced that the economy was on a comeback.

I think on a comeback, this will act as a big catalyst and booster dose and I think the larger impact on the market as a whole will be last eight months FIIs have been sellers and what we are seeing after the government actions in the last couple of days, FIIs are starting to get convinced about India growth story again. They feel that this demonetisation, GST, the apprehension that this has resulted in slowdown of the economy, have started to go away. I think if FIIs come back, we are already seeing that the Indian mutual funds are flushed with liquidity and investing in the market, FIIs have been selling and if FIIs if they even stop selling, I think that could be a very big catalyst for Indian markets as a whole.