In an exclusive conversation with Moneycontrol, Saurabh Tripathi, global leader, financial institutions at Boston Consulting Group (BCG), warned that the banking industry may be up against an existential crisis. One reason he gave for this was the heightened regulatory oversight the world over, including India. Another possibility he pointed to was the diminishing number of large corporate loans, which too could raise questions about the relevance of banks. However, Tripathi was confident about the growth trajectory of banking sector in India, largely owing to positive economic factors, but cautioned that how one adapts to technology will be a critical thing to watch out for.
Edited excerpts:
How do you believe that banking in India has changed after 2015’s asset quality review (AQR)? Are loans getting underwritten better today versus what we saw prior to the AQR?
AQR and the whole issue that happened with bad debts through large infrastructure financing highlighted the risks of a certain type of lending. Most banks have understood that and the banking industry has become quite careful about it in general. After the cleanup, there was a general belief that corporate banking was about to take off. But it didn’t play out really well. There are some underlying concerns around high levels of unemployment, problems in the rural market, and some of these concerns translate aggressively in the corporate investment cycle. Indian banks are on a continuous journey to improve the quality of data analytics. More has been done on the retail side. But, if I am to be honest about it, I think a lot more can be done on the business side, on the corporate side. This side is slow in using more advanced methods to assess risk.
The last report by the Reserve Bank of India (RBI) indicated that capacity utilisation is at an 11-year high. But that's not yet translating into brisk capital expenditure as such. How do you see capex evolving from a bank lending perspective? Will we be leaning more on bank loans to fund capex?
Most financial institutions are recognising that now there is another source of debt for corporates. Corporates themselves don't jump to bank loans. That's a very fundamental change in demand that has happened. The whole concept of private credit is a big thing outside India, and it's starting to become big in India also. Indian corporates now are much more comfortable with equity-based funding rather than debt-based funding and also, private credit in India that comes through the AIF (alternative investment fund) route. Whether the large-ticket lending will go to shadow banking or not is the debate happening the world over and it’s a very big issue in the banking sector. It may diminish the role of banks in all economies, given by heightened regulatory pressure on banks.
If large-ticket corporate loans were to be missing from the ecosystem, aren't we building an artificial pressure on the retail front?
Banks the world over and in India have a very serious business model challenge. It's not simplistic. The nature of demand is changing on the corporate side. The RBI has also highlighted that there is a genuine concern about certain pressures in the retail book, etc. India continues to have a very high need for credit as an economy. We are nowhere close to saturation in how much credit the Indian economy can absorb. The bigger point is that it's not about growth of the lending book but about growth of revenue. Then there is artificial intelligence which has come, and we don't know how to deal with it. Regulators are going to apply more cuts on banks. We are going through an adjustment phase in the global banking industry.
Do you see some of the smaller banks falling by the wayside in the whole process of readjustment because the cost of technology can be quite exorbitant?
Indian banks have managed to get by with less than global standard investment in technology for the last 20 years. Technology costs will go up and capability to manage technologies will be very different. Smaller financial institutions have a bigger problem, not just with their size but the ability to attract talent. In the past, we have seen that action is taken only when the crisis is really on us. Now I'm hoping that the regulator will take a lot more proactive action in managing the less capable segments of the Indian banking sector than waiting for a crisis. We need more consolidation in the banking sector.
What about with public sector banks? Despite the rounds of consolidation, they aren’t there yet for foreign investors to take a bet on.
A few banks are much larger than they were earlier. They have got better talent now. But that’s not enough. The paradigms are not necessarily aligned to very highly capable, talented technology teams. While there has been some movement with these banks, we may not be able to expect more because of a lack of political upside. Also, PSUs never attracted foreign investors. They may continue to have a serious discount to a fair valuation given the governance challenges and transparency that they normally will expect.
How are you evaluating the interest in capital flowing to private banks?
Foreign capital interest for private banks is very high. Indian banks are valued at the highest in the world. But they would only go for a few banks. A foreign institution investor sitting outside the country doesn't have the ability to understand the banks in detail, especially with small banks. They only look at top few. That explains the huge valuations. I don't see this changing soon, unless we have some very big structural change in the landscape.
What about some big-bang initial public offerings from fintechs?
Fintechs are very exciting because they create consumer experiences that are spectacular. After the Paytm episode, people will be reasonably cautious.
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