Banking sector still a promising bet: Experts

Pramit Jhaveri, CEO, Citibank India, Debabrata Sarkar, CMD, Union Bank of India, Gunit Chadha, Co-CEO-Asia-Pacific, Deutsche Bank, Chanda Kochhar, MD and CEO, ICICI Bank, Pratip Chaudhari, chairman, SBI and Aditya Puri, MD, HDFC Bank, share their view about the environment in which the banking sector is headed.

Below is the edited transcript of the interview. Pramit Jhaveri, CEO, Citibank India: Six months back, the environment was generally fairly negative from both external and internal perspective. Growth rates were trended down. With the change in finance minister, number of change took place; there was a series of announcements in terms of reform, there was a general indication about the change in the government’s mood to be much more decisive in terms of action and both of those were greeted by a very significant and dramatic change in terms of the external perspective towards India and that was reflected in the capital that is flown in then. Q: What is the outlook on the banking sector for 2013 compared to what we saw in 2012 and 2011? Debabrata Sarkar, CMD, Union Bank of India: I have spent 30 years in the banking sector; I never thought there is good time for banker. At all times are challenges. It is not the question that only the time is difficult at this moment. I think every banker is facing some or the other challenges and we have to bet according to the condition of the pitch. According to Pramit Jhaveri in the present situation sentiment has improved a lot but only sentiment will not work, some of the reforms have been declared, all are encouraged but reforms should be implemented at the earliest. Second, inflation is still a concern, which has a direct impact on the cost of deposits and subsequently on lending also. Currently, deposit growth is quite slow because there are other avenues for savings and at the same time whatever credit quote present - 17-18 percent. The gap is always present. Q: You have a regional and a global role so put your comments in a larger context? Gunit Chadha, co-CEO-Asia-Pacific, Deutsche Bank: It is interesting; at a broad picture we are more optimistic on global economy than consensus and mildly optimistic on India as well. We think India should argue from a position of strength rather than a position of weakness. Global investors, foreign direct investment (FDI) are more bullish on India, compared to Indian entrepreneurs. So, when I come to India, I find more negativity than when I am in Singapore and the same is true for the banking system. Banking system in India runs a 15-20 percent return on equity with trading two-three-four-five times book and global banking system runs at 5 percent return on equity getting to 10 percent return on equity and trading at way below book. So, time for India to look at the strength of India and portray that because that is the way global investors see the India opportunity. Chanda Kochhar, MD and CEO, ICICI Bank: We have to understand that there is a whole set of underlying strength and opportunities. The opportunity comes from the fact that our demographics is going to give us a huge amount of credit growth opportunity, the requirement of investment in infrastructure will give us huge amount of credit growth opportunity. We are running the banking sector with decent return on equity, strong capital adequacy ratios, good quality of capital, having low leverage ratios and so on. So, there is a huge amount of strength. The current challenge is that we have to hope that the economy moves at much higher levels because that will give us a higher rate of credit growth. I think asset quality is not a challenge but it is a requirement that we monitor all our assets because every asset class is going through whatever the economy is going through. So, there is a huge requirement of monitoring ones assets, there is a huge requirement of ensuring efficiency in every way, one have to have a better net interest margin, to be able to take care of the other challenges that may arise. Pratip Chaudhari, chairman, State Bank of India (SBI): The first and the biggest advantage that we see in India is high savings rate, of course we have been helped by high interest rate. The savings rate is between 28-34 percent and banks with their network, distribution and people's faith in the system are still in a position to mobilize deposits at good rates. So at this point the challenge for the banks would be to shed bulk deposits. Getting money is the easy part now, why do you send it out? Because when you get money in it has a carrying cost. So currently we find that the investment cycle being what it is, the demand is coming from the household sector. May be it is a reflection of the people's savings because among the house hold sector savings there are different segments, the financial sector, real estate, gold or commodities. So they now prefer to go back and invest in their own homes. Aditya Puri, MD, HDFC Bank: I firmly believe that India's structural story for the medium to long-term is intact. Do we have some problems in the interim? Yes. Are we probably towards the bottom of it? I think so. Are we making progress? I think the fact that we got FDI passed, we got the National Investment Board (NIB) leaves me far more optimistic, I am not sure how long the transition will take. Within that growth rate of around 5.5 percent this year, going up to 6 percent if our investment cycle starts that is where the delta is and I do believe that doesn’t require political backing that should come about. As far as looking in the context of whole world, the world goes around. If you look at what they think the European banking system is going to look like after the restructuring? It will like Indian banking structure. So it is not that we don’t have problems, I think they are identified, we are better off then the fiscal cliff, we are making progress on a relative basis. We are still in the best place to be. We have also underestimated the changes that are happening in rural India. So finally, coming to banking I still do believe that this is the best opportunity for financial services globally. Q: I would like to focus on monetary policy. You have been the most outspoken in asking for a substantial cut. What is your perspective on why do you think that the RBI is wrong? Chaudhari: They would have their own compulsions, so the RBI would always be under request from both sides those who want lower interest rates and those who don’t but there is another opportunity coming up in January. So may be this was one of the monetary policies where there is no formal declaration but just a publication. So possibly they had kept it there but personally a CRR cut would have slightly boosted the sentiment. But then RBI also has its responsibilities for inflation fighting so that might have swayed their overall decision. Q: The correction in the official policy rates has been only 0.5-1 percent but effective rates have actually softened much more is that correct? How do you see that happening? Kochhar: When we look at effective rates we should look at what is happening to the wholesale deposits, retail deposits, blended cost of funds for the banks and lending rates? We saw sharpest correction in wholesale deposits. In fact I think with the liquidity becoming easier, the CRR cuts and so on if you look at from the beginning of the financial year to now, wholesale deposit rates would have actually softened by at least 1.5 percent. On the other hand the retail deposit rates have not really come down. Secondly, the current and savings account (CASA) ratio in the system is not improving, it is only coming down. Given that, the blending cost of funds for the banks has not gone down as much, probably gone down between 25 to 50 bps or so. In a way that is what is reflected in the lending rates as well. Base rates have gone down effectively around 25 bps for most banks, some did it earlier, some did it later and then across different products the rates have gone down between 25-50 bps. So when we look at rates we should look at how it translates across different segments and finally what is the impact on lending rates. Q: If you look at the total fund flow from the banking sector to the commercial sector it is not the 18-19 percent that the credit growth shows. It is actually in single digits. So is the banking sector in some way failing to meet the needs of the real sector financially? Puri: If I wasn't a banker I would think all the problems and all the solutions live at the banks. If the fellow doesn't need the money what do you want me to do? I am in the business of lending money, you go and sell your product, you need money I will lend to you. Deposits are not growing because money supply is not growing. Chaudhari and me mentioned the same thing. If your money supply grows at 13 percent your deposits should grow at 13 percent, put money in the system. _PAGEBREAK_ Q: Do you think the banking system can deliver what the political system is now asking, the mobile, ATMs? You have very tight timeframes to all these changes in the air suddenly, can the banking system deliver? Chaudhari: I think we should think in between zero and 100, there are 99 numbers. We should not think of the god’s perfect product that banking system will go and deliver at somebody’s doorstep. That is something the post office does by way of money order, but it is hugely expensive.
If we don’t achieve that ultimate objective, but can put the money in the beneficiaries account that itself would be a significantly high or a significantly large scale transformation. For example, four or five years back most of the state governments were reluctant to put their salaries and pensions through the banks. These banks making pension payments happened 30-35 years back. An elderly gentleman said I have one thing to be grateful to the government about taking the pensions away from the treasuries into the banks.
So, similarly we have moved the salaries even for teachers. Now the next step forward can also be done, but we should not expect going and delivering at the doorstep. Putting it in the person’s account itself should be good enough. Q: Can I get the perspective of the two largest private sector banks with the largest branch networks. Do you have a role in this at all? What’s the pressure on you if anything to get into this or are you slightly removing from the action? Kochhar: No, I think we have a big role in this. I would say not on account of any pressure, but on account of our own belief.  That some of these things are going to be the India of the future.
So, if one looks at us, we have more than 10 million of no frills accounts. We have created these over the last two years and are now getting linked with Aadhaar. These are accounts the electronic benefit payments – the various benefits of the government schemes. Q: Is Aadhaar number enough to get a bank account in ICICI? Kochhar: Now it is, but there is a process. One still have to do an account opening process, but the Aadhaar number helps quite a bit. I would not say that all these accounts have been opened on the basis of Aadhaar number.
This process started even earlier than Aadhaar number started. There is a huge opportunity if we make the process, an ecosystem. Very simple to say Aadhaar number, banking account and electronic benefits transfer. If all these really seamlessly come together, there is a huge way of taking banking to the unbanked on a low cost basis. Q: What about HDFC Bank? Puri: We have a huge role to play. Let us be clear financial inclusion is a political, economic and social necessity, but let us not just restrict it to this cash transfer. As far as we are concerned, we take this as a major opportunity in taking banking to the unbanked. We start from the bottom of the pyramid. We do sustainable livelihood within the bank. We have helped 1.1 million people come above the poverty line. We have a target of 10 million over the next three years.
Secondly, if you see the product range and our distribution, which now moves 60 percent into the semi-urban and rural area, it is matching with what is required in semi-urban and rural India. We have the widest product range along with State Bank of India in terms of what is required in rural and semi-urban India. Q: One of the big threats seems to be a downgrade by rating agencies because when then India will lose its investment grade. If it happens, will that be the end of the world or will India continue to be attractive? Gunit Chadha, Co-CEO-Asia-Pacific, Deutsche Bank: It could happen, if the GDP growth heads further south into 5 percent and below, fiscal deficit moves up and currency loses significantly more value. It has already lost 25 percent YoY.
It could happen, but the probability is low. However, it is one of those events where the probability is low, but the amplitude is high. If that happens then India has a serious issue in terms of attracting capital. That could happen in terms of a sharply falling currency. I agree with Chaudhari that it is better not to get into the problem than find ways to get out of that problem. Let us not underestimate the implications of a rating downgrade on India. I do not think it is something, which in our eyes is the likely outcome right now. Q: Do you agree that the impact of a downgrade however a remote possibility will be substantial? Pramit Jhaveri, CEO, Citibank India: Without conjecturing on what will happen because your question was what if it happens, my own sense is at the end of the day one has to look at capital in different colours. If a downgrade happens, it really is going to impact institutional capital. If one looks at capital of the strategic kind which is FDI, at retail individual capital and at invisibles it is obviously going to react very differently.
So, I am a little less concerned than Gunit is, if that were to happen. Yes, it will impact the kind of capital that is completely rating driven. When one looks at strategic FDI capital, I do not think they are looking at the ratings, they are looking at the long-term 15-20 year opportunity in India. If one looks at some of the other sources of capital that we have been very fortunate to attract over the last few years, I think that will remain unchanged. Q: What are the customer surveys of banks showing about the service standard levels, especially in urban areas? Are they improving or going down? If they are going down what kind of steps are being taken to alleviate the issues that are being raised? Is the market showing any concern about how the customer service standards in banks have changed over time? Pratip Chaudhari, Chairman, SBI: When we were looking for a software system to take care, the biggest difficulty we came across was that nowhere in the world banks do such diverse things. That was lending for small shops and agricultural crops, collecting utility bills and using scholarship money.
So, in terms of range it has very significantly changed. I would not take the credit only for banks. RBI has put in a number of things, with one mechanism that is National Electronic Funds Transfer (NEFT) or Real Time Gross Settlement (RTGS) one can transfer money right across.
Today one looks at the number of activities that the banks finance and even on the deposit side have been done with the minimum balance. Literally with USD 5 of deposit or Rs 200 of balance in the account one can run a savings bank account. I do not think that is feasible anywhere in the world.