Singapore: Competition in India’s banking space is good for the consumer, and will also make existing banks more agile, adopt digital technologies at a much faster pace, and innovate fintech solutions. With several new payment banks and small finance banks due to launch operations, competition will bring the much required new energy into the sector. This was the consensus among panellists at MintAsia’s second global banking conference in Singapore on 15 November.
The event took place on the heels of the India announcing on 8 November that Rs500 and Rs1,000 bank notes will cease to be legal tender from midnight as part of a crackdown on unaccounted, untaxed wealth, terror finance and counterfeit currency.
Dinesh Kumar Khara, managing director, State Bank of India (SBI); Bharat Padmanabhan, managing director, regional head, Asean and South Asia, Standard Chartered Bank; and Julian van Kan, managing director, head of banks and intermediaries, Asia Pacific region, BNP Paribas, were on the panel to discuss the demonetisation of high-value bank notes and brainstorm on India emerging as a hot spot for the banking industry. The discussion was moderated by Tamal Bandyopadhyay, consulting editor of Mint and adviser to Bandhan Bank.
Bandyopadhyay: Let me begin with Dinesh from SBI, the country’s largest lender. You are getting a sizeable amount of deposits from the demonetisation drive, and this will bring your costs down. This will also help bring down interest rates, and it is, therefore, good for consumers. If we can address the logistical challenge of demonetisation, it should be good days for consumers in India. Give us a sense of what is happening in India?
Khara: To put it in perspective, on day 1, the money that flowed in from demonetisation was equivalent to what we had mobilized in 30 days the previous month. The outflow is much lesser when compared to the deposits, and this is not because people don’t want to withdraw, but because there are ceilings for withdrawal. When it comes to the common man, we are all aware of the stress they were going through because of the black money component in the economy, and it was eating away part of their purchasing power—that was a reality.
The common man is willing to go through the hardship which they are currently facing. There have been some issues and instances for which we feel very sorry as well. As a banker, and as a community of banks, we are geared up to meet and mitigate the challenges and hardships faced by our customers. We are trying to find out ways and means on how to address the problems they face. It has been as much a challenge to us as banks, as it has been to the common man. People are depositing their money into their current or savings account primarily. The cost of deposits is going to come down substantially for banks. As far as interest rate softening is concerned, it is bound to happen. Interest rate on home loans will come down further. This will also lead to a better compliance culture as far as taxation is concerned. This will shore up the revenue of the government. This will also lead to a reduction in fiscal deficit. This will have an impact on government borrowings and it will also have an impact on the base rate. Securities will be priced lower. By far, the sense we are getting is that, we are set to move to softer interest rates, and this is set to benefit the corporates as well. The investment scenario will also change. Corporates will be encouraged to take a leap of faith.
Padmanabhan: Directionally, demonetisation sounds positive to me. The impact of demonetisation and its impact on the economy—two months or six months from now—none of us, or at least I can’t predict. But people are looking at it from a positive aspect that in the long run, it will reduce fiscal deficit, yields will come down—it will be positive on inflation and liquidity side as well. If you were to look at this, along with GST (goods and services tax) that is coming in, and the direct benefit transfers and proceeds from disinvestment—if you put all of this together, the government has a lot more headroom to do a lot more things—be it increased spending in infrastructure, healthcare or education. Structurally, if you look into the government balance sheet, it can be managed in a non-linear fashion. From a broader sense, it is positive—but we face a challenge of managing the current phase, and we are all hopeful that over a period, once the currency starts flowing in, things will stabilize, and hopefully over the next couple of days, things will improve.
van Kan: Let me draw on my experience. In the past five years, I’ve been working around Europe extensively on restructuring of certain banks in large economies from Ireland, Italy, Portugal and, most specifically, Greece. We’ve also seen attempts to on-board or nationalize some of the wealth that had found its way out of the country. It is difficult to make a direct comparison, but the impact that the Indian government is trying to create form demonetisation is twofold. First and most important is compliance… this is a cynical way of doing it, but a rather direct way as well. Second is bringing the wealth back into the system—is that a bad thing? No. Maybe, the timing is interesting. I don’t think any geography has done anything of this scale before. The only geography that has attempted to do something like this is the euro zone itself—we took away the national currencies of people and replaced it with the euro—with new banknotes and coins. Yes, that was done over several months. Maybe, there were lessons to be learnt from that.
Bandyopadhyay: Bharat, how do you look at India now, especially since the worst is over for Standard Charted there. You had gone through a very tough time over the past two years in India. Your CEO Bill Winters has himself acknowledged that with Essar Oil’s sale to Rosneft, you will get most of your money back (from Essar Group). How do you see India now? Can you share details of how much money you will get back on account of the Essar deal?
Bharat Padmanabhan: I can’t engage in any conversation on specific clients. We’ve undertaken a strategic review—we’ve gone through our entire risk tolerance abilities… and we’ve moved forward as a bank. India continues to be a very important part of Standard Chartered’s Asia, Africa and Middle East operations, and clearly accounts for a significant part of that business—we continue to invest in India and we continue to service our retail, commercial clients and we continue to serve both international and large local clients in India. We look forward to continuing to invest in India. We want to do more in India.
Bandyopadhyay: Let us look at competition. We have already two universal banks up and running for over a year now, and between now and the next 6 months, we could have maybe another 8 new players. How does SBI view the entry of the new banks?
Khara: This question engages all bankers. Presently, all banks are into deposit raising, credit lending and payment systems. We are looking into the new set of banks that are going to come, particularly the payment banks and the small finance banks—they are getting into one core activity only; and to that extent, their area of activity and operation is limited. Second core point that needs to be kept in mind is that when it comes to banking, particularly in a country like India, we cannot think of having banks without brick-and-mortar operations—it has to be a combination of digital and physical branches for banks to have a reach and be successful. This is a major challenge for any new entity that comes in—unless they scale up, they will not be in a position to raise the kind of resources that are required to take on established banks. If entities are migrating themselves from NBFCs (non-banking financial companies) that have a widespread network, there is a possibility they can have the ability to raise deposit at a cheaper cost—they will have the advantage of being nimble-footed in terms of being near to the customer and they will be in a position to take decisions that will be in the interest of the customers. But having said that, existing players are mindful of competition, even though they have the advantage of having their networks already in place—they are all going digital, too. The only requirement is that existing players have to be more nimble-footed in terms of their decision-making, in terms of carrying out policy changes that are in sync with what their customers want. If we talk about small finance banks—they will probably capture the cash-flow based financing as against the traditional balance sheet-based financing, which was being done for SMEs (small and medium enterprises) all this while. Typically, with most of the economy being cash-driven, most transactions were not getting captured, and to that extent, much of the SMEs were not getting financed adequately, and banks are aware of this situation and tweaking their policies.
I would say that competition always brings in new energy that is required for the sector. The new players will make existing players more agile. Existing players have the advantage of learnings, past practices… In the past, too, when competition came in, public sector banks responded very well.
Bandyopadhyay: How do you view fintech? Foreign banks can no longer say they can’t expand in India because of lack of branches. You can take the fintech route.
Padmanabhan: This gives me an opportunity to do some publicity. We were the first ones to launch UPI (unified payment interface) for corporate customers—UPI has been launched with retail customers—so we are looking out, and looking out very seriously to adapt our presence and capabilities in the market.
With fintech, the switching cost for a consumer is so low; therefore, in order to contain a customer, it has to be very special and transformational. You now need to think about what kind of personalized solutions that one is providing.
This is the way things will be as we go into the future and there will be a balance. I have no crystal ball to predict exactly will happen. I am drawing from the experience we’ve had with competition in the past—in the dozen years of competition, PSU (public sector unit) telecoms lost about 70% of their market share, airlines in about 5-6 years lost about 25% of their market share… when you think about the way we are, we will have to think about a balance, but remember that India’s situation in telecoms jumped not because of landlines, but because mobile just took over. Possibly, we may see that jump in banking, but I don’t have a crystal ball—but this is the direction that we need to go. There will be a mix of the use of branches plus digital and fintech.
van Kan: Fintech is real. It is not shadow banking anymore. I am invested in a fintech business… peer-to-peer that is computer based, and therefore by definition is fintech. We all know about KYC (know your customer). That’s no longer a banana skin. But the biggest banana skin is fraud. How much attention are we paying to fraud. So, with all this technology, what are we doing? We are actually opening ourselves up to things we cannot see. To me that’s the biggest banana skin.
Khara: Banks probably need to do the collaboration with the fintech but also have to operate in the kind of a regulatory environment in which they are already working. So, eventually, they have to strike a balance for the ultimate good of the investor.
Bandyopadhyay: Dinesh, can you give us a sense in percentage terms—what part of your transactions go through the bank, what part of it is via mobile, and what part of it comes via the Internet?
Dinesh: As of now, 79% of the transactions are being routed through the Internet and ATM, mobile and other means where the branch or bank is not physically involved. So bank is only 21%—because we are serving all walks of life in India. So, 80% of your transactions are through non-branches. Yes, we are in a position to do that because we ramped up our ATM network substantially and many people are walking into ATMs for their transactions. So, that is something that has happened. Almost 25% of the transactions are happening through ATM channels, which is actually very widespread.
Today, if we open a branch in an upcountry location and we don’t provide an ATM, people will begin complaining about it. The ATMs have got into the system—it is a given thing now. If we look in terms of operations, our ATMs are certainly profitable.
Bandyopadhyay: Let us now discuss non-performing assets (NPAs). The RBI had started the so called asset quality review, and banks were given time till March 2017. The banks said they will do it across one or two quarters, but as we talk, even in the September quarter results, NPAs are growing. SBI has gross NPAs crossing 7% of your total assets. When was the last time that you were at 7%—a decade back? You have a 90% drop in group profits. Is the worst over?
Khara: I will come to the fact about drop in profit first. The drop in profit is attributed to aligning the asset book of our associates (affiliate banks that are to merge with SBI), which also meant that the interest reversal, which happened in this quarter, and the provisioning also was aligned… Other pieces relating to this kind of number in terms of NPA, which is looking very big, there are two reasons. One, when it comes to the growth in assets, it has not really happened in the last quarter. So, that is one reason why the number is looking very alarming. The second piece is the NPAs in terms of age, we are required to provide the higher provisioning in terms of the norms.
Bandyopadhyay: Is the worst over?
Khara: I would say that it is the function of the real economy as well. As of now, whatever we are perceiving, possibly we are quite hopeful that we get to see the resolutions also going forward. Also, mind it when the resolutions start happening, whatever has been provided for is all going to come back. And many of the assets are not really bad. They are good—but their inability because of the markets not doing well—their inability to really move in the market is something which is holding it back in terms of performing assets.
Bandyopadhyay: Julian, you have a charitable view on NPAs. You are of the view that NPAs of Indian banks are much lower at 8 or 9%, when compared to that of some of the larger global banks, which are around 25%.
van Kan: One has to applaud the way that the Indian system has worked. Because you have taken a universal approach across the whole banking system. As opposed to some of the other jurisdictions where we have just seen that the banks have to treat it themselves, so you could actually have one borrower defaulting with one bank but it doesn’t have an impact elsewhere.
Is that the right way of looking at it?
So, taking a universal approach I think works very effectively. Does it mean quite a bruising effect across the system taken as a whole?
We actually make a distinction. First of all, what are NPLs (non-performing loans)—is it can’t pay or won’t pay? I think that is an important part. The second thing is the way you look at it—do you have a legal framework for recovery? In India, you have a legal framework. But the British actually gave you one thing—time. The legal system—we need to do something about accelerating the process a little bit… because that will help you an awful lot on your writeback, because it is the writeback which is now going to be the next focus. It’s not about how much more I have to make provisions for, but how much more do I have to write back. And I think that’s important.
Bandyopadhyay: Every time we ask banks is the worst over, they say, “stupid, just look at the economy”. So, everything is linked to the economy, right? Is the worst really over? Bharat, what is your view?
Padmanabhan: I am a lot more positive about this whole situation. One thing currently is that this new demonetisation impact, whether it will last—hopefully, that will be short.
But you know one of the questions that I have in the mind is in the middle of this year, the government did help with capital infusion in about 13 institutions to the extent of about $3.5 billion, and you also had the Reserve Bank of India helping with other core tier-1 capital so that banks could start using their revaluation reserves, property, from deferred tax… these are all helpful. But we just need to think about this whole situation as a market as to what are the needs in this market now—what is the imperative in this market? The biggest thing that everyone is talking about, your magazine spoke about, India needs at least $1 trillion for infrastructure financing, and where is that going to come from? Now, when you really see the impact of NPLs across institutions due to the cycle that we have been through and we have seen, it almost gives me the impression that there are various estimates somewhere between $35-50 billion of new capital that is needed for the banking system.
Now, I don’t know which number is correct. But the fact is at some stage, we need to start looking at how are we going to finance this infrastructure, and typically it has been through banks, and banks have taken hits along the way… The forecast is that roughly, if you see, we would still have about one-quarter to one-third of the balance sheet basically made up of infrastructure, personal finance and mortgage finance. That’s pretty substantial. So, what is needed is a few things not only around infusion of capital which the government has started but also probably start relook at the depth of the bond markets. And clearly, as a market over the last decade, whether you saw lending double-digit growth, whether you looked at assets double-digit growth, whether you are looking even today at personal finance and mortgage finance, still kind of positive tendencies, with typical dips between 13-15%, but broadly in the right direction. I do see, hopefully in the next 12 months things improving. I see light at the end of the tunnel.