Shikha Sharma, CEO and Managing Director of Axis Bank, discusses the state of economy and the future of her bank in an exclusive interview with Govindraj Ethiraj on the show Bottomline, aired on Headlines Today. Edited excerpts:
Q: What really is ailing the economy at this point of time?
Well, if you look at consumption it is actually holding up quite okay. So the good news is that whether it is rural consumption or urban consumption, by and large it has done well. The economy is pretty much a domestic-focused economy, so we remain relatively insulated from what happened in Europe or anywhere else in the world. That is the positive side. The negative is that we need to invest. We need to invest in terms of capacity to build our infrastructure and that has been slower than one would have liked to see. And when that slowed then obviously you have lesser opportunities for employment generation and this could potentially slowdown growth in the future.Q: But there is also an overriding sense of despondency. The despondency is felt differently by different people. So how would you see it?
I feel despondency always happens. Frustration is always there when there is an expectation and reality gap. I think for most of us the great news is that post the 2008 crisis India sailed through really well and we came through that crisis very differently. We actually managed to decouple from what is happening across the world. So here was an opportunity for us to see several decades of high growth. That is the aspiration and if we have to realise the aspiration of a population of more than a billion then I think it is important for us to get high rates of growth because that is the only way we are going to get people out of poverty. And that has not happened because we don't have the right policy framework to be able to quickly build capacity whether it is in terms of infrastructure or other investments that we need to put in place. I think, that disconnect between the expectation and the reality is what creating the despondency.Q: Were we boosting our expectations?
I want to answer that differently. Do we feel there is a need to have more power in this country? There is need to have more roads in this country. There is a need to have more ports. There is a need to have a better urban planning. Do we need to have better supply chains on food delivery from rural market to urban markets? Is there any disagreement in that issue? I think there is no disagreement. Do we have the capability to do it all? Yes. It is not happening. If it were to happen, the growth rate will be higher. I think that pretty much answers the question whether we need to grow at eight per cent or not. I think we can and we need to think about what is it we can do which will enable this to happen and will enable growth to come back.Q: Is the despondency of a few affecting the mood and the thinking of country at large?A:
I think what has slowed down is the investment cycle, therefore yes, currently it is a few people who would have invested, who are feeling more disappointed. But if we do not invest and we do not create the jobs then I think the despondency can spread to a much larger group.
Let us look at banks. A bank like yours is continuing to grow regardless of whether growth goes up or down. Whatever crisis hit, whichever zone went through a problem, I think the growth has been sustained. Can one say that a country like India will continue to save and there will be opportunities to lend and to that extent you are only the beneficiary of a rising tide?
I think the good news is that because of the diversity and the scale of India and the fact that we are a very domestic consumption oriented economy, there is flow to the growth rate that we see, and because there is a flow to the growth rate, whether it is banking or any other industry we see a minimum growth come through. And coming back to banking, yes there is a saving source that continues to happen because people continue to earn and save and there is credit growth that continues to happen because retail consumers continue to consume and there are smart businesses which keep planning to get better every day and make small investments. But the question comes back - can we do better? And what is it that we should do to do better?Q: Are you grabbing market share or you are growing because market is growing?A:
I think it is a bit of both. When you are a mid to large sized bank, then clearly the opportunities in the economy impact what you can do. So, for instance, savings is growing at 16 per cent and we (Axis Bank) are growing at 20 per cent, so yes, we are benefiting from the growth of the economy but we are also benefiting in terms of gaining market share.Q: What is the portent for the future? If a lot of your growth is going to be the market share growth, does that mean the fundamentals of the system are relatively weaker than what they were earlier and therefore could play out differently?
The GDP growth has clearly dropped from 8.5 per cent to 5.5 per cent or whatever. That means that credit which has a relationship with GDP and savings has dropped off as well and that has dropped off for the system. But I think moods can change quite quickly. The fundamentals of the economy are very strong; we still have the opportunity to build out investments which will create employment and which can lead into a virtual cycle. The great thing that India is going through is that we have a very vibrant democracy. So, despite frustration we have many opportunities to let out that frustration and therefore we continue to have a large population which has aspirations and works hard every day to better its lot and thereby add to the economy. I think those are great things going for us and therefore I generally believe that sentiments can turn around very quickly.Q: Let me come to some of the areas you are exposed to. You are exposed to power generation and distribution, which is the largest exposure, then infrastructure and construction and then come finance and metals and so on. Are you sitting on a powder keg of an investment portfolio?
First of all let me clarify that when you talk about power being the single largest segment of exposure, you are talking of a large and mid corp. exposure which in itself accounts for 50 odd per cent of our book. As far as power is concerned, clearly there is uncertainty right now. We don't know what is happening on the fuel supply issue. There is clearly a situation where there is going to be a demand and supply gap in the country for a long time to come. I think if anything in the situation is going to move more in favour of higher capacity.Q: There is no doubt about that.A:
As bankers, our job is to look at the fundamental long term viability of these projects and as long as there is long term viability of the projects, it is our job to find the right financial structures which will cater to long term viable projects.Q: You have been a banker for two decades now. What is fundamentally different about the economic situation this time?A:
If I look back at the 30 years that I have been in financial services it seems to me the present is a very interesting time because India has a lot more confidence. We have that confidence because we have proven that we can compete in the global arena which we did not have 30 years ago. We had a much more protected environment. When India opened up we had to prove to ourselves and to the world that we could compete globally and that has happened over the last two decades. So that is a big plus and I think that confidence translates into many arenas. It translates into our ability to execute, it translates in terms of aspirations, it translates into the number of entrepreneurial ideas that we see today. Interesting ideas, small and big which are many more than I have seen in all my life in financial services industryQ: So there is a lot of good going for us. If we have seen worse then why should we be feeling… A:
We actually feel more frustrated to think we can do much more than is being done. We believe there is an opportunity but we are not able to fully realise it. So I think that is really the difference from a very philosophical point of view. I think from the economic cycle point of view the issue is that we are operating in a very different world. We are operating in a globally connected world, more connected than we have seen for a long time and therefore there are some things that we can insulate ourselves from which is the extent to which domestic consumption helps. But markets are globally connected and therefore I think it is difficult to operate a policy which is disconnected from what is happening globally, whether it is in equity capital markets or debt capital markets.Q:Are you more risk averse today than you were a year ago?A:
Obviously. I think when the environment is more uncertain you have to be a bit more risk averse. But I would not say that it is a general statement. I mean that we have to look at where has risk changed and therefore where we need to be more cautious and where is risk is looking healthy and fine and therefore we continue to invest in those segments.Q: With non-performing assets (NPA) of the system rising, more banks are going to be risk averse. Then how will growth come back on track?
I think growth will come back on track provided some things change in the environment. So if you're being more cautious today it is because of the environment that we see. If the environment changes tomorrow, it will be different.Q: Is the banking sector as a whole heading towards troubled times than before? I am using rising NPAs as one yardstick. I saw a figure a Crisil prediction of more than Rs 325,000 crore by 2013 compared with Rs 115,000 crore in 2012...
I don't want to react to specific numbers which someone else has thrown out, but generally if there is an economic slowdown and margins of companies are declining, it is inevitable that you will see some uptick in terms of delinquencies and NPAs and you have to manage that through any cycle. The fundamental way to manage it is to go back to which projects are viable and which projects are not long term viable and one difference that we have to point out in this cycle as opposed to the previous cycle is that the companies which have been set up now have been set up in an arena of an open economy, where they were set up to be globally competitive. So a lot of these companies are fundamentally viable. Some of them which have had a lot of capacity expansion could be overleveraged and therefore could be seeing an issue in being able to service that debt in a high interest rates environment. So there we need some financial restructuring but most of them as I said have projects which have been set up in the context of an open, competitive economy and would be viable. So I would expect to see a different experience in the cycle compared to the previous cycle and we are going to see that in different segments of the portfolio. SME, for instance, we are seeing that companies are doing better in that cycle because I think they are not investing the whole lot, they are being careful about their leverages.Q: Are our banks in general and Axis Bank in particular being allowed to function as freely as they want to in ensuring that companies meet their logical end, if they are not paying up or meeting their obligations?
I think banks have to make individual decisions and to the extent that we are the lead lenders or sole lenders we have of course a lot more flexibility because we are the sole lenders who take decisions. When you are in a consortium you have to work with a group of banks to figure out how you are going to move.Q: You were on record saying that you would prefer a lower interest rate regime. Is that something which is really feasible at this point of time?A:
We can't draw on what has worked in the past and what have been the policies that have worked in a different era. We are operating in an environment very different from the past. We are a more globally connected world and therefore in any policy that we set we have to take cognizance of that and if we are operating in a world where interest rates are low across the world then that is going to impact what happens internally. A lot of our inflation has been imported because of high oil prices and what has happened to the rupee. While monetary policy can have some impact, it is actually not able to control inflation because of supply side issue. So, is a high rate environment going to help in controlling inflation? Or is it just going to hurt the investment cycle? And if we are saying that part of the inflation is coming because we are low on capacity and we have a capacity problem or we cannot control the inflation as it is a supply side issue, I am just wondering how it is going to solve the problem. I studied economics 32 years ago and maybe I'm out of touch but if I just look at it from a very simple logical perspective, we need to focus on solving the problem and the problem here is not demand side inflation. It is the inflation coming from the supply side and policies which discourage investments are unlikely to solve the problem.Q: You know in all this Axis Bank has continued to grow. Where is that growth primarily coming from? I was looking at your branch and ATM expansion. You have been adding, for instance, almost one branch in two days and may be an ATM a day. So somewhere things are clicking. What's driving this?
I think we need to look at physical investments and from where growth is coming. In terms of branches and ATMs, Axis has built its branch network very systematically over a period of time where we add about 20 per cent new branches every year. Now we may do about 15 per cent as we are of a larger base. I think that systematic expansion of branches and ATMs is important because it allows us to grow organically and in efficient fashion. If you try and add too many branches or you completely slow down then you are either going to get inefficiency as you have added too much and you can't get productivity out of those or if you slow down you are not investing for the future. Even while, in the short term, maybe growth is looking like slowing down, we believe the long term for story for India is very much intact and therefore we cannot stop investing, so we will continue to add to our branch network and find the opportunities of growth in the market.Q: You are doing this because you believe that there is a growing mass of savers out there who will come to you?A:
Absolutely, and we are finding that. Our branches continue to be productive, we continue to acquire new customers who are savers and not just savers, there are borrowers too. So both on the savings side and the retail asset side we are continuing to see growth and we would pursue the areas of profitable growth that we see and that is what we are doing.Q: When the economy slows down slightly as it has done, there are some industries which cannot be supported. Which are those? What is going to work at this level and what's not going to work?
I think here we have to look at where the pockets of profitable growth are, where the pockets are where we believe that there is a lot of uncertainty and we do not want to therefore continue the same rate of growth. So, clearly in terms of the retail savings and consumption story, I think growth very much continues. There was some slowdown - we have seen for instance in sale of cars and two wheelers and therefore of demand for auto loans but if we look at the broader retail asset story it is very much intact because of increasing aspirations. There are lots of interesting small businesses out there. They could be in the services sector, they could be in the manufacturing sector and I think choice for us is to go and find right businesses and support them. So we will of course look at it selectively and since Axis has had long experience and we have fairly good knowledge of different local markets, that can be an opportunity for growth. On the infrastructure side, where clearly there are no entrepreneurs, those who are looking at investing... even if they did I think of doing so, the bankers would be more careful about how they look at that in the context of the uncertainties that are involved. Q: What can be done to change the mood?A:
I think the government is focused very much on trying to see what needs to be done to get clarity on budget implementation. I think we just want to see more of that happening. On monetary policy, I know we need a bit of more control before monetary policy can into play. I think some coordinated actions on that front would be welcomed because I think that can help to revive capital markets. We have to get the risk return equation right to make the investment cycle pick up and then we can get the balance right in terms of the investment cycle picking up as well. So it is fundamentally about enabling a few things around policy action and around the markets environment which are going to allow investments to be attractive.Q: What are the key challenges for you as a banker? A:
I think as a banker, it's just the question of making sure that we don't stop investing because we believe very much in the long term story of India. We talked a little while ago about making sure that we keep investing in branches and ATMs on the consuming side. Not only in terms of infrastructure but also in terms of capability, this could be product capability, servicing capability in terms of how we reach out to customers and we keep looking at the sectors where growth is happening. Selectively managing lending growth in that segment looking at the portfolio of the larger corporate book that we have and working with them in finding the right financial solutions. So those are the things we are working on right now and it looks like a challenge at one end but I think it is a very interesting opportunity to see how we can make a difference to our clients during this period and continue to make sure that we are ready for growth when it comes back because I am sure it is going to come back.