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A Fresh Start

Anand Adhikari     March 5, 2019

The Rs 152-lakh crore banking industry is yet to come out of the woods but is experiencing a breath of fresh air. There are new CEOs at some of the fast-growing private sector banks such as ICICI Bank, Axis Bank, IDFC First Bank and YES Bank. Two other well-run private banks - HDFC Bank and IndusInd Bank - will soon start the process to select their next heads. Consolidation has also been kicked off in right earnest.

The State Bank of India's mega merger with five associate banks has been a smooth affair. In fact, it has given confidence to the government as well as the regulator that bank marriages can work. The recent three-way merger of Bank of Baroda, Vijaya Bank and Dena Bank sets the stage for creation of a few large public sector banks in the country. The insurance behemoth - Life Insurance Corporation of India (LIC) - which was interested in a bank for quite a long time, has finally got majority control of IDBI Bank. This tenth-largest bank will now have the capital and management bandwidth to start a new journey.

In the private sector, the Capital First and IDFC Bank merger has created a lot of excitement. There are also over a dozen new banks, especially Payments and Small Finance Banks, that are competing with commercial banks. Clearly, the banking industry is set to see a lot of action in the days ahead.

The 23rd edition of the BT-KPMG Best Banks Study celebrates the best in banking. Like every year, there are many surprises this time. too. Contrary to the popular perception that public sector banks (PSBs) are not run well, the largest bank in the country - SBI - has made it to top in the jury awards. Similarly, Bank of Baroda surprised everyone with its fintech model under which it has entered tie-ups with dozens of financial technology companies to serve its customers better. Punjab National Bank, which hit the headlines for the Nirav Modi fraud, has excelled in the financial inclusion space by using technology to reach out to the bottom of the pyramid. While private banks did disappoint on the governance front, they will surely come back as their new CEOs roll out new strategies.

The credit for part of the change goes to the assertive Reserve Bank of India (RBI). Consider the way it has been pursuing clean-up of bank NPAs. This resulted in a lot of heartburn among corporates and policymakers, but RBI refused to budge. The RBI has also pointed out huge divergences in NPAs reported by banks and what it has found. Higher provisioning has been one reason banks reported combined losses of Rs 32,400 crore in 2017/18. The next on the RBI's agenda is the compensation structure for private bank CEOs. It will soon watch the performance and bonuses of CEOs.

A New Chapter

However, as recovery of bad loans via bankruptcy code or asset reconstruction companies picks up pace, there will be an opportunity for banks to write back profits. Going forward, compliance and governance will remain priority areas for the central bank. "Corporate governance in banks is another area where policy action is required with focus on transparency and accountability," RBI Governor Shaktikanta Das had said while taking over nearly two months ago.

There are also expectations that the new CEOs will bring about a change. "CEOs send out a big message and that brings a cultural change," says Shashank Joshi, Managing Director, MUFG Bank. Given that the market is now also flooded with new differentiated banks like Payments and Small Finance Banks, the competitive intensity is expected to go up.

In response, the banks are not only digitising their processes and systems, they are also tying up with fintech players to stay ahead in digital banking. Many experts say there will be intense competition to attract low-cost deposits and serve unbanked population/areas. India Ratings and Research recently said the competition for deposits could intensify. In fact, many new banks are offering a higher savings interest rate to attract more deposits.

The banks are also exploring areas like consumer durables financing, micro loans and lending to first-time borrowers. While some of these are high-yielding segments, they are also risky. "We are yet to see a full economic cycle to judge their performance," says an analyst.

Apart from all this, asset quality deterioration, mostly due to corporate loans turning bad, seems to have peaked. Gross NPAs had started rising some six years ago. They went up from 3.2 per cent in March 2013 to 11.5 per cent in March 2018. Low credit offtake also contributed because as asset quality deteriorated, the denominator or the loan was stagnant or nor growing at the same pace. The good part is that the banks are now rebalancing their portfolios (moving away from risky assets) and tightening credit standards.

After the bankruptcy code, the corporates will be cautious about taking too much debt or expanding indiscriminately as operational and financial creditors can now use this powerful tool to drag them to bankruptcy. The big names like Essar Steel, Videocon and Jaypee are facing bankruptcy proceedings. In the longer run, the code will create a good credit culture.

So, after several rounds of balance sheet clean-up and heavy provisioning for NPAs, the banks are getting ready to support growth. In the last five-six years, retail growth has been compensating for lower growth on the corporate side.

As they gear up to lend more, the banks will have to closely watch their funding to NBFCs. The IL&FS crisis has exposed the underbelly of NBFCs, which have been expanding indiscriminately by taking short-term loans. While banks are supporting NBFCs at this juncture by buying their loan portfolio to create liquidity, the NBFCs will also see a churn and the banks will also have to re-strategise their NBFC play.


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