Banks no longer vital; may get limited to transactions, says India Ratings' Ananda Bhoumik
Government will continue to be measured in their approach towards PSU banks. I think they will encourage consolidation, said Ananda Bhoumik.
The national mood is despondent after the drop in GDP numbers. How bad is it?
The long-term story is intact. But certain basic things such as transport, health care and education need to be upgraded. So the need for infrastructure is a constraint because balance sheets are stretched while savings rates are among the highest in emerging markets. In the interim, consumption has come under pressure because of demonetisation, and the goods & services tax has killed supply. Corporate performance suffered. Talks of nearterm prospects compared to other emerging markets, it will be a bit of a missed year for India.
Can interest rate cut do the magic?
If we are looking for an investment story, there is very low correlation with interest rates. Investment pickup happened when rates were far higher than this. For exports, currency and relative competitiveness matter. Statistics show that other emerging market currencies have appreciated vis-a vis dollar this year, but their export share has actually gone up.
So correlation with monetary policy is not well established. From structural point of view, we need to bring down inflation. So from RBI’s and government’s point of view, there is no dichotomy.
There is a constant government push for investment. How much of help can that be?
Bulk of the investments have shifted from private sector to government. In the past, private investments have tended to be better executed compared to that of the government’s for various reasons.
State government investments are not necessarily for commercial reasons but more for social reasons, for which the return may not be immediate — like building schools or roads. In case of government investments, the visibility on GDP could be long term like people become healthier. So if we were to measure investments, returns from the private sector would be more visible and government’s would take time.
What should the government do to attract private investments?
It’s a complicated situation. First of all, the sponsors themselves are stretched. So lending money to them is in question because their credit ratings have been impacted with their ability to borrow or produce collateral.
Till the time leverage comes down, EBITDA picks up... many of them are out. So we need to have a new breed of entrepreneurs who would come in. Second thing is who is going to give them money. Traditionally, PSU banks have been the largest contributor of debt fund for investments. They are exhausted. Paradoxically, they have liquidity but they do not have capital. So that option is closed. Other intermediaries, the likes of NBFCs, are coming up, the debt market is deepening. May be debt is the answer, but we need to find sponsors.
Will banks be able to support growth even if they are recapitalised? Or will they mess up again?
The big question is what role are banks going to play? Think of what they were playing 10 years ago and now. I think regulation is going to play a major role. After the global financial crisis, regulators are forcing the banking sector to be less leveraged, less ROE friendly, be more predictable. A lot of the banks will be questioning their business model.
Shareholders, including the government of India, will be questioning whether they want to be in this business at all because other forms of intermediations like NBFCs, P2P lending are coming up. We see the shrinkage of banks’ role in financial intermediation. Banks will exist only for transactions or if we need bulk loans. Banks are no longer as vital as they were 10 years ago. Government will continue to be measured in their approach towards PSU banks. I think they will encourage consolidation. They want healthier banks.
Ratings companies are being criticised for missing big defaults. Were you lax?
To the extent facts are facts, I think the criticisms are justified. We look at our portfolio and we are happy to see that none of our AA-rated firms have defaulted. So our stability rates are one of the highest. But we should not remain complacent. We remain invested in our processes, to understand what the trends are.
Sebi has tightened guidelines to ensure that monitoring by ratings agencies is made more regular. There are investments that we have made in the way. We continue to look at how to improve our product delivery, how to reach out to our investors more periodically and how to signal to the market the shifts in credit standards. We need not wait for a ratings change and signal to the market through other means like periodic commentaries and interactions with our investors.
Sebi recently rolled back its rule on default disclosure to stock exchanges by companies. Did rating firms lobby?
We don’t have defaulters as a large part of our portfolio, it is less than 10%. As long as defaulters remain in single digit, I don’t see why ratings agencies will become redundant. There will still be a need for relative understanding. We certainly did not lobby against it. In fact, we welcome it since there is greater onus on corporates to report on time, not just us.
Generally it is said that when a lot of updates are being done by ratings agencies, the economy is doing better—is that a correct way to judge?
Don’t look at that data from that perspective. I don’t think we do so, we just report the data. It just gets reported as news. I don’t think it should be interpreted as a reflection of the economy. Upgrades to downgrades are of course a measure. But even if the ratings of various organisations have not been impacted, a slowdown in the economy could have impacted their financials.
Is telecom the next steel sector?
As a shareholder, you need to be very patient. The feedback I get is if you are a financial investor in a telecom company, you are unhappy. In the long term, you are fine. You want to be in this industry. This is the next oil. So, why would you want to exit?
Should the government step in and stem the strength of currency or is the strength of currency overstated?
Other emerging markets have benefited by the strength of the currency. We would have benefited if there was no demonetisation or GST. It would have been a great year for us. Having said that, I would say GST and demonetisation are good for us. Government needs to expand revenue.
Do you think bank consolidation should happen and the timing is right?
Consolidation is seen as an economic answer when banks are in distress. But whether it necessarily saves costs? Cost benefit takes longer like what we have seen in Kotak- ING Vysya merger. There are values in PSU banks. There is value in franchise we have like Dena and Bank of Baroda in Gujarat. If the merger process was to follow those values, it would have been good. I don’t think size is a value proposition. A small NBFC that does lending in a cost-effective manner would get more interest from investors. If there were no stress, we would not be looking at it now.