There’s no business untouched by the Coronavirus induced lockdown. Pragmatism and conservatism are essential to nurse the economy back to shape, says Amitabh Chaudhry, MD, Axis Bank. In an interview with Saloni Shukla and MC Govardhana Rangan, he said the Axis Bank is inclined to err on the side of caution and conservatism rather than put shareholder capital at risk in some reckless lending. Edited excerpts:
What is your assessment of the current state of the economy?
In April I had stated that the situation is grim and when I look out of my window I donât see any signs of improvement from then to now. I would say the macro situation has improved quite a bit, but the economy is nowhere out of the woods. The economy today is operating at 70-75% levels. The recovery remains uneven with a faster rise in supply than demand. The RBI annual report published yesterday also suggests that they remain extremely worried about consumption demand and that it would take some time to recover.
How long do you think it would take to confidently say that the economy is on recovery?
We are in a long haul before the economy recovers to pre-Covid levels partly driven by the fact that consumption patterns have been debilitated in many ways. People are conserving cash, localised lockdowns continue. All this hurts demand, and the notion that things are coming back to normal. The economy will limp back to normalcy. We canât expect a miracle overnight.
What is the picture your clients are painting?
We are in touch with our clients and several leading business houses. The only good news I have heard is that we are seeing some return of optimism for sure. Increasingly corporates are saying that things should get better by the third quarter. But, I would still say that the improvement is spotty where recovery is visible in some sectors while some other sectors continue to get hurt quite badly. In my mind the government and the regulator are doing as much as they can do to get the economy back on track.
So by when do we return to the pre-Covid levels?
The Indian economy had been slowing down for a couple of quarters when the crisis hit us. And then we got a severe economic shock. We not only need to go to the pre-Covid levels we need to go back to the levels we were before the economy started decelerating. My worry is that this will take some time, it is a bit of a long haul. We are talking about somewhere between the first and second quarter of next calendar year and that is subject to vaccines becoming available on a mass scale that people are confident to step out and businesses can restart.
I am quite hopeful that once the customer is assured that we are the fag end of the crisis, things will change dramatically and the economy should revive much faster.
Some part of the blame should also be laid on the doors of banks who are risk averse and not lending. How do you read that?
We are answerable to our shareholders and we have to ensure that we lend conservatively and keep all our risk factors in mind before we give money to the customers. That is what the shareholders expect of us and that is what the RBI expects of us. If you look at RBIs financial stability report, the latest annual report and the various speeches of the governor he has been warning the banks please be careful with your money, please raise capital. Then on that you add the governance of each bank, our board has been looking at our numbers and models very closely.
The banks have learnt their lesson after the last crisis, they are not going to be out there lending in a hurry. This applies to public sector banks as well, if you see the additional lending it has been quite anaemic.
What is your view on the fiscal measures the government can take?
Government has already indicated that once the unlock process continues they will come back with more support for the economy. The government has to play a very very important role. Second is corporates, individuals all of us have to bear a part of the burden. The government is quite cognisant of the fact that they have a certain rating while they certainly appreciate the fact that they have to revive and support the economy they are dividing it into three buckets. For the people who need it they are doing the cash handouts, the second is supporting MSMEs for incremental lending and third category is about long-term reforms, working with the RBI to towards refinance schemes, moratorium, restructuring to support the other sectors of the economy. I donât think that the government has the resources to start writing cheques to support specific sectors. However, they will use this opportunity to drive reforms.
The RBI has permitted loan restructuring. How do you look at it?
We are looking at this in two parts – what is right for the customer and what is right for the bank. We will continue to adopt a conservative approach, we will do an intense credit screening before allowing any restructuring and we will be much more prudent in provisioning for such loans. We will help the customers where needed, we will help them if itâs really required. We know the media and the analysts, once the restructuring data is published they will look at it as pseudo bad loans. We are not against restructuring, but I will not use that tool to call an asset standard and make less provisions. It is expected that most of the restructuring would come from the moratorium book but there will be some which may come outside that as well.
Covid has impacted each sector differently, how do you this playing out and impacting the banking sector?
Some sectors have been severely impacted like Airlines, tourism, real estate. So when you look at restructuring you will see a disproportionate share coming from these sectors. In many cases you will have no choice but to restructure because if you donât give them time to recover they are gone. But, I also believe that there is no sector that would be able to escape this severe economic shock and the vulnerable ones in every sector will need help. When we look at the portfolio of Axis Bank to assess who might need restructuring we will find loans from practically every sector because there will be some corporates who were in vulnerable state and Covid pushed them into a state where they may need restructuring help. The impact of this crisis is huge, deep, across sectors and that is why the RBI is gently nudging banks to raise money because they know that the impact will be large.
While the equity markets have rallied back to January levels, bank indices are still trading 25-40% lower How do you explain this?
In some cases the moratorium numbers are very large. It is the uncertainty which is driving down the valuations of banking stocks. They would like clarity on the worst case situation. After moratorium one we had another round, now we have restructuring so again they will have to wait for this to play out for them to assess the worst case scenario. People have gone and raised capital even at these levels to ensure that from a confidence capital perspective we have enough. When they see light at the end of the tunnel the valuations could start coming back especially for those banks where they see the crisis is well contained.
Are you looking to raise additional capital after the QIP?
We have been getting reverse enquiries from some private equity players who are happy to invest in Axis Bank. There is nothing which is happening at this stage. But at the right price, if the right deal was to come along and it is long term money, we donât want to deprive ourselves of the money.
Are there any hopes pinned on the festive season if at all?
We are facing an economic challenge that has never been recorded before in human history. Given such a scenario I must applaud the government and the RBI who are trying to infuse confidence in the hearts and minds of people. The festive season has only begun and whether it will result in something substantial I donât know at this stage. We have another three months to watch and see. The situation does remain difficult. But we are planning several schemes for the festive season and working with various manufacturers to see what we can offer to customers so that they start consuming again.
CMIE data suggests that at least 2 crore people have lost their jobs, will this directly reflect into the performance of the retail book?
When people lose their jobs or their salaries are cut it will impact the retail portfolio. This time you will see a bigger impact on retail, followed by MSMEs and then wholesale. The banking system has been clearing up its wholesale book for the last 4-5 years so a lot of clean-up has happened. When people have very large portion of their books under moratorium you have to wonder whether they will start repaying post August 31. Our quality of retail portfolio is very good. My worry is whether the quality of the portfolio is as good across various banking institutions and NBFCs.
You have again tweaked the plans on the Max deal, how does this lesser shareholding help?
We are keeping our fingers crossed. We are having regular discussions with the regulator and explaining the contours of the deal. They have been listening to us and giving us a fair hearing. We are hoping that some stage the approvals could come through, but it entirely depends on the call the regulators make. At 18% our rights remain the same as when we were buying 30%. This deal will add a lot of value on both sides