Shikha Sharma, Chief Executive Officer, Axis Bank. (Photo: BloombergQuint)

Exclusive: Retail Growth Will Continue To Outpace Corporate Lending, Says Shikha Sharma 

Two years of bulging bad loans and a tough macro environment has prompted Axis Bank Ltd. to turn cautious. The country’s third largest private sector lender has learnt from its mistakes, said Chief Executive Officer and Managing Director Shikha Sharma. She also doesn’t expect corporates to make big investments in greenfield projects any time soon, adding that cash rich companies, are choosing to acquire stressed projects at a much cheaper price than make fresh investments. All this has prompted the bank to continue with its focus on retail lending for now, a segment that’s been growing at a healthy pace over the last few quarters.

Here is the edited excerpt of her conversation with BloombergQuint:

How would you describe the last two years?

It has been a tough environment due to three reasons. First of all there have been big changes in the macro economy, the fact that the capex cycle slowed down, some of the large projects got into a position of creating bad assets for promoters and banks. The other has been the evolving regulatory framework, globally and in India, forcing every regulated entity to adapt to it. And the third is technology changes. There were rapid technology changes and looks like they will continue for a long time.

So, there has been a lot of change which one has to deal with. And when it comes together, it can be a bit of fun or may be not fun at the same time.

One of the things that stood out is the perception of private banks. We went into the NPA cycle hoping that private banks will do much better than the public-sector banks. Two years later, it seems, that it hasn’t played out that way.

A research paper from a renowned global researcher said that when you see value creation over a long cycle, it’s much more about where you play and less about how you play.

If you look at where the NPA formation has happened in this cycle, it came primarily from large corporates and, within them, from capex formation and large project execution. There have been a lot of macro changes which have happened in the space which meant that a lot of these projects have gotten into some problem or the other and have not been able to service the debt that they took on. Therefore, every bank which participated in that space got impacted in terms of asset quality.

If you look at the pattern, it’s not been about public sector or private sector, but whether you were a financier of large capex projects or not because that’s where the pain has come from in this cycle. To the extent, as a private sector bank that participated in it, we have been hurt.

Were the risks not easy to see or were the risks ignored in some cases?

You always learn in hindsight. There are some things which were not easy to see and the environment changed. The obvious loud one was the cancellation of various licences like telecom licences or mining licences. Those are the risks which were not possible to anticipate. Even the dumping of steel which resulted in a lot of stress on the sector was not that easy to foresee. There were some elements which were not easy to foresee, but in hindsight, maybe the system took on more leverage than it needed to. And we did not have risk participation parcelled out correctly. That is a lesson we have learned from this cycle. There was a bit which was outside control, but in hindsight there was a bit that was within the control and we could have managed that part differently.

Do you think you paid the price in part for growing too rapidly?

I joined the bank in 2009. Given that it was then a relatively small private sector bank, it was growing at over 35 percent. We have slowed down growth ever since then, to mid-high 20s and further narrowed it down to 20s. So, it is a question of smaller banks growing faster, and the larger banks growing slower due to scale, even though their growth could be industry-beating growth. So, I won’t say it is because of growth. We have had higher growth in other certain segments too. I would go back and say it’s about where we played.

We had traditionally been a corporate lender and we continued to see growth in the corporate book. Traditionally, we had been more of a term lender and we continued to do that business. That business has caused pain for the entire sector and caused pain for us too.

On the issue of divergences, we have seen the regulator (RBI) penalising some banks for not adhering to the IRAC norms which are rare. So, from the banker’s side what is the issue?

The regulator has clarified on its part that divergence is part of the inspection process of Reserve Bank of India (RBI) and that’s where the number comes from. It is done every year. The change in regulation now requires it to be disclosed whereas earlier it was confidential and wasn’t required to be disclosed. We have an evolving regulatory environment and we are changing and learning as we go along.

Would you term it as under-reporting of bad loans?

I don’t want to debate on that issue technically. Let’s just take as it is. The bank reported a set of numbers, RBI inspection threw a different set of numbers and that’s what it is. RBI themselves clarified post the last monetary policy that it is an ongoing process and we will have to see how it pans out in the future.

You have been re-appointed for three years, and at one point you were re-appointed even before your term got over. At that point, there were a lot of rumours doing the rounds, why did the Board and you decide to sign off on that line then?

If you look at any large institution, especially a regulated one, it is important to have orderly succession. Typically, a large organization announces succession a year in advance. So, it should not be a surprise that the Axis Bank chose to do that as well, to make sure that you kill any uncertainty in the marketplace in terms of what is going to be leadership structure and where the organisation might go.

Was the context not important for re-appointment at that point because all of us saw it as a quell around the bank and its leadership?

We’ve had an ongoing succession decision for a long time. We had a succession process at the board level and at the executive level. I would reiterate that this is part of the process. The board has been in discussion. There were reports that the board used external consultants to look at the whole succession process and take the decision which is the best practice. And when they reached the decision they made the announcement. When you put succession process in place and that becomes public, given our marketplace, we love rumors and speculations. I think that is inevitable if you have a succession process.

There was never any doubt that Axis will get the capital as and when they wanted. But you got in some marquee investors. Was it more confidence capital than it was growth or regulatory capital?

I have been in the bank now for three rounds of capital raise. And the bank has been very disciplined about its capital raising. We have been fairly explicit in saying how we do our capital planning. So, every time, our strategy has been to try and raise enough capital to be sufficient for a three-year period because we don’t want to come to market too frequently and yet we don’t want excess capital sitting on books and no returns to shareholders. So, that has been the consistent process that we have used every time.

The second thing is, we would like to keep our tier one threshold higher than the regulatory minimum. We have articulated that when the tier one hits around 9.5-10 percent, we believe that it will be time to look at capital raise because we do want to keep that cushion for any growth or events that might happen. Having hit 10.95 percent in the last quarter, it would have been time for us to start thinking about the capital raise. With the impending discussion around India, is it going to come or not and what would be its implications, also the PSU bank recapitulation which means that a lot of banks might go out in the market to raise capital, it looks like it is better to go ahead rather than behind. So, that was the thinking around raising capital that we did. The amount that we had decided was very much consistent with what we have done in the past, which is planning of capital for the next three years. If that creates confidence, because we do get a good set of investors to invest at a price which is at a slight premium to the market price, then we are not cribling with it and that’s fine.

How do you see the cleanup process for your bank?

We have said that the hump is behind, and we still have surprises that come through. It is difficult to say that this is the end of risk or is near the end because you don’t know what can come in. We have seen two years of an elevated credit cycle. Since close of financial year 2012, we took stock of where we were lending and much of our pain came from where we lend. We were corporate lenders doing term lending projects which have been the key source of pain. Post FY12, we moved away from it to operating companies, higher rated companies and less project finance. If we put the combination of the fact that from FY13 onwards, we have been shifting where we have been doing our corporate lending. The last two years have seen elevated credit costs. We have to see that at some point this will end. Let’s see how it pans out. I don’t want to be very definite about it.

Is the corporate growth cycle back simultaneously?

There have been three factors in the corporate growth cycle. One is, the capex cycle has been weak because there has been a lot of capex stuck which is unproductive. So, a lot of people would focus on to acquire some of these stressed assets and make them productive rather than start a new capex cycle.

Then the issue of WPI deflation or very low inflation wherein the working capital got suppressed as well. Third was the issue of having a lot of liquidity in the system post-demonetisation. So, borrowers were going to the market rather than coming to the banking sector.

Two of those things will likely change. One is, WPI inflation is in positive territory, so working capital demand will come back. Two, with liquidity getting constrained, we will see more of a balance and going back to borrowing from banks and not just from markets. I think we will see growth in corporate credit. We are beginning to see the first signs of it.

As of the capex cycle, it will still take a bit of time. The people who have cash would rather go and buy stressed assets and create value from that, rather than do a greenfield project at this point in time. But I would watch the government’s budget announcement too. If the government pushes on capex, then that may create small pieces of capex in the private sector too. We are generally positive that corporate growth should look better. Maybe in low double digit or high single digit, but it will certainly look better than its looked in the last year.

Will you do project financing in a big way, whenever it picks up?

We have burnt our fingers. We have learnt lessons from concentration risk, the structure of the project and risk parcelling, and through the leverage structures. We would keep all these in mind when we do project lending in the future. It is not that we are not going to do project lending.

But we will be a lot more careful about the sectors and the kind of unknown risk that we might get exposed to. We will be careful about sponsors and we would certainly be cautious on leverage structures.

The preference would be to lend to companies with operating cash flows and to do project finance selectively depending on all those parameters.

The retail-wholesale mix for the bank is more or less stable. Would you like to see it at this level?

We have been seeing that consumer lending demand is growing faster than corporate credit demand which continues to hold true even today. With increasing digitisation and more movement from the informal sector to the formal sector, we are likely to see more growth coming from consumer and small businesses. So, the retail segment which accounts for 44 percent and retail SMEs holding about 58 percent, I think that could continue to grow larger as a percentage of the balance sheet, although the pace of change might be slower than its been in the past.

What will happen in next lending cycle? Do you think newer promoters will emerge who will take the next investment cycle forward? Or will banks be reluctant to lend to the same promoters?

We have seen a set promoters who have created investments in the past. In the past 100 years of Indian promoters, there have been different promoters for different cycles. Some of them have ebbed and flowed, so some of them were active in one part of the cycle and slowed down in other or some of them might come back in the next cycle.

So, India has no dearth of entrepreneurial talent. The people who will participate in growth in the next cycle will be the ones who have demonstrated a track record in terms of technical execution and financial discipline. I continue to be very optimistic about our economy. If you talk to global investors, they continue to be very optimistic about our economy. That comes from the demographics, but it also comes from faith in Indian entrepreneurship. I think we will find the right promoters to grow this economy.

Now you have IBC. Banks may now actually be more confident lending into the corporate cycle if it picks up if the IBC experience proves to be positive.

Bankers have been asking for a faster resolution process for a long time. It helps promote a strong credit culture and discipline which can only be good for growth. The best thing that happened to the consumer credit cycle was the creation of the credit bureaus and all the regulatory focus on how the collections should be done because that suddenly put the focus back on portfolio management and underwriting.

From a borrower’s perspective, it put the focus back on being disciplined about borrowing. That meant that people lent more confidently, and borrowers were more conscious. That could well happen in the corporate cycle going forward from here. With the amount of regulatory change that we have seen from RBI, with the Insolvency Act and with the availability of critical data, I think we are operating in a different world and I do think, we will have more confident corporate lending going forward.

How is your bank adopting to all the changes, particularly, on the retail credit side? How is the digital change playing out for you?

We have been investing in digital for a few years now, both externally and internally. The internal investments are for re-designing and digitising our processes. Because if you don’t do that, then you can’t deliver a digital experience at the front end. I may have a great mobile app on the front-end, but if it can’t get anything done, then it doesn’t work.

It was a six-year journey about re-looking at our internal processes and digitalising them. I will continue to do that, and I won’t say it is the end of that journey. The rest is we are looking at offering new offerings from product and service perspective to use technology to get a better experience to customers, whether it is the way you transact for a service request. Today a lot of retail customers are moving to mobile and so mobile experience become so important. Even the way we acquire customers for lending products or cross-selling investment product, you can use technology lot for that and we are certainly focused on doing that.

There was a fear sometime back that some of these newer entities would eat into the bank’s business, but that doesn’t seem to be happening, right?

We have to be fair to the regulator. They have also moved ahead and said that they don’t want regulatory arbitrage. So, if you can do one thing in a particular way in a payment bank, you should be able to do the same thing the same way with a bank in terms of the KYC processes or to factor authentication processes. So, you have a level playing field and it is up to every entity whether they have invested in tech processes and product capability to be able to compete for the mind of customers. A lot of banks have focused on strengthening that capability and being able to offer customer proposition and the fight will always be for the customer. In this fast-changing world, I wouldn’t say nothing is happening. You will see shifting market shares and the consumer will decide who they want to go with. For every bank it is about trying to understand what the customer needs and making sure that we are looking at processes that deliver the services and value to the customers.

What about the push towards digital transactions and moving away from cash?

From our own numbers, we are seeing a significant shift. So, cash is almost becoming stagnant whereas digital is continuing. If we look at global economies, back in 1997, Singapore had a fully digital payment system as they were one of the first adopters of the digital system. But even today Singapore uses cash and it is not that cash has gone away.

Cash will not go away but as long as cash continues to occupy a smaller proportion of transactions, that’s (digitisation) what we hope to achieve. Digital transactions are now close to 70 percent of the total transactions that a customer does with us. Interesting statistic is, before demonetisation, for every debit card transaction that a customer did two-third was the cash withdrawal and one-third was the transaction at pos. Today that number is more that half a transaction at pos and less than half a cash withdrawal. So, it is changing, and it is a short period to see that dramatic shift. Consumers  are adapting to that technology.

What’s your broad impression of 2018 looking like?

Bankers are always optimistic and I continue to be optimistic, however cautiously. There are a lot of good things happening. The U.S. is growing well, Europe growth is coming back, so global growth looks positive. In India, we have had major structural reforms and some of the reforms may cause short term pain, but they are very good for the economy from a long-term perspective. One should expect to start reaping the benefits of those structural changes going forward. I expect to see a probable focus on rural economy over the next two years, everybody’s expecting that, along with a focus on fuel consumption as well.

Another aspect to be watched out for is the IBC resolution process. If large projects are stuck, then those are just visible signals leading to lethargy and despondency. If some of those assets are made productive through this resolution process, it will be great for the economy and will have a lot of spin-off benefits. I don’t expect liquidation to happen for any asset which has a real value. I’m sure that the large projects under IBC resolution will find buyers.

Between changing global growth scenario, the positive impact of some of the reforms, the positive impact of resolution and government’s own focus on driving growth, I think 2018 should certainly be a better year than 2017.

Are we entering into a rising interest rates scenario?

We have seen the bottom of the rate cycle. So, I don’t think we are waiting with bated breath for another rate cut. But we will see how it goes. It is such a fast-changing world. Right now, the whole sentiment is that oil prices are going up and inflation will go up, so we can’t take a rate hike. However, if the oil prices stabilize tomorrow, then maybe we’ll opine that it’s good to remain stable, so who knows.