Post demonetisation, what are the challenges faced by banks?

Post demonetisation, the major challenges are retention of CASA [current account, savings account] deposits, deployment of these funds, impact of spurt/decline in low-cost deposits on MCLR [marginal cost of funds based lending rate], transformation towards digitalisation and the associated issues like cyber risk management. Having said this, I may mention that the challenges are not new to the banks. What I perceive is that there will be a new normal for the banks to move ahead. Right now, retention of deposits is an immediate challenge, for which the bank has already launched a Retain CASA campaign, along with a focus on current deposits, since less-cash or cash-less is likely to direct the informal sector to come into the banking channels. I can say that demonetisation has been ‘short-term challenges for long-term gains’.

Cash crunch continues and higher denomination notes are still in short supply. How long will it take for remonetisation to be complete?

Well, all of us know that the shortage which was felt till January 2017 is nearly resolved and limits on cash withdrawal from banks have been removed to a large extent. RBI has declared March 13, 2017 as the date for complete removal of restrictions on savings deposits. Overall, I believe that the situation is likely to normalise by mid-March, as high volumes of new notes of smaller denominations are getting into the markets. Post demonetisation, all the currency notes received by the banks are totally recyclable and that has also added to easing the conditions.

How do you plan to utilise surplus money that has come into your bank?

In the absence of credit demand, a large portion of surplus liquidity has found its way into the government bond market. This has given boost to treasury income of banks and aided earnings to some extent. Debt market is also opening up some opportunities which the bank will explore as we move ahead. In the absence of projects, deployment in credit avenues will be mainly in the small-ticket advances in MSME, agriculture, retail etc, through our vast network of branches.

India has traditionally been cash-dependent. How easy or difficult is it going to be for banks to move people into digital mode?

Various estimates making the rounds indicate that nearly 91 percent of households have bank accounts. Post demonetisation, banks are getting new demand for opening of accounts. I believe that encouraging digital banking requires not only incentivising people for going digital but there should also be a disincentive for making cash transaction. As far as difficulty in moving the people towards digitalisation is concerned, I think that financial literacy, clubbed with adequate infrastructure, is the need of the hour.

In order to reduce the difficulties, we have made the opening of accounts much simpler now. All you need is an Aadhaar card and services like Tab banking to facilitate quick opening of a bank account with KYC compliance. The establishment of bank linkage also helps the government to use this as a means of easily disbursing benefits, grants and subsidies.

Creating a digital society or less-cash society is a challenge given the enormity of the exercise. But there is great welcome for digital services in rural areas and I have seen in a few villages that shopkeepers have opted to become digital champions to promote digital villages. We are in the right direction to move to a less-cash society through digitalisation efforts.

Cashless economy is welcome, but infrastructure and red tape have been hurdles so far. Your comments?

Well, infrastructural bottlenecks have to some extent been a constraint in the quick adoption of digital modes of payment. Rather than bureaucratic constraints, it is more of a structural and logistical constraint. It is seen that the talent in the country is finding its role in taking the society towards a cashless economy. I think in the medium term, this is set to undergo change in a big way and developments can be seen around. As we know, the government, in its broadband highways project, has targeted 2,50,000 village panchayats to be covered under the National Optical Fibre Network (NOFN). There are around 55,619 villages in the country that do not have mobile coverage. Certainly the speed with which digital implementation is happening will help cover the long mile in less time.

Recent data has pointed to a low credit growth – at 5.1 percent as on December 23. With weak private sector investments, a fiscally constrained government and demonetisation, how will economic growth happen?

I think credit growth and GDP growth are mutually enforcing. Credit growth, as we all know, has been low due to several factors, and slowdown in economic growth and near-term disruption due to demonetisation are some of the reasons.

It is true that the growth in our economy has been led by public investment and private consumption. Private investment, you see, has been weak because of constrained business environment and investment climate. This is the result of slow global economic growth, uncertain environment, high corporate leverage and low profitability. Excess capacity in various industries has led corporate houses to defer their capex plan.

I also see the economy getting benefited by the increase in the size of the formal sector. Besides, in his budget speech, the finance minister has also made it clear that the government’s focus is going to remain on propelling growth through investment in infrastructure and other manufacturing projects. Moving in the direction of growth, banks have also reduced rates of interest in the recent past, remonetisation is progressing rapidly, pump-priming has begun through government spending on rural and social infrastructure and supply-side bottlenecks are also being addressed. All this will gradually build up an environment for acceleration of economic growth.

In view of the Rs 1.8 lakh crore capital shortfall in the government-owned banks as per Indradhanush plan, there are concerns that a Rs 10,000 crore capital infusion to state-owned banks this fiscal will not repair their balance sheets. Your views.

I feel that there have been various assessments of capital requirements of the banks in view of the high level of stressed assets. The Budget 2017-18 provides Rs 10,000 crore for capitalisation of PSBs [public sector banks] but there is a clear statement that the amount will be reconsidered after the Q3 results. I believe that once the third quarter numbers of all the banks are declared, the government would make further decision on this front. As all of us understand, the government knows the role of the banking sector in economic development and is very much aware of the fact that without adequate capital in their kitty, banks will be constrained. Meanwhile, the banks are considering optimisation of risk-weighted assets, selling of non-core assets and raising capital. Capital conservation is also one of the steps to meet the capital requirements of the banks.

Further, I see that measures are continuing with the policy of tightening the noose on the defaulters to recover money. Already much is being done on improving the asset quality front. I hope that these sincere efforts on the part of the regulator and the government and strict compliance by the banks will bear rich fruits and resolve this issue.

Yes, the amount required for keeping the banks well capitalised to meet the Basel III requirements, as well as taking care of future growth, will be higher than the projected Rs 10,000 crore for FY18. The union budget for FY18 has hinted at providing more if required.

Moody’s and its Indian affiliate ICRA have forecast subdued prospects for Indian banks. They have said that asset deterioration will remain a key challenge over the medium term and non-performing loans and standard restructured loans will still rise. How will banks overcome these haunting issues in the long term?

It is a broad generalisation, which may not hold true for all the banks. I understand that the asset quality will improve with implementation of new windows opened by the government and the regulator for debt recast. Recovery has begun to improve and possibly, NPA formation has slowed down for some banks. Going forward, I believe that steps like setting up of the Insolvency and Bankruptcy Board and allowing listing and trading of the security receipts issued by the securitisation or asset reconstruction companies are going to improve the recovery and resolution in stressed assets further. We may also see more banks selling off the bad debts to the ARCs [asset reconstruction companies], as is being done in other countries.

At PNB, we have taken this challenge head on and had set up a war room about a year back. The recovery and upgradation made this financial year so far is close to  Rs 15,000 crore and with the efforts in progress we should be doing better. Going forward, a slew of catalysts are seen, for example, economic growth, de-leveraging, development of the bond market and consolidation in corporate space.

Do you think banks today have the capability to raise funds through internal resources without government help?

The position may vary from bank to bank. At present, most banks are facing challenges on the asset quality front post the AQR [asset quality review] exercise, which has resulted in higher provisioning requirements. The slowdown in credit growth, huge stock of stressed assets and declining interest rate scenario has dragged down the interest income, which has impacted internal generation of resources.

In view of the business plan, forthcoming requirement of capital, and most importantly, in the stressed environment when the profit margins are shrinking, banks are seeking different options for raising capital through the domestic and international market route. We are planning to raise capital in the form of additional tier I and tier II and also exploring the sale of non-core assets etc. However, being a major shareholder, the government’s support is likely to remain necessary to achieve desired growth and capital requirement.

Do the new payments banks pose any challenge to conventional banks? What would be the revenue loss for the latter?

As we know, payments banks’ primary objective is to further financial inclusion by providing small savings accounts. These entities will accept deposits of up to Rs 1 lakh and cannot undertake lending activities. In view of their limited profile, the challenge from them always would be limited. These are still teething years for payments banks. Their economies of operation are yet to be tested. Payments banks will be required to invest minimum 75 percent of its ‘demand deposit balances’ in statutory liquidity ratio [SLR] and hold maximum 25 percent in current and time/fixed deposits with scheduled commercial banks. In a competitive environment you can pay 7 percent interest on your accounts provided you have avenues for generating higher revenue to service the interest to be paid.

The threats to conventional banks, in my view, are magnified. Most banks have invested huge money in strengthening their payment infrastructure and are handling more and more transactions through internet, mobile banking or e-wallets. In financial services, trust matters, and it is here that existing banks have an advantage as they are not only providing enhanced convenience but also safety. It is expected that 5 to 10 percent of the funds can move from the banking industry to payment banking.

Overall, I feel that rather than competition, there is likely to be cooperation between traditional banks and payments banks. We have entered into an MoU with the India Post Payments Bank [IPPB] which is expected to emerge as the country’s largest payments bank. Initially, we are extending them support in terms of technology and people, and expect to give loans to the customers of IPPB. This will be a good combination for the customers of IPPB and for the bank as well.

Bank Board Bureau chief Vinod Rai has proposed a performance-linked incentive for public sector banks. Your views?

It is a welcome move and it is time we embraced and implemented it. Industries across various sectors adapted to this much earlier. With its introduction, employees will be motivated to perform better. You would agree with me that at times equal remuneration to the same rank employees seems to be demotivating to the performing employees. I also view this as a big tool for talent retention and talent nurturance when one can foresee talent migration in the near future. I am sure the younger generation want to be challenged and would like to prove themselves.

geetanjali@governancenow.com

(The interview appears in the February 16-28, 2017 issue)