For Axis Bank, the sharp increase in bad loans over the last couple of quarters has been worrying. The incremental stress over the past two quarters, coming from outside the watchlist — that is, the pool of stressed assets — has been a key cause for concern. Jairam Sridharan, Group Executive and Chief Financial Officer at Axis Bank, discusses some of these issues. Excerpts:

Axis Bank had created a watch-list that had outstanding accounts of around ₹22,600 crore as of end-March 2016. While this list has now halved, 30 per cent of the corporate slippages came from outside the watch-list in the latest December quarter. What has led to the sudden increase in stress?

As we had communicated at the time of creating the watch-list — of the most stressed pool of assets — that significant part of our slippages in the coming eight quarters would be out of this list.

Over the last three quarters, about 85 per cent of corporate slippages have come from the watch-list.

This shows that the watch-list was a fair reflection of what we believed to be the source of stress and, in that sense, it has served its purpose. But the watch-list is a stock item and as it shrinks, slippages from it will no doubt reduce and that from outside the list will increase.

There is nothing unusual about it. Eventually, at the end of the next four quarters, there will be no watch-list.

During the December 2015 quarter, when the RBI’s asset quality review (AQR) led to a sharp rise in bad loans for public sector banks, private lenders such as Axis Bank remained more or less unaffected. It was only in the beginning of the current fiscal, as you disclosed the watch-list, that stress started building up. Did the AQR activity forcing PSBs to declare certain accounts as stressed form the basis of such a watch-list?

We followed a two-step process to create the watch-list. First, we listed out the objective criteria — namely, performance levels of the accounts, leverage position of the corporates, and payment record.

Corporate accounts that triggered any of these rules were put in the long-list, which were then short-listed based on an account-by-account assessment.

This two-step process sought to create the riskiest pool of corporate accounts within the bank, which were not yet NPAs (non-performing assets) but were showing signs of stress.

The RBI, post its inspection of different accounts in various banks, had come out with the AQR list which was expected to impact banks in the December and March quarters of the 2016 fiscal.

When Axis Bank received its AQR list, we implemented it in its entirety in the December 2015 quarter. No bank was in the know of which accounts and how many were part of the AQR list of other banks. Hence, what we know is only in hindsight that Axis Bank’s AQR list was much shorter than many others.

It is possible that some accounts that were within our watch-list were part of some other banks’ AQR list. But there was no way for us to know this.

But once an account becomes NPA in another bank, you do get that information…

If Axis Bank has an exposure in some account which has been declared an NPA in another bank, then, thanks to the credit information available within the system, we do get this data.

But that does not necessarily mean that the particular account would turn NPA for Axis Bank as well. We would have taken this information into account while drawing up our watch-list, but the intent was not to mimic the AQR exercise.

Where is the stress outside of the watch-list coming from?

The stress is mostly from the large corporate side. Sectors such as power, infrastructure construction, textiles, and iron steel, as is the case elsewhere across other banks, continue to remain the key source of stress.

Over 98 per cent of our slippages outside of the watch-list in the December quarter were from legacy accounts originated prior to FY11.

So, will there be additions to the watch-list in the coming fiscal?

At this point in time we don’t see the need to update the list. The existing watch-list will continue.

Nearly half of your existing watch-list consists of accounts from the power sector. What is the outlook there?

In the power sector, the banking system, promoters and regulator — all need to come together and make a concerted effort to resolve stressed accounts.

There is still a large amount of power deficit in our country and it’s unfortunate that some of the power assets are sitting idle. The situation needs to get resolved fast and if it requires lenders or promoters to take haircuts, then it will have to be done.

Banks have been aggressively increasing their retail portfolio in the last few years. Do you see risk building up in this portfolio as in the past?

No. The risk levels within retail continue to be at or below the long-term average for the overall banking system and we do not see any concern there. The stress has been very low for very long in this portfolio and there is only some increase in the risk levels.

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