Money & Banking

Corporates may end up paying higher interest rates, says Axis Bank CFO

Radhika Merwin BL Research Bureau | Updated on December 05, 2019 Published on December 05, 2019


Axis Bank delivered healthy performance on the core business front in the September quarter. But elevated slippages and notable stressed book (BB and below-rated book) are concerns. In an interaction with BusinessLine, Jairam Sridharan, Chief Financial Officer at Axis Bank, says the bank has been proactively identifying stressed accounts and that the BB and below-rated book have been shrinking. However, there could be two to three quarters of elevated slippages. Excerpts:

After double-digit growth of 12 per cent in March, bank credit growth has once again slipped to 8 per cent as of September. For Axis Bank, retail loans have seen strong growth. Will retail continue to drive growth over the medium term?

While the overall sector itself has grown by 8 to 9 per cent, for Axis Bank, loan growth has been healthy. We have been able to deliver 8 percentage points higher growth than the overall industry. On the wholesale side, growth has been modest — with the utilisation rate of existing limits by corporates shrinking, there are several drivers of growth. One, most of the lending has essentially been refinancing, rather than funding fresh capex or investments. Two, lower competition or supply of credit from other players challenged by capital/asset quality issue or distracted by merger activity, is aiding growth for banks such as Axis Bank. Additionally, challenges faced by the NBFC sector have thrown open opportunities for us.

Hence, for large banks with a wide distribution network, strong capital base, and good liability franchise, among others, loan growth prospects remain healthy. Within that, retail will continue to drive growth, with demand continuing to outstrip supply.

But the retail loan growth in recent years has been led by unsecured segments, such as credit card and personal loans for most banks, including Axis Bank. Is the aggressive growth a cause for worry?

It is true that the unsecured portfolio has grown significantly over the past few years. At Axis Bank, the strategy has been to target our internal deposit customers where we can assess their saving pattern and transaction behaviour — 90 per cent of our unsecured lending has been to existing customers. This has helped mitigate the risk.

Also, while the growth in secured loan portfolio — home and vehicle segments — has faced a slowdown, they still form a large part of our portfolio. Hence, 85 per cent of our retail portfolio is still secured. When the growth in these secured segments, including agri comes back, then there will be a more broad-based growth in retail loans.

We have seen another leading private lender shut down its project-financing division. How will Axis Bank play this segment in the long run?

Banks have realised that funding long-term projects or greenfield projects is complicated and have ‘equity-like’ risk characteristics. This makes assessment of risk and pricing such loans difficult. Hence, banks may find it very hard to lend to such long-gestation projects, and there is a need for specialised institutions. What the ownership structures of these focussed institutions will be and how they will be able to retain a stable long term funding base is still unclear.

We will have to see how this pans out in the long run. But importantly, corporates will have to be ready to pay higher interest rate for the underlying risk and also bring in more equity than in the past. As of now, there isn’t much demand on the capex or project funding side. So, banks cutting back lending to the segment is not going to pinch the segment that much.

Axis Bank has a high loan-to-deposit ratio of 89 per cent, which is limiting the ability to lower deposit rates. How do you expect to maintain margins post the introduction of repo-linked loans?

The intention of the RBI in introducing repo-linked loans is to bring down borrowing costs, which is welcome. But banks in the past have not been able to bring down lending rates because of the high cost of funds. The move to repo-linked loans will now nudge banks to transmit the repo rate cut with respect to a portion of the loan portfolio.

This will, hence, lead to some discrepancy on the banks’ balance sheets, as some portion of the asset is linked to the policy rate, while almost all of the borrowings are at a fixed rate. So, going ahead, we will see banks linking some portion of their liabilities/borrowings to the repo. Otherwise, the one-sided risk could create instability in banks’ balance sheets. For now, the comfort is that repo-linked loans is a small portion of the loan portfolio. But, over a period of time, every bank will have to figure out how to manage the interest rate volatility.

We saw slippages rise in the September quarter for Axis Bank. In the context of recent episodes of fresh stress emerging — Karvy being a case in point — what is your outlook on asset quality?

It is true that in this calendar year there have challenges on account of fresh stress emerging from corporates that were not considered at risk of default. Axis Bank has been proactively downgrading a significant number of accounts to BB and tried to identify the potential risk. We have seen reduction in the stock of stressed loans, with the BB and below-book shrinking.

But we are still not in a position where our stressed book is down to ‘normal levels’ and, hence, there could be two to three quarters of elevated slippages.

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Published on December 05, 2019
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