What India’s Top Bankers & Financiers Are Saying About The Economy
A spurt in defaults, fear of slowing consumption growth and fragile financial markets are keeping bankers awake at night.
A spurt in defaults from Indian corporates, a fear of slowing consumption growth and fragile financial markets are factors that have got India’s bankers and financiers worried.
The first quarter earning season has seen bankers express concerns about evolving conditions in the economy and in financial markets. Some have chosen to adjust the path their businesses are on to avoid any further pain.
‘Swachh Bharat’ Phase
Uday Kotak, chief executive officer of Kotak Mahindra Bank, while addressing an analyst call after the bank’s earnings said that the Indian financial sector is going through a “swachh bharat” phase. “We are in the middle of it. I don't think it is fully done and some of it is playing as we go forward,” Kotak said.
We have all got to be very alert and paranoid to make sure that we take care of ourselves as we see this cleansing process going through our financial sector.Uday Kotak, MD & CEO, Kotak Mahindra Bank
Kotak believes that the Indian economy is going through a “very important and interesting phase”, where the government has shown a commitment to fiscal consolidation. This, Kotak said, should leave space for further monetary policy easing. He expects another 50 to 75 basis points in interest rate cuts between now and March 2020.
Vitiated Credit Environment
Vishwavir Ahuja, CEO of RBL Bank, highlighted the sporadic instances of corporate default emerging from varied sector.
Ahuja said that a combination of high leverage at the promoter level, at the company level together with tight refinancing markets and volatile equity markets have led to the prevailing corporate credit environment.
We are going through times when the corporate credit environment has been quite vitiated. At promoter level, there is build up of leverage. There has been tight liquidity conditions and the equity markets have been volatile. So its combination of all of these working out.Vishwavir Ahuja, CEO, RBL Bank
He, however, believed that since these businesses were well performing ones until recently, resolution may be easier.
Caution On NBFCs
Bankers continue to take note of the troubles across some of the non-bank financial services firms.
A number of large banks have an exposure to these firms, some of whom have seen their ratings cut to ‘Default’. This has raised concerns about a slowdown in bank lending to NBFCs, who are already finding it more expensive to raise funds from the market.
Commenting on the prevailing environment across non-bank lenders, PS Jayakumar, CEO of Bank of Baroda, said that the troubles are still concentrated in the wholesale lenders. He also said that some of the pain in NBFCs is emerging from governance-related concerns.
Jayakumar said that much of the stress is linked to real estate and NBFCs will need to ring-fence that exposure. In the interim, lenders such as Bank of Baroda, will continue to give out financing to NBFCs based on their risk appetite.
NBFC Financing Challenges
For those running NBFCs with both retail and wholesale loan portfolios, the environment has remained challenging.
Dinanath Dubhashi, MD and CEO, L&T Finance Holdings Ltd, told analysts that the sector is facing challenges in four areas. This includes liquidity issues, credit rating downgrades, solvency challenges for some of the NBFCs/HFCs, and a demand slowdown across various basic sectors.
He added that the Reserve Bank of India has put lot of liquidity in the system, but the liquidity flowing into NBFCs has been very limited for many reasons. Dubhashi was speaking to analysts after the company’s Q1FY20 financial results.
Auto Slowdown Persists
One of the sectors which has sparked concerns is automobiles. Sales have contracted and some automobile firms have indicated production cuts due to the weaker demand environment.
Analysts have pointed to a host of factors to explain the slowdown in auto sales. While weaker demand is one cause, higher insurance costs too are believed to have played a role.
IndusInd Bank, which has a large vehicle finance portfolio, has still seen strong growth in vehicle financing. However, CEO Romesh Sobti admits that momentum has slowed and cautioned that it could stay that way in the second quarter of the current year.
HDFC Bank’s deputy chief financial officer Srinivasan Vaidyanathan, who addressed analysts after the bank’s earnings, said that changes in the vehicle finance segment are reflecting in slower growth.
Disbursals in the last three months have not been as strong as in the previous year, because the vehicle segment is dragging the overall credit growth of the bank, he told analysts, while adding that auto manufacturers are hopeful of a pick-up in demand in the next few quarters.
Consumer Lending Concerns?
Through the last few quarters, even as the broader NBFC sector faced challenges, consumer-focused lenders were seen to be relatively immune. This quarter saw some large consumer-focused lenders show early signs of caution.
Bajaj Finance Ltd, in its investor presentation released on July 25, said that as a measure of prudence the company has tightened its underwriting standards across lending segments, which would lead to a cut in the quantum of fresh loan disbursements going forward.
Rajeev Jain, MD, Bajaj Finance Ltd told BloombergQuint that from the portfolio growth in the past quarter, it is seemingly clear that discretionary consumption is going through a slowing environment.