Conference Report Assocham .......
ASSOCHAM organized the 4th National Summit on Bankers Borrowers Business Meet with the theme ‘Coming Of Age: Changing Contours Of Relationship Between Bankers And Borrowers’ in Mumbai recently. Highlights of the deliberations at the meet:
V. Vaidyanathan, Exec Chairman, Capital First: Of the total commercial borrowing of `54 trillion, large corporate borrowing is `25 trillion, SME is `10 trillion, retail is `12.5 trillion and micro enterprises is `5.5 trillion. Let us look at SME NPAs. For PSU banks, SME NPA is 22% and for micro-SMEs it is 11%. It is lower for private banks and NBFCs. The NPA for micro entrepreneurs is the lowest. What is changing recently is that the conversation from most players in the industry is about retailization of their loan book, ie lending to the middle class of the country. What are the factors enabling this change? One is the push from the regulators. The central government is also pushing for lending to entrepreneurs. Close to `4.6 trillion of Mudra loans have been disbursed, of which 76% are to women. Some 10 years ago, lending against income tax returns was the norm. That is now changing. There is access to bureau records and GST data. Focus is more on cash flow and less on balance sheet. A lender in Africa is looking at contact data and saying that more than 50 contacts is a positive indicator. Similarly, talking to same 4 people every day was considered positively. There are 2 types of fintech lenders – with balance sheet and without balance sheet. Retail lending as a percentage of non-food credit has increased from 20% to 25% in 3 years. Retail as a percentage of incremental lending has shot up. RBI should continue to increase the number of players in this sector.
Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services: Truism from the NPA crisis that has emerged is that lenders and borrowers should have been more responsible. So, the relationship needs to be strengthened. Household savings used to be the main source of funds for banks. No longer it is so. Funds have shifted to the mutual funds market. When that happens, the investor is taking a huge market risk. Thanks to NCLT and IBC, bankers and borrower have to recognize, admit and start making corrections much more in advance.
Debasish Mallick, Dy MD, EXIM Bank: Mutual funds are getting more money than bank deposits. So, banks will have to look at alternatives. Banks are also facing competition in getting customers and asset creation. Corporate sector is suddenly not looking as good enough to lend to. Refinance agency like Mudra has the comfort that it will get its money back from the bank. This may not be sustainable for banks and may impact the relationship between the bank and the refinance agency. There are issues in retail lending. Retail is a derived sector. It generates cash flow from trade, commerce and industry, and if these sectors stultify because of shortage of credit, I do not know if retail will be a sustainable sector. SME sector has shown not to be able to sustain on its own in the time of a recession. Some corporate have shown this capability.
Two new factors are changing lending – KYC norms and capital adequacy norms. In trade finance, I am seeing a difficult situation due to tight KYC norms. Due to non-rated lenders or low rated lenders, there is higher capital allocation for refinance companies, which is hurting flow of funds to them.
Bottomline is, what is good today may not be good tomorrow. No course should be fixed and final.
S.S. Mundra, for Deputy Governor, RBI: If we look at the changing contours and shifts, one thing that is clear is that both sides have more choices – borrowers and lenders. Even within banks, there is a new breed – small finance banks and NBFCs. The former is beginning to make a difference and the latter has already made an impact. Also, there is private equity, venture capital, etc. Similarly, banks are moving towards retail.
Even for international banks, it used to be 2/3 corporate book and 1/3 retail book. This has reversed and is happening in India as well. If every banker is searching for nirvana in retail, then I must caution. The bank-borrower link will not become irrelevant in the near future.
Another shift is that borrowers are looking for holistic solutions. Banks can also play match-makers and support it with credit.
There is increasing demand and adoption of technology and digitization. Digital is for simple solutions and physical for complex ones. So, any lending has to be high tech and high touch.
For users, technology is a great enabler, and they must migrate with caution. Lalajimunimji syndrome is that banking with tech is an in thing, but Indian system has a different psyche. So Lalaji won’t operate himself, but the operating part is left to Munimji.
If a bank is introducing too many products at too high a speed, it will confuse both customers and employees. So the pace must be carefully calibrated.
Outsourcing credit processing completely is not good.
I have been using 2 cliches about leverage. Leverage should be like blood pressure in our body – it should neither be too low nor too high. Similarly, operating on thin equity is like skating on thin ice… you can fall and break your limb. Looking at the last few years, I have discovered a new kind of cloud computing. This is that you have 1 unit of equity sitting in the cloud. It starts trickling down and starts getting compounded at geometric rate, ie it becomes 2 and then 4 and then 8 and then 16 and then becomes 32 by the time it reaches the ground.
For both bankers and borrowers, postponing the solution to a problem only compounds the problem. NPAs are a reality of a business cycle and should be understood as such.
Sutras for success: Bankers should say no to a business they do not understand. Borrowers should avoid rapid expansion and unrelated diversification. The time duration between sunrise and sunset has shrunk; the lifetime of a business has become shorter. Mis-selling and impulsive buying are sins. Pay attention to the components of the credit rating, not just the final outcome. Conserve capital during good days for the stressful days.
Jyoti Prakash Gadia, MD, Resurgent India: All informal sources of money have dried out and with GST coming in. Now, formal sources of money are required. The banking system has organized in such a way that bad credit should not happen. But it is time that the system should not turn away good credit. There should be a differentiation in declaring NPA (90 day default) on the basis of the extent of the collateral.
Around 80% of SMEs belong to 42 industries. The banks ask for industry forecast and how can the SME possibly give a forecast about things such as injection moulding machines? So, for these industries, there should be a standardized industry report. Also, there is no standardization for loans to service sector.
Rajat Bahl, CEO, Brickworks Solutions: In ratings, the most important is the financials of the company and its credit history. Apart from these, we are looking at other sources of data. SME borrowers typically have access to other sources of funds for paying back loans, and thus their NPAs tend to be lower than calculated. The addition of lots of borrowers who have been rated has reduced the median rating. However, only a third of the borrowers were renewing the ratings, as they got the 25 basis point benefit. Then, the government gave a subsidy for rating, which led to another round of ratings. But the culture of rating never got built up. We are proposing to banks that every time an SME gets a rating improvement, the bank should give some benefit to the borrower. That way we hope to improve the culture of credit rating.
A panel discussion in progress at the summit
Panelists listening to a presentation