Banking reforms are great but execution risk remains high: Vishal Goyal, UBS Securities
“I am not sure the banks who are at 10% or above in CED-1, would be forced to sell non-core assets.”
By now, we know what the reform roadmap is. You are going to have special monitoring of loans which are above Rs 250 crore. You have got a 10% limit on consortiums. All of this is expected to reign in the risk appetite and flag off NPAs much earlier in the system. What do you make of all of these reforms, is this enough?
It is a step in the positive direction. Talking about fixing risk management, a lot of discussion around turnaround time and customer experience will have to be enhanced as well as use of technology. These are great initiatives but as we have seen in all our previous proposals and schemes, the execution risk is still very high given the state-owned nature of these banks. Second, the HR related reforms are not discussed much, which is also essential to improve the structural franchise of all these banks.
We interviewed the SBI Chairman, Rajnish Kumar, in Davos yesterday minutes after this announcement and he said that they still need more clarity, for example on whether SBI Life a non-core asset. Do you have clarity on all of that? What is the market expecting, what are experts like you thinking when it comes to the non-core asset part and the HR policies that have been outlined by you?
Non-core assets would be critical for banks which are running well below the Basel-3 requirements. So, banks who were basically struggling at 7% kind of CED-1, the non-core asset monetisation is critical for them. I am not sure the banks who are at 10% or above, would be forced to sell non-core assets.
Can you tell us how important is this capital for growth in credit because the SBI management did tell us that this money will be used for pickup in credit. Do you think it is an important trigger for corporate credit pick up?
There are two parts to it; one let us take a step back and analyse what is the provisioning requirement still left for the entire banking system or especially SOE banks. There is still a shortfall on the provisioning side. This capital, would barely meet even the existing NPA provisioning requirement, assuming there is no more stress left. Outside of this, whatever 13.5% has been reported by SOE bank gross NPA, that is part one.
It seems the way allocation has happened, a large part of the capital is going into NPL provisioning. Second, if you read the agenda you would see there is a push for SME lending and that seems to be the thrust area for the government, so that you would see some accelerated growth in that particular segment, not essentially the corporate or large corporate loan growth.
In terms of loan growth, do you expect big ticket size loan to pick up this year? Is that something which you have built into your estimates?
Not really. Our structural thesis is SME, retail and rural agri would grow much faster. Corporate growth would remain muted for two reasons; one, lack of any new projects, second lot of deleveraging is already happening and capacity utilisation is anyways low. Lastly, even working capital requirements are met by the non banking sources of funds like mutual fund, insurance etc.
The government has also stated that there is going to be no interference in the commercial decision making and the appointment of independent directors and steps to improve the overall governance of the banking system. How are you looking at this and do you believe that it is a positive?
It will be a great positive if you ask me and to some extent maybe that is already happening. But it has been like seven-eight years that we have been hearing about independent board, the Bank Board Bureau and so the real improvement or real impact of all these changes have not been felt at the bank level. My view is that execution risk to whatever has been promised in the agenda, especially about reforms, still remains high.
And given that there was also a comment that there will be no relaxation when it comes to the overall FDI in the banking system, was that something that was desirable? Was that something that the sector was looking for and how are you looking at that and any sort of a closing comment in terms of the pecking order for some of these PSU banks that you have?
If you look at the current FII ownership of state-owned banks, you will get the answer which is much below the current limits also. It seems there are really no interest currently in owning PSU banks, at least by the FIIs. Second, we do not give stock specific comments and I would refrain from giving you names on what we like.