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Breaching the fiscal deficit target won’t hurt if spent well: Kaushik Shaparia, Deutsche Bank India

People want structural things to be addressed before they invest. The NBFC crisis is not redressed yet.

Dec 10, 2019, 08.00 AM IST
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Kaushik Shaporia-Deitsche Bank-1200
India faces the peculiar challenges of structural reforms as well as a global slowdown. The government reiterating the fiscal deficit target is prudent, but it may not be bad to breach it if it means the revival of animal spirits, says Kaushik Shaparia, CEO, Deutsche Bank, India, in an interview with Joel Rebello and MC Govardhana Rangan. Edited excerpts:

A common thread among all discussions in the business community is the slowing growth. What is your experience?
Actual demand is low partly because people are not confident and they withhold investments when they are not confident. Secondly, while we are a large domestic economy, we are still not insulated from what is happening around the world. Thirdly, it is also due to the implementation frictions that arose due to implementation of the Goods and Services Tax, demonetisation, etc. The intent is good but there are carry-on effects. The Bankruptcy Code is good but the implementation is a challenge. Promoters are now being careful in having enough of their own capital. Then there is the whole NBFC liquidity crisis.

How do you get around this? Especially the NBFC one?
I am very happy with the fact that we are not trying to get out of this by giving out doles because it could lead to short-term gains but long-term pain. It's laudable that we are trying to come out of it by maintaining our fiscal deficit at 3.3%. The government has announced a huge infrastructure investment coming soon. To me, that's a very important thing. If it comes out the way we are expecting, it will lead to a supply-led fillip. By doing so, if the deficit goes up to 3.5-3.6% it would not be a bad thing. But putting money in the hands of the people who use it once could be inflationary.

Won't that send a wrong signal to global investors? How would the rating agencies react to such a miss?
We have to sell this story on what the increase has gone towards. Governments around the world have tried to address slowdown issues by providing more liquidity but we are being more prudent. The only issue for us is that we are at the very edge of investment grade and are now on negative watch, so we have to be careful. Having said that if we have a good story, those guys will understand. Where you spend that and how you spend is important. With that if the growth comes in we are good. I am not saying a deficit of 3.8% or 3.9% but where we spend is very important.

The RBI has already held back on a rate cut. It also indicated that revenues could fall short given that GST is already below expectations...
It's a pause rather than a stop. Our house view is a 65-basis-point rate cut next year. RBI expects the fiscal path to play a bigger role because cutting down interest rates without it getting transmitted in reduced rates is irrelevant. Growth is not getting impacted due to a lack of liquidity. People are not even drawing their full limits. It's more about creating the demand for goods and for finance. It's not availability of finance that is a challenge. By reducing rates by 25 bps, will another project come in? People are looking for structural things to be addressed before they invest. The NBFC crisis is curtailed but not redressed yet.

How do you address it?
Liquidity is still not coming in. We still don't have a proper stressed asset resolution. We need an AQR (asset quality review) for NBFCs because the current rules allow only a limited haircut. May be a TARP (Troubled Assets Relief Programme in the US post the Lehman crisis) kind of thing for NBFCs. The PSUs were given a shot but they didn't take it up. People like us will be very happy to take it up. We need some of those to get addressed. What is important is that the good should not be impacted by the bad. We have suggested the AQR and also making the withholding tax on PTCs (pass-through certificates) in line with bonds and also reducing the ECB (external commercial borrowing) tenures.

You have been one of the most active participants in the stressed assets business. Are you still at the top of the business given that resolutions are seeing delays?
Even after the crisis took place in October 2 018 we pumped in a large amount of money into the NBFC sector. We put in hundreds of millions of dollars. Whatever was kosher, or doable, has been done but now it is going to be the tougher ones. That's where we need the changes for people like us to support. People who do the financing do not keep everything in their books. They need to sell down the risk. We need to have structures which will be tax-efficient, regulationscompliant that allow you to transact easily. We have made some concrete suggestions. There is enough capital interested to fund stressed assets at a price. It's more about how to fit in the regulatory and tax issues and opacity which needs to be taken out. Our deal pipeline is pretty big but everything has got something attached to it. Many of the restructuring talks are coming to us because most banks only do simple transactions.

I think it's a pause rather than a stop. Our house view is a 65-basis-point rate cut next year. RBI expects the fiscal path to play a bigger role because cutting down interest rates without it getting transmitted in reduced rates is irrelevant.

-Kaushik Shaparia


Deutsche Bank has been going through a lot of changes and challenges. How do you play the India game now?
We will play to our strengths. Our custody business, advisory services, long-term derivative contracts for hedging purposes are all doing well. We have a strong foreign exchange practice. We process about a sixth of the FPI flows into India. Then there is structured finance which is in a sweet spot. India needs international capital, international investments, which is a huge strength for us. Global clients want to have a strong European bank to avoid geopolitical challenges. Our retail and MSME business in India is doing well and we are making heavy investments there. We are expanding serving of our MSME clients who will also need allied services besides lending.

What are the kind of returns you are expecting from these business, especially the stressed asset ones?
We want returns on capital and equity. But if there is more clarity we will be able to put a lower risk weight and that will help us improve our pricing. If we do not have enough, then we will assume the worst which will make it riskier and increase our return expectations. Pricing may look rich but we also have to sell down. Mezzanine risk cannot be looked at like lending. This is where some of the regulations need to get clearer. Expecting commercial lending rates as a benchmark of what you can pay is wrong because we are buying stressed stuff which requires different pricing and the current regulations do not provide room.

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