Banks in India must be allowed to grow, failing which the problem of non-performing assets (NPAs) will become unmanageable, former chairman of ICICI Bank KV Kamath said in an interview to Network18 group editor-in-chief Rahul Joshi on Tuesday.
In the interview, Kamath said that the coronavirus pandemic is likely to lead to a bad loan tsunami, and banks have no choice but to grow their way out of it.
This, he said, would have to be done alongside other corrective measures such as building prudent provisioning buffers, capital injections, and so on. “Whether it is in corporate India, whether it is in rural India or in retail India, I think we need to maintain (growth) momentum,” said Kamath.
“If I look at pre-COVID, I think the banking sector was having a problem which was serious. But with all the efforts- like from government with capital injections and so on- it needed a little more hand holding, but is coming out of it,” the ICICI Bank veteran said in his interview.
The spread of coronavirus and the resultant hit on businesses would pose a serious challenge for the banking industry no doubt, he said. The second remedy for banks, as per Kamath, is a low interest rate regime.
“If interest rates are at 12 percent, your NPA doubles in 6 years. If it doubles in six years, then there is no chance of that institution surviving…without massive capital injection, and that capital doesn’t probably exist,” he explained. “You need to get down interest rates so you buy time for banks to heal on their own. If banks lend at 6 percent, you have 12 years for NPAs to double,” Kamath added.
While he acknowledged that interest rates had been trending down, Kamath said that all stakeholders- the government, banks and regulator- would have to ensure the low interest rate regime endures. “Interest rates need to drop even further if banks have to come around without too much pain,” he said.
While Kamath lauded recent policy measures like a holiday on loan repayment for six months, he said borrowers opting to repay loans irrespective was excellent news for the industry. For sectors that are genuinely in pain, KVK concluded, a longer moratorium must be considered by policymakers.
Edited excerpt from the interview:
Q: Let me turn to the banking sector, clearly the banking sector was struggling under the burden of bad loans even before COVID, do you feel that after this that could exacerbate that problem could become worse, does it worry you at all?
A: If I look at pre-COVID, I will only amend what you said very slightly. I think the banking sector was having a problem, but I think the banking sector with all the efforts of the government, the capital that was injected and so on, is coming out of the problems. It needed a little more hand-holding when it was coming out of the challenges. Clearly, the answer to your question is yes, there will be a challenge and the sectors where we will have challenges are also known. So what is the key response?
The key responses are on three levels. I learned this lesson very long back in my previous stint as a development banker, not the current stint that the only way a bank can survive is by growing. If you do not allow a bank to grow, the problem of NPAs is going to unmanageable. So, apart from corrections in terms of provisioning, capital injection, and so on, banks will have to grow their way out of NPAs.
Growth is going to be a critical part for the banks coming out of this. So I think with the steps that have been taken the growth will happen whether it is in the corporate India, whether it is in rural India or whether it is in retail India I think we need to maintain the momentum of growth.
Second is at this point in time low interest rates. Lower interest rates are going to be critical for the survival of banks and I will explain why? Take a very simple scenario, if interest rates are 12 percent your NPA doubles in 6 years, and there is no chance, no chance at all institutions have if an NPA is going to double in 6 years without massive capital injection. So you need to get interest rates down so that you buy time for the banks to heal on their own. So you turn the thing around, the bank lends at 6 percent, they have 12 years for the NPA to double and clearly you will have at least one if not two economic cycles in the period which will raise all boats and the banks will be able to come back to health. Yes, capital injection will be required, but the order of capital injection will be significantly lower than what it is if you run it in a high interest rate regime. So I think banks really need to look at how they work with the government, with the regulator to ensure that the low interest rate climate endures.
Having said that interest rates have started dropping, I would guess that interest rates need to drop even further if the banks have to come around without too much pain. Otherwise, they will probably come around but extreme pain and money being provided by various stakeholders which is going to be a challenge that is the second part.
The third point I would think is some steps were taken, moratorium was announced by the Reserve Bank of India (RBI) and there was also an extension of moratorium; very well done. I am even more heartened when I see bankers come out and say or some NBFCs come out and say that ‘X’ percent of my customers took the moratorium, that was 2 months back, but today remaining of them have said that we will pay in time; extremely good news. So, I would think and hope that continues.
However, having said that, if there are sectors who genuinely have a problem, I would think that it is right time that policymakers could consider, again I have no prescription, but could consider a moratorium of longer nature, maybe a one-time moratorium. I have heard other banking leaders talk about it and I would stand with them to say that that is probably the need of the day and probably the lowest cost way in which you will put the banking system back on its feet — low interest rates, one-time moratorium, and provide them a market to grow and encourage them to grow. I think this puts back banking on its feet quickest; this is the lesson that I learned going back almost 30 years into my career or more and I think it stands true even today. This is something that we could consider.