Let us get in an overall picture from you on the entire banking sector because we have seen balance sheets getting cleaner, growth looking strong, it is pretty strong environment as well. So, given the fact that historically private sector banks have thrived, a lot of public sector banks are now looking a little more competitive, valuations as well are looking better. So, how does the picture stack up?
The picture seems to be very good as far as public sector banks and the overall banking scenario in the country is concerned and it is an effort which had started a couple of years ago. All the banks took steps to clean up their balance sheet. The recognition of NPAs was done. Adequate provisions were made. And the cycle also has turned around where the credit demand, which was slow for a couple of years, it has come back. So, as of now, everything seems to be going right for the banking sector. The loan book is growing. The balance sheet is strong. The profit margins are good. The only thing to watch out will be that the repricing of loans has happened but the repricing of liabilities that impact will come now.
So, there may be compression as far as the net interest margin is concerned. But if the compression in net interest margin is made up by higher business growth and other cost efficiencies, then bank can continue to show a good return on assets and equity and ample opportunities for credit growth are there because the investment climate in the country currently is very good and a lot of investments are taking place.
A lot of analysts are saying that unlike private banks, PSU banks right now disregarding the risk pricing of loans. They are taking it very easy.
I would not agree with that assessment in the sense that one, most of the banks, there has been a rebalancing of the books. At one point of time, corporate loans, they constituted about 60% to 65% of any bank’s loan portfolio. Currently, it has reversed. The ratio of retail loans has gone up to 60% and the corporate is now about 40% or even below 40% in case of many banks.
In retail, if we analyse, this is called RAM, retail, agriculture and MSME. Historically, for the public sector banks in particular, the delinquencies in agriculture and MSME have been higher and there should not be a cause of worry as far as these two are concerned. So, the risks which the people are pointing out or there may be some concern is around unsecured personal loans. But there, I believe that the pricing is fairly good and compensates for the higher risks. Unlike the past years where the project funding was done and the risk pricing was not commensurate with the risk taken and when the higher percentage of corporate loans and project loans became NPLs, the banks had to pay a very heavy price. So, currently, I would not agree with this analysis that banks are not adequately pricing the risk which is mostly today in unsecured personal loans.
With regards to the entire sector, we have seen concerns being expressed on unsecured lending, we have seen more than one private bank coming out and suggesting that there is a mispricing in corporate loans as well. Is this somewhat the start of a new cycle and, of course, margins peaking out in the first quarter?
Margin squeeze already I have spoken about that it seems to be a bit inevitable because the repricing of liabilities, its impact is or will now be visible in subsequent quarters.But as far as the mispricing of the loans is concerned, on the corporate book most of the banks, they price their risk according to their external rating of a loan as well as the internal and there is a huge competition because the corporate loans, the operational cost is relatively low because of this ticket size.
As far as the retail is concerned, the banks which have put in the proper data analytics based underwriting, there the chances of their taking a higher risk would be minimised because the information which is available today and the capabilities which banks are developing in analysing the available data, there is definitely an improvement in the underwriting models and for a couple of banks I have seen that unsecured credit also the book is holding on very well and the NPA is not higher.
But if something happens at a macro level that is where the economy goes into a spin and there is a loss of employment then it is a different thing. But otherwise, the underwriting standards have improved.
The other thing is who wins the race because what we have seen is private banks traditionally have been thriving, public sector banks have been losing market share but now what you are seeing is that valuations are looking a lot better, even for PSBs, for private banks as well. They are all pretty competitive and pretty much neck to neck now. Do you think in today’s environment one can really make that classification or is it going to be from an investment perspective, a very bank to bank kind of story?
Well, the valuation of the public sector banks no doubt has improved. But still if you compare the price to book value, they still lag behind. Even the State Bank of India in terms of price to book value lags behind HDFC and ICICI Bank. So still there is a discount in the market for the ownership which rests with the government.
And I do not think that going forward also any major or approach in valuation would happen. So, there would always be a discount when it comes to price to book value.
But definitely valuations have improved because the earnings have improved and the going forward scenario for the earnings for public sector banks also looks good and today they are competing well with their private sector banks in terms of both. Not in terms of profitability if measured by return on assets, but the overall profits they have done pretty well in the last couple of quarters. But there is still a scope for, like there is a difference, I would not say that there is a scope for it (7:33) but there is a difference when it comes to return on assets of private sector banks and public sector banks. And coupled with the government ownership, this gets reflected in the discount in the valuation of public sector banks.
Do you think the platform launch of Jio could have disruptive impact on the way how distribution in the financial services and the products has been done? Can they do something like what they did to Jio and telecom?
They have an advantage in the sense that already the distribution reach, which has been built for Jio and Jio Retail, so there are certain synergies in the group. But I always believe that competition is not bad for any sector. India is a vast country, there is still under penetration of credit. So, if there is a new player and who brings in new technology or does something different, it is always welcome and that is how the development of any sector or economy happens where there is a competition, competition tries to bring in some unique selling propositions what is called USP and competition is not necessarily bad or rather not at all bad for the consumer.
Consumer always benefits because of the competition and the legacy institutions, obviously, they will have to continuously work on improving their functioning and look for ways to remain competitive and relevant.
What about lending per se? Look, they got Jio services out, they talked about scale and reach and they were able to change the dynamics of the telecom sector. But when it comes to lending, do you think that dynamism may not be at play because ultimately you are also dependent on the market rates, you may have better rates of borrowing but ultimately your raw material is based on the 10-year yield, so Reliance is unlikely to be a disruptive NBFC player, can I say that?
For Reliance Jio in particular, they have a lot of captive market, that is what we have to realise because of the synergies within the group. So, how does that synergy play out that would be the crucial factor.
But as I said, the advantage for a player like Jio is they have a huge captive market and synergy within the group which can be very helpful. But lending for anyone, that is Jio or anybody else is always a business which requires prudence, which requires good underwriting model, good collection machinery, control over cash flow.
So, there are many dimensions on which the lending business is dependent and putting all the pieces together then ensure that the risk remains within the tolerance domain and we spoke earlier about the risk pricing, to get the risk pricing model correct. So, these are some of the key elements. But Jio has started according to me with a certain advantage in terms of its size in telecom and in retail.