RBI should allow one-time loan restructuring instead of moratorium extension: Amitabh Chaudhry

Moratorium is a bit of a blunt instrument and only pushes the problem down the road, says the Managing Director & Chief Executive Officer of Axis Bank.

Looks like markets are not very excited about the package that we have got from the finance minister. Yes, the long-term vision to fix the supply side measures are great and are needed but in the short term, very little has been done to stimulate the demand for a country like India where 60% of our GDP comes from consumption.
While all the actions cannot be determined by what the market wants but obviously the market it looks like was expecting more. Let us be fair to the government in what they have done. If we look at the economy and where it is and we divide it into various, I think right now we are in survival mode. Then we have to go to recovery mode and then normalisation and then growth. Now in the survival or the recovery phase, the government has to ensure that they take care of the people who are suffering the most and they also have to target whatever spending they have in mind and they have given credit financing or guarantee to that particular segment of the population or the economy which needed it the most. Obviously putting money in the hands of people is not going to help because in this time of survival, people might not actually spend it. They might save it. So I think this clear linkage which people are making that just put money in their hands and the consumption will come back might not be the right way to look at it.

The government has put in the money and they have just put it in the form of the NREGA scheme. They are saying you do some work, we will give you the money and then if you want to stay wherever you are, you can survive. They are also trying to distribute food. So we have to look at just what phase of the economy we are in. We are still going through a deep shock in the economy. Everything has been shut down and in that phase, the government is just trying to do both the short term stuff and coming out with some medium term and long term account will take time to fructify. I think it is a combination of the number of things which are being talked about. Yes, people are not happy with the real money which has been put on the table and people are not happy with the fact that some sectors have not been supported. We are just trying to come out of shock and a lot of people are still in the survival mode.

The banking sector has a lot of liquidity currently parked in reverse repo. Some banks are not lending, some are being prudent, some are saying we have the appetite but right now we do not have the ability or the capability to understand whether lending makes sense. What has been your experience at Axis Bank? For those who are criticising that banks are not lending, how would you defend it?
We are also answerable to our shareholders and to our regulator in terms of how we lend, what the risk management framework is, what those guardrails are and it is not just specific to Axis Bank; it applies to every bank out there. In this environment we do not know when we will really come out of the lockdown, when the economic activity will pick up, in what form and shape it will pick up, and which companies and individuals will be able to survive this shock and come out stronger. A lot of these are unknowns at this stage.

Now in this time of so many unknowns, to go out there and just start lending left, right and centre is a big question mark. As far as individuals are concerned, why would anyone need money at this stage when things are not clear? It is difficult to buy a home right now. Very few people should be borrowing at this stage and as far as corporates are concerned, you have to go and assess things as the balance sheet or income statements of the past have no relevance. You have to look at what their balance sheet was and how much it has been impacted because of this lockdown or will get impacted and then access what kind of money you can give to the largest corporate, to the SMEs and MSMEs. I think everyone is doing their analysis.

No one wants to not lend. Ultimately we are in the business of collecting deposits and lending. We cannot shut one shop completely. But yes, you have to be careful and cognisant of the fact that there are lots of unknowns out there because if you lend just left, right and centre today, you will suffer it later and your shareholders and investors will make you suffer.

In two weeks, the RBI moratorium will get lifted. Do you think there is a reason for the RBI to come and increase the moratorium limit or banks can manage it now?
Indian Bank Association has gone to the Reserve Bank of India asking for extension of the moratorium or allowing one-time restructuring or some other concessions because right now the lockdown will not get lifted before May 31. I do not know if it’ll get lifted after May 31 and if all companies or individuals who have taken the moratorium will be able to pay on June 1. It will be difficult. So yes, by allowing a moratorium for 90 days, we are in a way taking the can down the road. It has not really led to any improvement in cash flows. It just allows people more time. I think the expectation I believe from RBI is that more time should be permitted. Now the preference between the two would be a one-time restructuring because then you would like to look at the cash flows again and see whoever has borrowed from you and restructure it to the extent that it matches the cash flows.

Moratorium just pushes the problem or the recognition of the problem down the road for a certain period of time in the hope that when the economic activity revives, the cash flows will come back and things will be okay. So moratorium is a bit of a blunt instrument. One-time restructuring is obviously very specific. Let us see what the RBI decides; there is still some time left. The Reserve Bank of India has been quite prompt in the past. So I am sure they are thinking about all suggestions that are coming their way and they will come out with an announcement very soon.

But are the banks ready? Well some of us have taken provisions which are much larger than what the initial RBI requirement was. Some of the results have not come out; so I do not know what they are deciding and what they will decide to do. But yes, with the amount of moratorium one is hearing about in the banking system, the amounts are large and if the moratorium is not extended or some concession is not given, the amount of provision that might have to be taken will be large and that would mean in some cases, infusion of capital. So I guess the government and the RBI is to decide what is the fine line. They want to walk and I am sure they will reach the right decision on that.

A part of the economy has already opened up. What is your analysis and ground feedback telling you? Is the demand for credit coming back? Are you getting a sense that economic transactions have started taking over?
If I look at Axis Bank branches, about 49% were in the red zone and 33% were in orange and the balance were in green. People have started talking more and more actively about opening business activities and going back to work. So yes one is seeing some pick up in demand or pick up in request coming from various people that we need the money or we are planning to start and this is what we are going to do. In many cases, showrooms of automobile companies are open but it is a slow start in many cases. In many cases, supply is not available. In many cases, stocks are not available. So it will take time.

As I said, this survival and recovery phase will take time. In some cases, it might happen faster and in some cases it might be quite slow. Even if you look at the announcements which have been made across the country on what this phase 4 of lockdown means and what is allowed, what will be opened up and what will not; there is quite a bit of variation between various cities say Delhi and Calcutta and Bangalore and Mumbai. So the announcements are still coming out; so the recovery phase will be like that. Various cities and jurisdictions will do different things and for a company to manage all those variables on a day to day basis means that it will not be rapid. It will be slow and it will be grinding.

It will take time and we need to learn to live with the Covid-19 crisis. The infections are not reducing. They are just growing at a slower rate than what would have if the lockdown would not have happened but it appears that the infection is continuing to rise across the country; so we need to learn to live with that also. There are instances where a plant was started but had to be shut down and you will see that across various parts of the country because something will start and then suddenly there will be a spread of some cases and then again that part will be shut down. It is not only specific to India; it is happening across the world. So it is going to be a bit of a grinding recovery from here on.

For a bank like Axis Bank, liquidity and liability is not a challenge at all but when do you think you will be able to give a complete clarity on what will happen to your asset? How do you see things panning out because last time when we spoke after your quarterly numbers, you said we do not know the shape of the world, so I am in no position to give guidance. Are you in a better place now because there has been a gap of about three-four weeks between our last conversation and this conversation?
No, things have not changed dramatically at least in terms of being able to give you better guidance. I think it will take another four to six months for us to be able to give you a better idea of where the asset quality is headed. We do not know whether the moratorium will get extended or not. If it gets extended, then obviously guidance will be delayed. Secondly, even if it is not extended, the first quarter of this financial year will not tell much because the two months of moratorium will be adjusted; so only that many accounts might go into NPL. So it will be at the end of the second quarter when we will be in a better position to assess how bad the situation is. My view is another four to six months to give you a real idea of where the financial system is headed in terms of incremental slippages. It will not be in a short period of time. There are too many variables out there which are unknown.

Let us talk about the credit guarantee schemes which the government announced in the package of Rs 3 lakh crore. You have 10%-11% exposure to that pocket. What happens to that exposure now?
What they have done there is quite remarkable. The only point that needs to be seen is when the details and the mechanics of the scheme comes out; whether it is going to be easy to tap into that guarantee as and when the accounts go into NPL because some of the accounts will slip into NPL. So the mechanics of the scheme are important and if the mechanics of the scheme are going to work the way the government has been telling us, then you will see credit definitely flowing to the MSME and the SME sector. I think they have kept things simple and they have kept things quite clean. So if the payout and the guarantee is also kept simple, you will see a lot of money flow to the sector.

What happens to us? Yes, obviously it helps our exposure because firstly a very large part of our exposure is to what we call A minus and above; 85% of our exposure to the SME sector is backed by hard collaterals. So we are quite well-covered. But yes, a lot of the SMEs will suffer through this crisis and they might not have money with the promoters to be able to pump into the company and this additional line of credit will allow them to open up and gradually move towards normalisation. The inherent operating model of these companies is not bad. This is quite good and hopefully they will come back. They would have to obviously bear some pain but I think the pain will not be large enough forcing them to shut down. So we are looking forward to the scheme. It would help the entire MSME and the SME sector and it will help our borrowers also to come out of this shock which the economy is going through.

The shareholders of Axis Bank I am sure are not very happy because of the way stocks have fallen. It is not for Axis bank but for everyone and the concerns are perhaps valid. What would be your communication to your shareholder because if I look at my screen, Axis Bank and other banks have really suffered. I am sure this is not the right value of their franchise in this time of crisis but in general, how would you quell or douse queries of shareholders?
We have been talking quite regularly to our investors and people who are interesting in understanding what is happening in India and what is happening to the financial industry and what is the impact on Axis because the structure of those conversations have been extensive. They are all part of a public disclosure. Yes, the major concern which the investors have is obviously when the economic activity will come back and what the impact of that is on the asset quality across the banking and the NBFC system. As I said, sometimes it is very difficult to justify but we did walk them through how the likely events are going to play out and what the impact on the asset quality would be. Some of them have appreciated, some of them are keeping their cards close to their chest and waiting for better clarity to come and I am sure they will come back to the market because the shares have fallen to a point where it almost appears that people are just saying that I do not understand it well enough. I do not want to take the risk; let me just clear up my position and I will come back and look at it later on.

But because the financial stocks accounts for such a large part of Sensex; if the financials suffer obviously the entire stock market suffers in a very big way. The financial services industry has to do well for the stock market to do well and for the economy to do well. So yes, all of us are very focussed on ensuring that we keep doing the right things for the short term, for the medium term and the long term and our belief is rather than getting caught up with the day to day stock prices, just keep doing those things right. The government is also obviously very closely monitoring everything in terms of the economy and what they need to do. Yes, there is pain in the short term but hopefully people who are willing to live through the pain and willing to remain invested through the pain will come out smartly at the end of it.

We are already coming out of the lockdown. We all realise we need to live with the crisis. So the big part of the shock which had to be given is already over. So let us understand and appreciate that. One month back, we were not sure whether the lockdown would be lifted. Now it is actually happening. So as gradually more and more of it happens and just as positive sentiments hold, people return and as they return, I am hoping that it will affect the stock market also.