Are global and domestic macros favouring financial system growth?
If you look globally, much of the world is grappling with high inflation and recession. If you look at global commodity prices coming off, one could make the call that inflation has peaked. So, inflation may come down but it’s not going back to the 2% levels we have seen in the US. As interest rates go up in the US, we will have to see the damage it causes to the world’s largest economy, and therefore, the implications for global growth. To that extent, while domestic continues to be strong, there is a very strong correlation with overall GDP growth versus global growth. Ultimately, if the US is not going to grow, it is inevitable that exports will not grow and that’s a worry. In the context of what’s happening globally, India looks like an oasis of calm. We will grow over 7% this year and 6% next year. In India, while inflation seems to have peaked off, we have growth that’s reasonable, we are quite comfortable as we look out into the future. In this context, retail growth, MSME growth continues to be strong and corporate demand is back.
What gives you confidence about the customer profile?
One of the big things that has happened over the last few years is the quality of corporate India’s balance sheets. Debt to equity is 0.6 times, levels we have not seen for 10-15 years. Given that corporate India has de-levered and become more efficient, its ability to withstand global shocks has significantly improved. And given the set of customers we have chosen to bank with, now 88% of our incremental lending is to A-minus and better (rated companies); I do believe that their ability to withstand pressures is very strong. Also, many of these players are domestic, which is an upside. India is also a beneficiary of the China-plus-one strategy. I know that several global players across industries are having strong conversations about moving some part of their supply chain away from China into India. Each of these will provide us opportunities to create new businesses.
Are there conversations on capex?
We are certainly having conversations with corporate India on capacity utilisation, especially in the areas of specialty chemicals, cement, renewables. Will all of that get financed by the banks? Probably not, because corporate India’s operational cash flows have improved so that they are quite happy to use internal accruals to create fresh capacities as well. As interest rates continue to go up both locally and globally, corporates will assess what will give them the best benefits and given the fact that a lot of arbitrages are reducing, the demand for bank loans will rise.
Does the issue of mispricing of loans still continue?
If we are looking to optimise our NIMs (net interest margins) so that we get to better RoEs (returns on equity), we need to pick and choose where we grow. In the large corporate space, we feel that we are not getting paid for the risk that we are taking. If it all comes down to pricing, we are happy to wait because we have other engines to grow. Growing the balance sheet is not a problem, but growing profitably has become more and more critical for us.
Are you becoming more conservative in picking corporate loans?
All I am saying is in the corporate space we need to be paid for the risk that we are taking. The credit risk environment is reasonably benign but having said that, if a 10-year G-sec (government security) is at 7.30% today, I would expect to be paid in excess of 8%. Otherwise, I would rather buy G-sec which is risk-free.