Lesson that Axis Bank learnt from the NBFC crisis

'It’s not that the asset-liability mismatch issue was not known.'
'I think the lesson from an Axis Bank perspective is the biggest decision what you will not do rather than what you will do; who you will deal with rather than who you will not deal with.'
'We need to be very, very clear on this.'
'We want to be on the journey of conservatism.'

It’s been eight months since Amitabh Chaudhry moved into the corner office at Axis Bank.

He has since steered the bank on to a conservative path, eschewing needless risks.

He’s been candid enough to admit that the exposure to the infrastructure sector in the past proved to be an Achilles heel.

The bank’s managing director and chief executive officer hopes to grow the business at 5-7 per cent above the industry average.

Chaudhry spoke to Shreepad Aute and Raghu Mohan on the road ahead. Edited excerpts:

How has your journey at Axis Bank been so far?

The first couple of months were about putting a strategy in place.

We shared it with the investor community and gave a much deeper version of it to our employees.

The strategy required certain structures and we put them in place.

But the economy is not helping, but that’s okay.

So, how do you view the economy?

We are going through a process where businesses are expected to relook at the way they are being run.

If you have too much leverage, we’ll just stop lending to you one fine day.

If you look at non-banking financial companies (NBFCs) and real estate (that combination), you are seeing some banks talk about stress building up.

We have not seen the signs yet, but we are part of the ecosystem.

If the signs continue, we’ll also potentially get caught. One has to be extremely cautious.

You have expressed hope of growing at 5-7 per cent over the industry average. Given the state of the economy, where does this optimism stem from?

I am talking about the medium and long term. If that is the case, we are well positioned as a wholesale bank.

With information being shared with everyone and this being much faster today, you have to take a call on not doing business with certain groups.

With this and the Insolvency and Bankruptcy Code, promoters are also realising their own rules don’t apply anymore.

The new rules are such that the leverage is lower, promoters cannot siphon off money, and the penalties mean the borrower loses his business.

How is your plan to increase retail business progressing?

We have always done well on current and savings accounts, and been very strong on government business.

More than 80 per cent of our retail loans are coming from existing savings account customers.

On the unsecured side, the number is beyond 90 per cent. We have created the book in a calibrated low-risk fashion.

Plus, the level of analytics we use has always been high.

How do you see the trade-off between your growth ambitions and shareholder returns?

We are targeting 18 per cent by way of return on equity (RoE); 16 per cent is what we can get, and again, I am talking about the long term.

I said the 18 per cent RoE target will make us think differently and that does not mean we do risky lending.

Our intention is to create long-term solutions on how this 18 per cent can be maintained.

This would mean we need to get to near the leadership position in certain sectors, markets, and products.

You need to get your net interest margin up; right now, it is at 3.4 per cent.

There are other factors such as pushing fee-based products and growing the book at a lower incremental cost.

When is your next round of fundraising?

We have taken board approval for raising up to Rs 18,000 crore and that is valid for a period of one year.

I am sure we can raise the funds. But it has to be at our price.

Are you happy with the book quality?

You see, there are Reserve Bank of India (RBI) norms on both the retail and wholesale side, which require you to do provisioning in certain ways.

We have created Rs 2,358 crore by way of cushion over the norms on the wholesale side.

On the retail side, we have always been more conservative than what the RBI requires us to do across asset classes.

From an RBI perspective, our provisions are higher than what they should be.

We want to be on the journey of conservatism.

So, have we reached that level of conservatism, which I would ideally desire? No, not yet.

How do you view the NBFC crisis?

This is not the first time we are seeing such a crisis.

It’s not that the asset-liability mismatch issue was not known.

But it still ended up the way it has.

I think the lesson from an Axis Bank perspective is the biggest decision what you will not do rather than what you will do; who you will deal with rather than who you will not deal with.

We need to be very, very clear on this.

Does the NBFC crisis present you with growth opportunities?

Customers who were going to NBFCs were willing to pay higher rates.

So, why would a borrower go there?

First, NBFCs provide bigger loans, their loan-to-value ratio is different, the terms and conditions they impose are also different from banks.

Secondly, this borrower is not good enough for the banks. There is no third reason.

So, are these the customers we suddenly want? The answer is no.

I think it is not that NBFCs’ absence has suddenly led to us being able to lend more.

We have enough opportunity to grow.

Photograph: PTI Photo