UPI just turned your phone into a bank

Customers of 21 banks can soon use Unified Payments Interface app to send/get money

In a push to a cash-less economy, National Payments Corporation of India’s Unified Payments Interface is ready and customers of 21 banks will in a day or two be able to send and collect money via a smartphone.

A brainchild of RBI Governor Raghuram Rajan, the UPI, which works on single click two-factor authentication, will allow a customer to have multiple virtual addresses for accounts in various banks. The UPI app of 19 banks will be available on Google Play Store in two-three working days for download. The details of the service will be available on the websites of the 21 banks. The new payments interface will also provide an option for scheduling push and pull transactions, such as sharing bills among peers.

One can use the UPI app instead of paying cash on receiving a product from an online shopping website and also for naking miscellaneous payments such as utility bills, school fees and over-the-counter/barcode-based payments. To ensure privacy of customer data, NPCI said, in a statement, that there is no account number mapper anywhere other than the customer’s own bank. This means customers can freely share their financial address. A customer can also use the mobile number as the user-name instead of a virtual address like “1234567890@xyz”.

AP Hota, MD and CEO, NPCI, said: “This is a success of enormous significance. Real-time sending and receiving money through a mobile application at such a scale on interoperable basis had not been attempted anywhere else in the world.”

After assessing the pilot run, the RBI had accorded final approval for public launch of the product. NPCI had decided that only banks with a thousand pilot customers, 5,000 transactions and success rate of around 80 per cent would be permitted to go live. Such a threshold criteria helped banks to refine their systems and procedures.

Banks on the bandwagon

Arun Tiwari, Chairman and Managing Director, Union Bank of India, said: “...Union Bank in association with NPCI is one of the first public sector banks to launch this (UPI) product. This mobile app can be used by both our bank’s customers and non-customers.”

1Q’FY17 BANKING PERFORMANCE REVIEW

Overall, the rate of increase in bad loans for the banking industry slowed in the June quarter, but the trend is not uniform even for the private banks

The dominant theme of conversation among banking sector analysts these days is whether the worst is over for India’s state-owned banks that roughly has 70% market share. I spoke to four of them last week. While two analysts say that these banks have been to hell and back, the other two are sceptical; according to them, some more pain is left for many banks. I am not naming any one of them as we spoke on condition of anonymity.

The answer lies in the numbers—more than the quantum of bad loans that each bank has piled up, the growth in the pile over the past three quarters ever since the Reserve Bank of India (RBI) asked them to clean up their balance sheets. Between August and December 2015, the RBI inspected the loan portfolios of all banks with a fine-tooth comb and asked them to set aside money for three kinds of loans—non-performing assets (NPAs) not recognized yet by them; loans given to projects where the dates of commencement of commercial operations had passed but the projects have failed to take off; and restructured loans.

The banks were directed to provide for the first two types of loans in two phases in the December and March quarters of fiscal year 2016, at least 50% each. For the restructured loans, they were asked to make 15% provision in six quarters, 2.5% each, till March 2017.

This simply means all banks should be through with recognizing NPAs and making provision for them by March 2016 even as they will continue to provide for their restructured assets till March 2017, by when the entire clean-up exercise gets over. Has this happened?

Bank of Baroda, which claimed to have bit the bullet in the December quarter itself, made a massive provision ofRs.6,165 crore and posted a Rs.3,342 crore net loss. It did an encore in the next quarter and made an even higher provision of Rs.6,858 crore and reported a marginally narrower loss of Rs.3,230 crore. In the June quarter, its provision against bad loans dropped some 71% to Rs.2,004 crore even as its gross NPAs rose 6% to Rs.42,992 crore.

This is more than double of the pile of bad assets the bank had a year ago (Rs.17,274 crore) but the pace of growth in NPAs has definitely slowed. In percentage terms, its gross NPAs rose from 4.13% in June 2015 to 11.15% now and after provisioning, net NPAs are 5.73%.

State Bank of India (SBI) had made close to Rs.8,000 crore provisions in the December quarter and an additionalRs.13,164 crore in March. In June, it made 44% less provision as its gross NPAs rose marginally. In the past one year, SBI’s gross NPAs rose Rs.56,421 crore to Rs.1.15 trillion, but accretion of new bad loans is certainly not as much as we had seen in the past three quarters. In percentage terms, its gross NPAs rose from 4.29% of loans in June 2015 to 6.94% in June 2016 and after provisioning, the net NPAs are now 4.05%.

Among large banks, Punjab National Bank, Bank of India and Canara Bank seem to have got a hang of their bad loans even though their level of NPAs vary, but for quite a few banks, we have not seen the worst yet. For instance, take the case of Indian Overseas Bank, saddled with more than one-fifth of its loan book turning bad. Its gross NPAs had risen 17% in the December quarter and 33% in March, fromRs.22,672 crore to Rs.30,049 crore. On top of that, in the June quarter, it has risen a further 13% to Rs.34,000 crore.

There is no respite from rising bad loans for a few SBI associate banks too. State Bank of Travancore had refused to recognize growth in NPAs in the December quarter, but had shown some aggression in March when its gross NPAs rose some 23%. However, that was not enough. So, in the June quarter, the pile doubled to Rs.6,401 crore.

Data compiled by Mint Research’s Ravindra Sonavane shows that State Bank of Bikaner & Jaipur too was slow in admitting the problem. Its gross NPAs rose around 5% and 17% in the December and March quarter, respectively, but in June, it has risen by more than 27%, on a higher base. State Bank of Mysore too has shown around 19% growth in bad loans in the June quarter after a 34% growth in the December quarter and another 25% growth in the March quarter. All of them will be merged with the parent.

The tale of woe continues for a few other banks such as Oriental Bank of Commerce, Allahabad Bank, Bank of Maharasthra and Andhra Bank. In percentage terms, Uco Bank and United Bank of India have higher NPAs than these banks, but both have added less bad assets in the June quarter than the preceding quarter.

Overall, the rate of increase in bad loans for the banking industry slowed in the June quarter, but the trend is not uniform even for the private banks. Axis Bank’s gross NPAs have risen 57% in the June quarter and that of Karur Vysya Bank, little more than 37% (after a drop in two successive quarters), while ICICI Bank has managed to contain the growth at a little less than 4%.

At a recent banking seminar, RBI deputy governor S.S. Mundra had said for some banks, it looks like the worst is over but some others are still struggling and “it is still work in progress”. The banks are in the business of lending and part of the loans will always go bad for a variety of reasons, including inefficient credit appraisal and monitoring, but shoving them under the rug is not a good idea.

The continuous rise of bad loans in the June quarter for some banks and a sudden surge for a few has two explanations. One, they refused to reveal the real picture in December and March; and, two, more loans turned bad in June, something the managements had not anticipated. Even if the second premise is true, it’s not a good sign when most banks have virtually stopped giving fresh loans.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.

When banks return to retail lending

Banks burdened by NPAs in areas such as infrastructure seem to be back in the retail game, after a retreat in the years since 2005-06. How will this play out?

With an increase in the bad loans burdening the books of the banking sector, commercial banks once again seem to be focusing on the retail lending business. While broadly defined as lending to individuals, retail lending covers a host of loans: those meant for investment in housing, those for purchases of consumer durables and automobiles and those for education, deferred payments on credit card expenditures or unspecified purposes.

The post-liberalisation changes in banking practices included an increased emphasis on retail lending, which transited from being a risky and cumbersome business to one considered easy to implement, profitable and relatively safe. In some instances, such as housing, the income earned (rent received) or expenditure saved (stoppage of rent payment) from the investment is seen as providing a part of the wherewithal needed to service the loan.

In other areas, confidence that future incomes to be earned by the borrower would be adequate to meet interest and amortisation payments provides the basis for enhanced retail lending.

Too much exposure

The result of the transition in perception has been a sharp increase in the share of retail lending in total advances since the early 1990s. After having risen gradually from 8.3 per cent of total outstanding bank credit at the end of 1992-93 to 12.6 per cent in 2001-02, the share of personal loans rose sharply to touch 23.3 per cent at the end of 2005-06 (Chart 1). This was a time when total bank credit too was booming.

It is to be expected when there is a sharp increase in lending to a few sector of this kind, those who would have earlier been considered risky or not creditworthy could enter the universe of borrowers.

Not surprisingly, by this time the fear that overexposure could result in an increase in defaults had begun to be expressed.

Addressing a seminar on risk management in October 2007, when the subprime crisis had just about unfolded in the US, veteran central banker and former chair of two committees on capital account convertibility, SS Tarapore, warned that India may be heading towards its own home-grown sub-prime crisis (‘Sub-prime crisis brewing here, warns Tarapore’ BusinessLine, October 17, 2007).

Banks too began to hold back as reflected in a gradual decline in the ratio of personal loans to gross bank credit from 23.3 per cent to 15.6 per cent in 2011-12. While this was still above the level at the beginning of the previous boom, the decline in share did suggest that the retail lending splurge had moderated.

However, more recently, this decline in the share of retail lending has reversed, rising from 15.6 per cent in 2011-12 to 16.6 per cent in 2014-15. Figures on rates of growth tell a clearer story.

According to Care Ratings, over the financial years ending March 2015 and March 2016, while overall non-food credit grew at 8.6 and 9.1 per cent respectively, personal loan growth rates were 15.5 and 19.4 per cent respectively.

Over the financial year ended March 2016, the home loan segment grew by 19.4 per cent, vehicle loans by 22 per cent, and credit card outstanding by 23.7 per cent.

House of cards

The reason for this turn are not difficult to find. First, the other major area of growth in bank lending has been infrastructure, which today accounts for a large proportion of the non-performing assets on the books of the bigger banks. So banks have been seeking out new avenues of lending. With industry not performing too well and agriculture languishing, retail lending emerges as the preferred choice.

Second, since retail lending was discouraged in the period prior to financial liberalisation, the exposure of the retail sector to debt is still quite low.

The ratio of personal loans to personal disposable income has indeed increased in India, from 2.4 per cent at the end of 1995-1996 to 13 per cent in 2007-08, and it still is at a historically high level of around 12.5 per cent (Chart 2).

However, this is extremely low when compared with, say, South Korea, where in 2013, when it faced a housing loan crisis, the ratio of household debt to household disposable income was around 150 per cent.

While that may be far too high a figure for a country like India with a much lower per capita income to approach, it has considerable headspace in this area.

Finally, default rates on retail lending, even if increasing, are still quite low. In the case of the State Bank of India for example, NPAs in its retail loan portfolio are placed at a little above 1 per cent, whereas the aggregate NPA ratio is above 6 per cent according to recent estimates. So shifting to retail lending seems a sound idea.

Segments of concern

That of course depends on the degree to which increasing exposure in the retail market requires diversifying the retail portfolio of banks. As of now, housing loans overwhelmingly dominate that portfolio, accounting for well above 50 per cent of the total (Chart 3).

With loan-to-value ratios in housing still low in many cases, and housing serving as good collateral, NPAs in this segment are among the lowest. There are three other areas that account for a reasonable share of personal loans outstanding: automobiles, education and credit card outstanding.

Of these, while the automobile loan segment is not a high default area, education is definitely proving to be so. Government policy mandates provision of education loans of up to ₹4.5 lakh without collateral.

So recovery too is difficult. Yet the inability to find jobs after financing education with loans is resulting in rising defaults, which, according to reports, average 8 per cent of such loans.

Moreover, well over a quarter of retail lending is in the “others” category, and possibly includes personal loans for unspecified purposes advance without collateral or lending against shares, etc. by banks trying to build their retail portfolio.

Here too, rising default is a probability as aggregate lending increases and recovery difficult.

That prospect notwithstanding, it is more than likely that India would witness another retail lending boom, led by banks trying to maximise their presence in this ostensibly underexploited area.

That may well result in exposure of a kind that warrants the fears expressed earlier by the late SS Tarapore.

Inter-bank squabbles delay NPA resolution

There is discontent about larger banks striking bilateral deals with promoters of firms with stressed assets

While the Reserve Bank of India does not prohibit a bank from conducting bilateral dealings with a borrower, it doesn’t seem to have foreseen private deals struck outside the joint lenders’ forum. Photo: Aniruddha Chowdhury/Mint

Cracks in the joint lenders’ forum (JLF) experiment, aimed at timely resolution of stressed loans, are beginning to show and the picture isn’t pretty.

According to at least four people in the know, there is discontent among factions of lenders about larger banks in the forums striking bilateral deals with promoters of firms with stressed assets, making it difficult for JLFs to effectively implement a resolution or recovery procedure.

“In some large cases, larger banks have taken possession of land parcels or other fixed assets, reducing the outstanding debt of the company. This allows them to maintain a standard asset classification on the asset for some time,” said a senior official at a large public sector bank, the first of the four people quoted above. The banker spoke on condition of anonymity as discussions at JLFs are confidential.

These decisions are usually taken outside the JLF in direct discussions with borrowers, said the banker quoted above. What such deals end up doing is reducing the pressure that the JLF would put on an errant borrower and delaying the resolution process further.

Indian banks have gross bad loans of Rs.5.8 trillion, a number which bankers expect to rise.

“The JLF mechanism is a time-bound process; so, any delays in it will only hurt the bankers involved. We have issued a clear mandate that if any such bilateral dealings are discovered from now, they will be reported to the regulator immediately and action will be requested,” he added.

To be sure, the Reserve Bank of India (RBI) does not prohibit a bank from conducting bilateral dealings with a borrower.

In January 2014, the central bank issued norms that require banks to form a JLF as soon as an account delays repayment by over 60 days. The JLF will be organized by the lead lender in a consortium lending case and by the largest lender in cases with multiple lenders. The JLF is then required to come up with a corrective action plan within 30 days and a majority of the lenders are required to sign off on the plan within 30 days.

Delays in decision-making or implementation of the plan are met with accelerated provisioning on the case, according to the regulatory norms.

But RBI doesn’t seem to have foreseen private deals struck outside the JLF.

In April, private sector lender Axis Bank acquired control over Jaypee Group’s headquarters in Noida, in exchange for reducing debt. In the same month, IDBI Bank Ltd and State Bank of India (SBI) were also offered parcels of land to reduce the debt. At the beginning of the year, ICICI Bank, too, had taken over 275 acres from Jaiprakash Associates Ltd and reduced nearly Rs.1,800 crore worth of debt of the company.

Eventually, the promoter was forced to offer an option to other lenders as well to take over unencumbered land. The proposal is still under discussion and yet to be approved, the first person confirmed.

SBI, IDBI Bank, Axis Bank, ICICI Bank and a spokesperson from the Jaypee Group did not respond to e-mails seeking comment.

In the case of Bhushan Steel Ltd, according to a public sector banker who is the second of the people quoted above, most public sector banks had moved to classify the account as a non-performing asset (NPA) in April. However, some of the private sector banks continued with a standard asset classification on the account.

“Divergence in asset classification tends to work against any recovery measures as lenders won’t ever be on the same page. Besides, if a majority of the banks in the consortium have classified the account as NPA, it is unfair that others continue with it as standard,” the second person said.

While it is unclear why some banks continued with a standard asset classification in this case, a probable reason could be some short-term repayments which were received by them, added the second person.

Bhushan Steel has over 40 lenders, most of which are public sector banks. SBI and Punjab National Bank (PNB) are the lead lenders. Calls and text messages to spokesperson for PNB and Bhushan Steel remained unanswered till the time of going to press.

“Some smaller private banks and foreign banks who have small loan exposures in certain cases also break protocol and threaten to file winding-up petitions, even as the JLF process is going on. If lenders are quibbling among themselves, then you cannot force the borrower to do anything,” said the second person.

However, the blame for any delays in JLF proceedings does not just lie upon private sector or foreign lenders. According to a senior official at a large private sector bank, state-owned lenders often have an elaborate and rather slow decision-making process, which makes the JLF resolution very cumbersome.

“There have been cases where smaller state-owned lenders agreed to give additional working capital loans to a borrower and then never sanctioned it because the head office differs from what the banker at the JLF has agreed to. If the borrower cannot run daily operations, it would be unfair to expect them to pay back their dues,” the private sector banker said.

According to RBI’s financial stability report released last month, gross non-performing assets of banks rose to 7.6% of total advances in the March compared with 5.1% in September 2015. The top 100 borrowers accounted for nearly a fifth of these bad loans. A large number of these top borrowers have a JLF looking at possible solutions to ensure recovery.

“These differences among lenders point to the fact that probably the JLF system is not working to the extent that it was meant to. Bankers will have to sit together and resolve their differences themselves. It is likely that the deadlines that were talked about earlier will be stretched further,” said Saswata Guha, Fitch India Services Pvt. Ltd.

In December, RBI governor Raghuram Rajan said that banks would be required to clean up their balance sheets by 31 March 2017. This meant recognizing visibly stressed assets, providing for them and coming up with a resolution plan.

Hit by NPAs, PNB to focus on lending to better-rated firms

MD and CEO of the Punjab National Bank,
 Usha Ananthasubramanian

Impacted by asset quality woes, state-run Punjab National Bank today said it will focus on lending to better-rated corporates for credit growth.

"We are looking for highly rated accounts like AAAs and AAs, but it does not mean we will shy away from the B-rated accounts.

"However, the preference is always for the higher rated corporates," the bank's Managing Director and CEO Usha Ananthasubramanian told reporters here. 

She said even if income is going to be less from such accounts, there is stability in this segment as the capital charge is reduced. 

"We also encourage the B-rated companies because that rating does not mean they are bad. The only thing is that where the capital charge is more, we re-look and want them to be supported by collateral," Ananthasubramanian said. 

Although the bank gets proposals from sectors which are not performing well, it takes a conscious decision not to get into them, she said. 

"We do not want iron and steel but where we are already in, it is difficult to come out. Thermal power, gas-based power plants are some of the sticky areas. The old projects we have to continue and should support but we are not keen on incremental fresh exposure," she said when asked which sectors the bank is more cautious about. 

The bank had yesterday reported a 58 per cent decline in net profit to Rs 306 crore for April-June period on account of rising bad loans. 

Provision for NPAs jumped almost three-fold to Rs 3,620 crore from Rs 1,291 crore in the same period a year ago. GNPA ratio shot up to 13.75 per cent.
Speaking about recoveries, Ananthasubramanian said the 

bank is trying to recover non-performing loans which have turned bad. 

"How it improves our asset quality is a thing we have to see and one quarter will not decide it. So going forward, if you are able to control the slippages and improve the recoveries to outnumber the slippages, then it will reflect in the asset quality of the bank," she said. 

The bank has identified some bad loans to be sold to asset reconstruction companies (ARCs). 

"We have already lined up about 72 accounts which have been identified but it is not known how many of them will actually be put on sale," she said. 

The bank has enough security receipts (SRs) and is fine with the SR route as well, she added. 

"It is a misconception that the bank is always after full upfront cash purchases by ARCs," she said.

Asked whether bank has identified accounts under the scheme for sustainable structuring of stressed assets (S4A), Ananthasubramanian said the accounts are run by a consortium of lenders and not by one bank. So, most of the accounts where the bank would like to invoke S4A, there are other consortium lenders. 

She, however, said only completed projects which have commenced operations are eligible for S4A. 

"Unless they generate a positive earnings before interest, taxes, depreciation and amortisation (EBITDA), it will not be possible because the servicing of the loan starts the day you identify the sustainable debt and the unsustainable debt," she added.

We are AA+ rated, we want to be rated AAA: Rana Kapoor (MD & CEO of Yes Bank Ltd)

Rana Kapoor, MD & CEO of Yes Bank Ltd.

Rana Kapoor, managing director and chief executive officer of Yes Bank Ltd, comments on the bank's first quarter earning in an interview.

Let me come first of all to the growth, asset quality is not a problem with Yes Bank but 33% loan growth is a very impressive number at time when growth is scarce. Is this repeatable? 

    If you see last year, which was a very tough year, FY15-16, we grew the loan book at 30%. The fact is that our overall denominator is still like a medium-sized bank which is now leaning towards a small large bank.

So, our growth last year was 30% and we have reason to believe that with the sectoral and fairly well fine-tuned segmented, geographic as well as sectoral strategies we can address the credit demand in some sectors which is resurfacing. 

 So, this 33% is manageable?

   Thirty-three percent is not sustainable beyond a point but we have reason to believe that next four years, which is the third phase of Yes Bank’s lifecycle of growth from a small large bank into a medium large bank till 2020, we have reason to believe that we can sustain between 27-30% credit growth and because of these sectoral strategies we have, there is reason to believe that with good credit filters, relationship management, intensified product penetration that this can be done. 

   Where did this 33% growth come from? 

Fundamentally the growth is coming in from the sectors we focused on literally from inception. Some of them continue to be sunrise sectors like agri-business. We have reason to believe that in renewable energy we have a fairly significant market share apart from substantial market and mind share in that particular business. 

Broadly is it corporate, retail, small and medium enterprises, midcap? 

The engines are all moving, the interesting thing is that the corporate businesses, because of our proven track record and relative resilience in asset quality, give us an opportunity with that proven track record to build market share and mind share. At the same time all the growth engines and what we like to believe in our SME businesses which is not small anymore -- it is 23% of our total advances -and if you look at even the consumer and commercial retail, which is clubbed as retail banking, is almost inching up to double digits, it is about 11%.

So, with the overall branch banking driven growth and strong growth in retail liabilities and with credit cards, which is the last mile product launch, we are going to be a very comprehensive retail bank this year. 

Other income has contributed substantially to your profit, it straightaway goes to the bottomline. The notes to accounts gave us very broad ideas that it comes from guarantees, letters of credit, financial advisory, selling of products, can you give me a breakup, did a substantial amount come from sale of securities, investments? 

Overall if you look at the composition of our earnings in this quarter, we were approximately 60% driven by net interest income and just around 40% by non-interest income. This was a very good quarter because what we are seeing is increased market share on corporate banking and in corporate finance, the reason is that our branch that we set up in Gandhinagar—the international banking unit—that is giving us new breakthroughs in clients like pharmaceutical sector which was difficult to compete with when we did not have an offshore loan book. 

How much of equity dilution will come because of the qualified institutional placement? What are you prepared for as an upper limit? 

When we discussed this three months ago, I had shared with you that we expect overall dilution of around 12-13.5%. So, I will pretty much stick to that number, may be 12-13%. The fact of the matter is that the continued resilience of the asset quality of the bank, the sustained profitability of the bank, increased market share of the bank, the outreach of retail and branch banking is in a way helping to rerate the bank. We have had a soft landing on asset quality. 

If it is 12-13% equity dilution, your return on equity (RoE) at the moment is about 21%, how many months will it take or how many quarters will it take to come back to 21%?

 When we meet investors this question comes up invariably in every meeting. Equity capital raising for a bank like ours is value and earnings accretive from day one. So, we have reawatch son to believe that give or take 6-8 quarters we can restore RoE back to 20% and at the same time because our RoE is a 20% and our dividend payout policy is about 80% retention and 20% dividend payout, that in itself gets us about 20% of organic growth through retention of profits.

So, the incremental capital that comes in is going to help us to grow at 30% and with that we can become RoE competitive in less than 6-8 quarters.

We have done it in the past, if you see our 2010 capital raise, $225 million, within 4-5 quarters we were back to 20%. If you look at our $0.5 billion capital raise in May 2014, which was a very big success, it has doubled in value since then; that also enabled us to get back to 20%t RoE in less than 8 quarters. So, it is value and earning accretive. 

Will you be wanting to take over a microfinance or a small bank?. We just saw IDFC do that. Small bank business is fairly lucrative, look at the way Equitas and Ujjivan are doing. Will inorganic be a thought? 

I must confess that the DNA of Yes Bank, which has been in a way personifying in itself over the last almost 12 years, is driven by hardcore entrepreneurship, what we call professional entrepreneurship. So, the ability to create building blocks within the bank, to make them profitable within reasonable timeframes is the real entrepreneurial joy of our top management.

So, we will look at acquisitions as and when they come through but there is a fair amount of organic capacity, bandwidth, bench strength, the bank has to be able to build businesses organically.

We are building a securities business as a subsidiary which is going to be more in retail, broking and asset management in course of time; we have got a licence. So, our ability as a bank with a professional DNA, as the professionals bank of India, is really organic. What happens is HR in India needs to be very homogenous and sometimes when you address it and put a shock in the system it can take a couple of years to recuperate. The systems have to synergise, IT has to be very friendly on the interfaces involved. So, a bank like ours which is still like a brand new bank even though we are 12 years old has the ability to engineer new businesses organically. 

So, your preference is organic? 

Prefer that, more weightage on that but if there is a very sweetheart deal, why not? 

There will always be one or two sceptics out there who would feel that if you are growing 33% at a time when the economy is still difficult, have you become a little more, shall I say, courageous in lending? What are yourself given targets on non-performing loans (NPLs)? Do you think you will go maximum to 0.8-0.9%, how might the subsequent quarters look like?

 The guidance on gross (NPLs) is that we should not exceed 1%. We have a minimum provisioning policy literally of 60% and right now our overall provisioning coverage is 64.2%. Which means net-net we should not fall or increase net NPAs beyond 40%.

At the same time there is a lot of focus and visibility on recovery of losses, recovery of NPAs, reducing restructurings; as you will see in our numbers, we have made significant progress in reducing restructurings overall. In sale of assets to asset reconstruction companies (ARCs), security receipts, when you look at the totality of the asset quality, I can promise you today, we are outperforming the perceived retail banks in the country.

We are AA+ rated but we want to be AAA but I am sure you are talking in equity context.

Federal Bank hopes to cash in on better credit growth in FY17

MD and CEO Shyam Srinivasan says NPA slippages are coming down and credit is picking up

Federal Bank posted first-quarter numbers above Street estimates, with profits rising 18.4 per cent to 167 crore albeit with some uptick in NPAs. Speaking to Bloomberg TV India, Federal Bank Managing Director and CEO Shyam Srinivasan says NPA slippages are coming down and credit is picking up. The bank aims to sustain credit growth of 19 per cent in FY17, he said. Excerpts:

Federal Bank’s profits have increased quite substantially. What contributed to the robust results?

The quarter began quite well from our stand-point — in terms of the areas where we wanted to see improvement. Operating profit grew close to 16 per cent and overall net profit grew by over 18 per cent.

The important features of the quarter were certainly in the balance-sheet growth — both the credit-deposit ratio and the asset portfolio grew way above the industry averages, and the assets growth was close to 19 per cent. The credit-deposit ratio expansion was close to 73 per cent. So we saw good utilisation.

And in terms of margin expansion, it was driven by few fundamental features such as credit deployment and the lower cost of deposits.

So the margin expansion, lower slippages leading to lower credit cost and good cost management saw improvements in net interest margins, profitability and our cost-income ratio, which showed up in the P&L (profit and loss statement).

Asset quality has not improved much as the NPAs in this quarter have been fairly flat. What is the outlook going forward for FY17?

The crucial part is to look not just at the (NPA) ratio, because the ratio is sometimes flattened if you have any sale to asset reconstruction company (ARC) or a technical write-off or a combination of both.

So the important part is to see the absolute movement in slippages. As against some 1,670 crore slippages in last quarter (Q4), the first quarter of FY17 saw the overall gross NPAs at 1,747, which is roughly about 80 crore increase in the slippages. So we think that trend is the most important one.

Importantly, the slippage for the quarter was almost half of the previous two quarters of FY16 — 280 crore was the slippage during this quarter. That is the improving trend we would like to continue. And if the trend continues, the outcomes are going to be better during FY17. So, what is important is to ensure that the slippages remain in control, and that trend is possible.

What is your outlook on the advances and deposit growth?

Last year (FY16) our credit growth was 19 per cent and we would certainly like to keep that trend. Credit growth has been quite robust during the last three quarters, including Q1 of FY17. A good proportion of that was largely driven by a good pick-up in our corporate lending in last year’s Q4. And we see that opportunity very much in the market on account of some banks being distracted and our own internal strength being enhanced.

So I see the ability to grow credit in and around the region of what we did in the first quarter. That’s quite possible.

What are your expectations on the upcoming credit policy?

I’m not going to second guess what the RBI Governor is intending to do. I think the liquidity is pretty strong.

So the decision to lower rates will be driven by many other factors. From our point of view, it is a very encouraging sign at where the bond yields are now and that would mean the treasury book will see some gain. And the focus is on leveraging the opportunity of good-quality liability profile and ensuring credit growth.

Emerging markets, including India, will drive innovation in payments industry: PwC

The payments landscape in emerging markets, including India, is expected to transform in the wake of accelerating growth in electronic payments with advent of new and disruptive market players and alternative business models, a PwC report said.

"The growth of economic power within the emerging markets and their potential to leapfrog developments in mature markets will aid the creation of a state-of-the-art payments ecosystem," multinational accounting firm PricewaterhouseCoopers said in its report.

'Emerging Markets - Driving the Payments Transformation' examines the dynamic nature of emerging markets, especially payments, which creates challenges that have never confronted the developed world, but also opens up opportunities for innovation and growth.

"Given the underlying infrastructural issues in emerging markets, there needs to be a focus on developing the infrastructure both for issuing and acceptance of payments products and instruments. Alternate payment instruments and modes like mobile wallets, virtual cards and accounts, social media and contactless payments are gaining traction for specific use cases, especially the unbanked customer base, driven by technology, customer needs and declining margin," said Vivek Belgavi, FinTech Leader, PwC India.

In India, the new payments banks (who cannot lend but can borrow up to a limit) are expected to start operations in 2016. Since their focus will be solely on transactions, they will look at providing seamless transaction options for payments of utility bills, mobile bills, and school or college fees, either electronically or through the banking touch points they create.

At the core of this change will be technology, which in addition to maintaining current standards of reliability, is expected to also reduce transaction times, improve security, increase acceptance channels (especially physical), and - in the case of merchants - lower transaction costs, it said.

"Given the large unbanked population and the growing regulatory agenda to engage these people into the financial system, emerging markets are in a unique position to drive growth in the payments industry," said Hugh Harley, financial services leader for emerging markets, PwC.

The report said that the payments ecosystem will also be redefined by regulatory interventions, to balance the disruption of alternative payment service providers with the reliability of traditional players.

Noting 85 per cent of the global population resides in emerging markets, it said that customer expectations are driving the change in payments industry in these markets.

"Nearly 90 per cent of people under 30, which account for 75 per cent of the online transactions, reside within the emerging markets. This is favouring the growth of online transactions, which is in turn curtailing the black economy and stimulating economic growth."

It said though literacy rates and urbanisation are on the rise, access to basic financial services poses a major challenge in these emerging markets, and in response, there has been a rapid expansion of new economically viable technologies and innovations like e-banking and mobile money.

With regulators in emerging markets realising the huge costs, risks and inefficiencies associated with cash transactions and recognising importance of electronic payment methods in promoting access to formal credit and savings instruments, drastic measures like introducing differentiated banking licenses, tax benefits on electronic payments, awareness campaigns are being taken to build a sustainable electronic payments ecosystem, it said. Many governments have opened their markets to non-bank players aimed at furthering financial inclusion, it added.

With the proliferation of smartphones and tablets, which are serving as a convenient, cash free and card-free financial transaction medium, emerging markets are driving the growth in e-commerce spending, and there is a rapid development of new payment concepts based on mobile infrastructure initiated by the online retailers.

"Banking on high customer adoption of these models, this has the potential to displace traditional cash with other electronic modes of payments," it said.   --IANS