What according to you is leading to the selloff and the negative sentiment in the BFSI space because many believe that the entire financial sector of the Indian economy is in a very brittle space and it is all going to fall down like nine pins?
Let me be very blunt. I think the root of the problems is the real estate sector and so unless and until the real estate sector looks up, we really do not know what is in the offing for the NBFC sector. Does that mean the entire sector has turned bad and overnight or rather since last August end when the so-called crisis started? Has the entire sector become a four letter word, certainly not. There is no concern over NBFCs which are primarily exposed to the retail segment. It is only those which have exposure to the realtors and wholesale and the last mile financing and the LAP instruments, that continue to be in trouble.
Just to give you a little lowdown on the entire thing, we are in the third phase of the so-called crisis. From August 2018 when it started till about January-February 2019, there was intense speculation and suspicion whether these companies will be able to rollover their CPs, redeem them and whether they will be able to fulfil their commitment. The short-term borrowings — every month it was trillions of rupees — were coming for rolling over. We have passed that phase.
Then came the liquidity problem, there is liquidity in the system but the banks are not giving them money because of the risk averseness and the lack of trust.
Now, we are in the third phase and there is the fear of the unknown. It is not an NBFC, but the current cooperative bank problem (PMC), has again reignited the fear of the unknown. People are wondering, how much more is out there hiding. So, banks, NBFCs and the triangle is completed with the real estate sector. You can call it nexus, you can call it relationships, but this is the triangle we need to look at. This will not be solved overnight unless India’s real estate sector looks up.
I do not think real estate sector will come back in a hurry, if at all. We may see some uptick in low-cost housing but that is about it. If we are not staring at real recovery in the real estate sector, can I safely assume that what we have seen with PMC Bank, YES BankNSE -1.65 % and any other PSU bank, this is just the tip of the iceberg and we are in a serious down cycle for the next couple of quarters?
No, I am not saying that there is a huge problem staring at us. I am just making a limited point that we do not know, we are in a phase, where there is a fear of the unknown. For instance, the PMC Bank was the HDIL bank. It was putting 11 million depositors’ money at the backyard of HDIL and this money was laundered and so on. Instead of 15% exposure, it took 75% exposure.
So, a very small cooperative bank became the house bank or piggy bank of a realtor. And now that has come out in the open. I am making a limited point. I am not saying that there is a deep-rooted problem, I am just saying we do not know. It is the fear of unknown that has gripped the system and the key to the revival of the NBFC sector is the revival in the real estate sector.
Key to the revival is to some extent managing the banks portfolio better and coming back to the standard assets and for the banks. All of us say that the recognition phase is over now and it is a kind of recovery phase but now the fresh questions are asked, is the recognition phase is over, probably not. If you see the Reserve Bank of India’s biannual report and the last two reports talking about NPA trajectory going downward but I have a feeling now we will see a reverse. So by end 2020, the NPA numbers we will see probably will be more than what we had seen in 2019.
It is not only the NBFCs, the spillover effect is also coming on the banking sector. Again a limited point, it is the fear of the unknown. I do not want to play the role of Cassandra that everything is bad, every realtor is bad and every bank and every NBFC will burn their fingers but the point I am making is that we do not know. It is the fear of the unknown that has gripped the investors and nobody knows what is going to happen, we are in that phase. That is the key and we need to address the real estate sector if we want faster recovery of the NBFC sector.
Apart from real estate, are there any other things or challenges which the banking system somehow has managed to conceal? Do you think we are in for a very pronounced kind of a contraction even for the good banks? If credit and demand is not there, it is going to be double whammy because when bad loans and slowdown come together, that squeeze the system?
Just a quick recap. Between 2015 September and 2017 March, RBI did a AQR (Asset Quality Review). If you see the graph, all these problems of banks started getting exposed, only after being forced by the regulator. They were in a denial mode and it started coming in the open and it got spill over, it spilled over even now we are seeing more skeletons coming out of the cover with more and more discovery, with the so called nexus with NBFC segment and so on.
At the same time, we have 21 public sector banks and 1 private sector bank were put under PCA, which means they were not allowed to lend and one private bank. Now 11 PSU banks have come out of PCA. Number wise, it is half of the banking system but actually asset wise about one-third of the banking system but even those banks who were not under PCA, they are also curbing their credit because of multiple reasons; a) for fear of getting more bad assets and b) the fear of the investigative agencies. You can remember how many bankers were hauled off and I wonder whether any of the misdeeds would have been proved.
So I think it is a combination of factors. Now the PCAs have been waived. The outreach programme was launched on October 2. Thankfully, they are not calling it loan mela. I am told that in the truest sense of the terms, it is an outreach not loan mela. Banks are not doling out loans. That is a good story but if you ask the banks, they are not seeing too much demand. Solar energy and roads are the kind of sectors where there is demand and credit offtake. Retail again is seeing a tapering off.
Overall, there is a negative sentiment playing out even though we had a fantastic monsoon; pretty low interest rate; rupee is doing fine. The current account deficit is doing pretty well but still there is not much of demand as yet. Though the bankers officially are saying that they are saying too much, but the numbers do not say that.
Other part is the fear psychosis still haunting the banks. I am told that recently there was a meeting at the finance ministry level and they have created a new board where beyond a certain level, the bankers do not need to worry whether a particular case needs to be referred to CBI. It will be on the board I think Mr Bhasin the former Indian BankNSE 1.04 % Chairman and CVC is the Chairman of the board and that to some extent probably will allay the fear.
Apart from the demand tapering off or there not being too much demand, the fear psychosis also has been playing around till now. The constitution of the board probably will give a boost to the morale of the banks, but things are not rosy at this point of time.