Exclusive: Shikha Sharma Says Axis Bank Will Tread With Caution On Project Financing

Until September 2015, Axis Bank, like other private lenders, was an investor favourite. It’s shares traded at close to three times book value; a large majority of analysts who covered the stock had a buy rating on it. So when a bad loan clean-up, prompted by the Reserve Bank of India’s asset quality review began, most expected the country’s private lenders to come away unscathed.

It’s didn’t turn out that way. Not for private banks. Certainly not for Axis Bank.

As of the end of the September 2017 quarter, Axis Bank had gross bad loans of over Rs 27,000 crore (5.9 percent of total loans) compared to under Rs 4,500 crore (1.38 percent of total loans) at the end of the September 2015 quarter. Private banks saw their bad loans double and all listed lenders saw gross non performing assets rise to Rs 8.4 lakh crore from Rs 3.4 lakh over this period.

It’s been a tough environment, said Shikha Sharma, chief executive officer (CEO) of Axis Bank in an interview with BloombergQuint. She cited three factors as key to the pain faced by banks – a slowdown in the capex cycle, the evolving regulatory framework and rapid technology changes.

For Axis Bank, it has been anything but fun.

Over the past two years, the bank has had to fend off rumours of an unsolicited takeover bid and quell speculation of a management change. Most importantly, it has had to explain why, as a private lender, it didn’t manage risk better than state-owned banks, which were hamstrung by their government ownership.

Sharma sees it differently. It’s more about where you play and less about how you play, she said quoting a research paper.

That’s not to say that the bank was not at fault. With hindsight, there is always something to learn, said Sharma. For Axis Bank, the lessons of the last cycle were many. Judging the extent of leverage in the system, reducing concentration risk on its balancesheet and picking the right category of borrowers.

Also Read: Axis Bank Raises ‘Confidence Capital’

The bank is attempting to correct some of this. A presentation on the bank’s website shows that its exposure to the top 20 borrowers as a percentage of Tier-1 capital has come down to 118 percent now compared to 287 percent in March 2011. 85 percent of the bank’s incremental sanctions are now going to corporates rated A or above compared to 68 percent in FY12, shows the presentation.

The bank’s perception has also been hurt due to the ‘divergence’ in the quantum of bad loans reported by it and what the regulator judged bad loans to be. At the end of fiscal 2017, the bank classified loans worth Rs 21,280 crore as bad loans. The RBI, however, pegged bad loans at Rs 26,913 crore. The resultant divergence stood at Rs 5,633 crore. For FY16, the bank reported an even higher divergence of Rs 9,480 crore - 156 percent more than the reported amount.

Is this under-reporting of bad loans?

“I don’t want to debate that issue. Let’s just take it as it is. The bank reported a set of number. The RBI inspection threw up a set of numbers. As RBI themselves clarified, this is an ongoing process, so we’ll have to see how it pans out in the future,” said Sharma.

Treading Cautiously Into The New Cycle

While Sharma is hesitant to call a definitive peak to the bad loan cycle, she seems hopeful that the end is near. In its most recent Financial Stability Report, the RBI said that the cycle may be bottoming out, although it expects bad loans to rise a bit further to 11.1 percent by September 2018 from over 10 percent now.

Sharma’s outlook for bank’s asset quality similar.

Sharma sees signs of a turnaround in corporate credit demand too. Some of this will come from working capital demand but some pick-up in private capex could follow the government’s focus on reviving investment in the economy. “It [corporate credit growth] could be in low double digits or high single digits.”

As the bad loan recognition cycle winds down and loan demand picks up, is the bank ready to move into the next lending cycle? After raising more than Rs 11,000 crore from investors including Bain Capital, the bank is adequately capitalised at least for the next three years and has enough growth capital to capture any uptick in credit demand. Sharma, however, says that this time will be different.

For one, the bank will continue to see stronger growth in the retail and small and medium enterprises segment in the near term. This means that retail and SME (small and medium enterprises), which make up close to 58 percent of the bank’s total book, may continue to dominate lending.

On the corporate side, the bank will look to lend to companies which have operational cash flows and take on project risk very selectively.

What could help Axis Bank and other lenders is the year-old Insolvency and Bankruptcy Code, which is expected to improve credit discipline among large borrowers. Atleast 40 large stressed accounts are being resolved under the IBC, following directions from the RBI. In many of these cases, promoters are unlikely to be able to retain their assets due to a recent amendment to the IBC, which says that promoters who have been defaulters for a year cannot participate in the bidding process unless they clear their overdues.

Sharma believes this could give banks more confidence in lending to corporates.