Asset quality can be an issue for banks, not NIM: Mukul Kochhar

We have been trying to stay on top of all that is happening. There is still no clarity about any kind of fiscal plan coming in and as expected, there has been an extension of the lockdown. Does it change anything because to a large extent we knew that this extension was coming?
On the margin, there is quite a bit of change because if you want to use the thumb rule, each week of full lockdown is roughly 1% of the GDP; that means 50% to 60% of the country’s economic activity is shut down. So now, if you do the math, we are probably going to be negative GDP for this year per se but that is okay.

In fact, the IMF has come out with some really bad predictions for global recession and depression.
I saw the World Economic Outlook (WEO) for India and it was still positive but post yesterday’s announcement, it is going to be negative now for the year. Now, it is a one-time impact. If you look at how the earnings and revenue shape out, especially for companies that are non-levered, it is not going to make as much of a difference. But it has other implications for the economy.

So earlier we were expecting that the fiscal deficit goes to 5.7% and additional funding requirement of roughly Rs 5 lakh crore from markets; this goes up substantially now and this is where the focus is going to shift, too, for the government. How do you manage the borrowing program of the government while keeping the money markets stable? This is something to really watch out for and one reason why we are cautious on any NBFC in this environment is actually because through the year, we expect a fair amount of volatility at least in the money market. So it has implications. Overall, it is still a one-time event. Once India gets it under control, you will expect a slightly better outcome but that seems a little far away right now.

Just taking away from the point on NBFCs as well as private banks, if the government continues to extend foreclosures and extend forbearances tactically, is it time now to re-think how you would approach private banks or for that matter even consumer finance companies because retail delinquencies perhaps is going to be the new reality post COVID.
What you are saying is absolutely correct. We will see how retail delinquency plays out and it is definitely a concern. Having said that, one has to remember two things. One is, going into this crisis, the penetration of credit rating agencies in India really picked up. More than the penetration, it is the awareness of credit. So going into the crisis, retail credit in India was actually quite well behaved. I will just give you anecdotal information. We did an IPO for an international MFI. They were operating in 12 different emerging markets two years back in London. One recurring message from that NBFC was that the credit behavior or retail behavior of credit in India is one of the best in the world and that is partly because of what has happened with the structure of retail credit in India.

The second point is, retail credit in India itself is very underpenetrated. So what you may see actually coming out of it is that retail credit does not blow up the same way it did in 2008. So expectations may be a little bit better off than where we stand at present.

Having said that, I just want to add to the point you made on NBFCs versus banks. Banks in this environment are flush with liquidity. They are even lowering their cost of deposit. So margin wise, there should not be an issue for banks. More people will watch out how the asset quality plays out and part of it will be retail.