Wednesday, July 8, 2020

Interview with Dr Ajay Shah, Professor, NIPFP on Impact of COVID-19 on Health, Finance, Industries & Data


By Kuber Bathla



The COVID-19 pandemic has begun to devastate our already crumbling economy. To brace ourselves from this impending storm, we need to hear from the experts who can guide us better. In this search, Dr. Ajay Shah, a professor at NIPFP, helps us to understand the financial and economic aspects of the problems that we face today. Drawing from his insights can help us to tackle the pandemic fairly better, since his work in the field of finance and economics has been exemplary.

 

Dr. Shah firmly believes that each individual is a thinker and questions the idea that people, even the ones living below the poverty line, cannot make choices of their own. Therefore, he emphasizes that it is important for the government to make "fine-grained micro data" available for each individual, so that they are able to make decisions in an efficient manner, and decide whether going out on a bright sunny day might be a good option or not, during a crisis like the one we're facing right now. The most important changes in behaviour are voluntarily created by the people themselves, with the help of data.

 

As workers are massively affected by the crisis, Dr. Shah thinks that India's healthcare and insurance policies for workers in the informal sector are still evolving, and it is yet to be seen whether an insurance policy like the Employee State Insurance Scheme (ESIS) can live up to its promise. He suggests that India should be more open to firms and investors from abroad, and the solution to structural problems in the industrial sector is the use of liberal policies, so as to encourage competition and capability among Indian industries. Going further with this idea, Dr. Shah believes that engaging with the world during such times is a good way to approach the pandemic, and find our way to greater strength as a nation.

 

He looks at agricultural issues in a very interesting manner, by dividing the activities into two categories- Input and storage. Stressing on the idea that the Indian state has low institutional capacity, Dr. Shah goes on to suggest that Indian farmers are capable of making thoughtful decisions in their economic lives, and can manage well in a market based agricultural system. He thinks that government intervention in agriculture is too extensive, and the farmers can only achieve self-reliance with less government involvement. Extending his thoughts to other sectors, Dr. Shah thinks that institutions like NABARD should have a purpose, which is to tackle market failure, and be limited to certain tasks only. "It is important to step back and ask first principles questions- Do you really need this at all?"

 

He sees a silver lining in the pandemic as well, as he emphasizes the importance of video-conferencing and the ICT sector, which can help Indians to work for foreign companies while staying in India, giving more good jobs in India. On the healthcare front, Dr. Shah has interesting ideas to share, on the importance of private healthcare and public health.


In this exclusive interview with Seasonal Magazine, Dr Shah speaks on the challenges that surround India vis-a-vis COVID-19 and its impact on health policy, finance, industries & data. 

Ajay Shah (AS): So I'll begin with a question based on one of your writings. In one of your articles published around a week ago, you suggested that Indian workers should use the Employee State Insurance Scheme (ESIS) to finance their treatment as peaks hit different cities. Given that many workers, especially in the informal sector, are not insured in any manner by the government, how do we make sure that they too get good treatment at subsidised rates?

 

AS: With COVID-19, most people bounce back without any healthcare, a small number of people go into relatively simple supportive care, and a tiny fraction of people need difficult healthcare. We should keep in mind that COVID-19 is not as dangerous as is sometimes made out. It will be nice to have an insurance-like model, where many people are a part of an insurance pool, and a small number of people, a very tiny number of people, face extreme expenditure, and they are paid for by the insurance pool. So insurance is really great for a disease like COVID-19.

 

Now, in the private sector/formal sector, there is already a mandatory program called ESIS. The problem is that ESIS is not properly implemented, so for many workers in the private sector it's just like a tax - you're paying money into ESIS and you're getting nothing in return. ESIS has not figured out how to contract with private healthcare providers, and be able to deliver the services that it has promised the employees of private sector firms.

 

On the vast, informal sector it's a different problem, and there, frankly, the policy frameworks are still evolving and there are no easy solutions. The big new idea is Ayushman Bharat, but it is in an early stage, so it'll be some time before it works effectively on scale.

 

These are the pathways for work in policy. We need to figure out ESIS. And whatever is done in terms of implementing Aayushman Bharat will be very important policy learning, and out of that we can refine and iterate.

 

And somewhere in the back of our minds, we should remember that there is an overwhelming problem in India, and that problem is poverty. We desperately need to get our act together and become a prosperous country. Because fundamentally, we need much more wealth, much more income, so that more people can afford things such as capable health care. Otherwise, we are a poor country and basically the frontier of possibilities is low.



So you’ve emphasized a lot on the importance of data in public health to tackle the pandemic. Can you elaborate more on how individuals and communities can use the available data to take better decisions in their life, as each day passes?

 

AS: This is a very important issue. So far in India we have often tended to look to the government to think about what is happening in the COVID-19 epidemic. But this is an incomplete perspective. All of us are thinking people. Every single individual is a thinking person. We are all watching this landscape, we are all understanding the risks, and we are all changing our behaviour. Whether a government says or not, how likely is that you will engage in the same behaviours that you were used to, prior to February. All of us are changing our behaviours, are asking the questions: 'Will I go into a wedding? Will I go into a temple?'. The concept of going to a temple and going to a wedding seem more remote today; recent NCAER data suggests about 10% of the people are ready to go to a temple.


The critical factor that can and should shape the behaviour of individuals is data. As an example, I live in Goregaon East. The most interesting and important thing that is needed for me as an individual is to understand the state of infection and antibodies in the population of Goregaon East. These facts will help me understand my local landscape. It may be that in my local landscape that there is not a lot of infection, then I should be more comfortable. I should go down, have Panipuri on the roadside. But if the local landscape is more dangerous, then I should be more cautious.

 

The most important changes in response to the pandemic are not those that are imposed from the top by the government. They are the changes in behaviour that are made by every single person. We weigh various trade-offs. We think about our livelihood, we think about our objectives, we undertake certain behaviours, and we shrink from certain behaviours. For this process, we need data. By this argument, what we really need is fine-grained micro data every pincode of India. What is the percentage of the population that is presently infected? How many people have been infected in the past, have recovered, and developed antibodies?

 

The extent to which antibodies correlate with immunity is unfortunately still a scientific question. In my nonspecialist reading of this literature, it seems that about 70% of the people with antibodies are clearly immune; it's not yet clear hat everybody who has non-zero antibodies is safe. But a good chunk of people who have antibodies are safe. And it’s a good way to know what is going on in a neighbourhood.



What kind of structural reforms do you wish to see in the industries as a part of the government’s Atma Nirbhar policy?

 

AS: The big story in India is that in 1977, the Janata party took charge and they started reversing some of the extreme socialism of the late 60s and early 70s, and then there was a big boost forward in terms of integrating with the world, in terms of reducing trade barriers starting from 1991, all the way into Vajpayee's period. As a consequence, things went well in India, we got high growth, particularly from 1991 to 2011, and then after 2011 we’ve fared poorly.

 

In that larger journey, we've got to think, what can policy do to cater to a capable, competitive economy? And really, the answer is more competition, better state institutions, institutional reform of the core institutional arrangements that are run by the government, namely the judiciary, the criminal justice system, economic regulations, the tax system. I think these are the important levers. These levers will make the Indian economy more capable, more competitive. That would be my big picture about how we should think about Indian growth. Let’s do things that get us back to the growth of 1991-2011.



So talking about the industries again, do you think that the government of India, in an attempt to increase competitiveness among domestic industries, should use trade restrictive policies for a certain period of time?

 

AS: If you want to make Indian firms more competitive, you don't give them less competition. When Indian firms face more competition, then Indian firms are driven to work harder and try harder.

 

If your objective is “this is my child, I want to be nice to my child” fine, you can do that but this will come at a cost of the capabilities of the child. If your objective is to build strong capable firms, then the path to that lies in having more competition, not less.


If we want capable Indian firms, we should have more competition from imports, we should have more openness to foreign firms operating in India, more openness to technology coming into India from abroad, we should have more openness to ideas coming into India from abroad, we should have more openness to people coming into India from abroad, and so on. So basically a pro globalisation approach caters to the growth of development of capabilities in India in a more effective way.



So again, going back to one of your writings. One of your articles talks about the importance of market based warehousing system for agriculture in India. But given that small farmers are already facing a liquidity crunch due to the outbreak, and a general lack of knowledge in rural areas about such things, what kind of intervention from the government do you propose to realize a system like this?

 

AS: I want to pick on your idea that the farmers have little knowledge - I do not share that point of view. I think a lot of people in the world of farming are extremely thoughtful, extremely capable. They care deeply about their own life, they are thinking, they are trying everyday. There is an extensive economic literature that says poor people are sophisticated and respond to incentives. We should be careful before we rush into this idea that there are helpless farmers who don't know how to think about the world. That's not a reasonable description of the world.

 

And then, we have the problem of government intervention. If there is a problem in Indian agriculture, it is too much, too extensive, too reckless, too poorly thought out government intervention. The source of many of the problems in Indian agriculture is the Indian state. So we should be cautious about asking the Indian state to do more things. Decade after decade we have gone after one government intervention after another, and it hasn’t worked. We should be more skeptical.

 

Finally, I'd like to take three steps back and think about what is the problem in agriculture and what we need to do to fix it. At heart, there are really two economic decisions in agriculture. The first economic decision is what to sow and how much to invest in terms of inputs at the sowing time. And the second decision in agriculture is what to store. All of the agricultural system runs on private individuals making these two decisions.

 

Some private guy is thinking - Should I sow mustard or should I sow jowar? Different people are thinking all over the country: what should I be sowing? And people are making decisions on what inputs to put into it. How much money do I want to spend on land improvement, how much money do I want to spend on water, how much money do I want to spend on fertilizers. So this is the decision made by the producer.

 

The second decision is - there is a harvest, what do you want to do with it? A different private guy, an unrelated private guy can make that decision. A person may think: “you know what, prices are going to go up in the future, so I will make a profit by storing goods today”. These are the two main decisions that shape and tie the entire agricultural system.

 

We need to think about all the elements that go into the decisions of these private people and create an environment where rational decisions are made. And unfortunately, most of what the government is doing is distorting these decisions. The interventions of the government - whether it is on fertilizer pricing, free power, MSP, Essential Commodities act, or the working of the PDS and the central warehousing corporation - this entire government machinery is adding up to inducing less good decisions by private people. That is the problem of Indian agriculture.

 

So we need to go back to basics and think - who are these private people and what decisions do they make? How can we create a world that is more conducive to those people making better decisions? By and large, this involves rethinking most of what the government does in agriculture.



Do you think that the RBI Governor's announcement of special financial assistance being given to NABARD is the right way to go and why? By that token, what is the larger role of the primary sector in a post-COVID world?

 

AS: Vijay Kelkar and I wrote a book recently which is called In Service of the Republic: The Art and Science of Economic Policy, and in that the big idea that we talk about is the notion of market failure. Market failure is the class of problems where the free market fumbles and does not work so well, and you might like to build some government intervention. Everything that we do in terms of state institutions should be motivated by market failure.

 

Whenever faced with a policy question, we should wonder: Is there a market failure? Is it really an important market failure? We have limited capabilities and capacity in the Indian state. So we should think twice about what we're doing. We should devote ourselves where there is an important market failure and intervention of the state is absolutely essential.

 

I worry that there are many organisations in India with a little bit of a lost mission - What is this organization? Why is it there? What is the market failure that it is addressing? Here and now, in a practical way, people will keep always chipping along and doing incremental stuff around the entrenched and incumbent state machinery of India. It is important to step back and ask first principles questions - Do you really need this at all?



Again, going back to the government's Atma Nirbhar policy. Do you think that this policy relies too much on credit infusion to raise investments, and that can be a problem as people do not have much money to spend right now? If yes, what can be your suggestions to improve the state of liquidity in the economy?

 

 

AS: We have a significant problem in the financial system. And again, this goes back into history. In 1991, there was a systematic attempt at financial reforms. There was some significant work done in the early years, in the early establishment of SEBI, the NSE, the NSDL. Those were remarkable years, there was a reforms program that more or less ran till about 2001 and delivered outstanding results for the country through the early establishment of these organisations. After that we've run into many difficulties in the financial system.

 

We need to rethink what is the design and shape of the financial regulatory apparatus in the country. This is all old and well understood material. In 2007 Percy Mistry led a very important committee report on fundamental thinking about the Indian financial system. There have been many other important expert committee reports in the late 2000s, and it all led up to a project led by Justice Srikrishna, which was called the Financial Sector Legislative Reforms Commission, which was about a deeper rethink of the laws and of the institutional apparatus. Now a lot of that hasn't been done and so the Indian financial sector does not work too well.

 

As part of the difficulties that came from 2011 onwards, these foundational problems interacted with the economic stress, and now a large part of the financial system is facing significant problems. So I agree with the proposition that the Indian financial system is facing significant stress.

 

For a well functioning real sector, we need the Indian Financial system to work, but that needs deeper reforms. It needs a ground up fundamental understanding of what is going wrong in the financial system, of diagnosing what is wrong in the financial system, of coming up with short term, medium term and long term measures to address those problems.

 

We have seen this kind of problem and response in India in the past.

 

In 2000-2001, there was quite a mess in the Indian financial system: IDBI was in trouble, ICICI was in trouble, the Calcutta stock exchange had a payments crisis, we had a scandal on the BSE, there was a UTI US-64 problem. In that episode, the Ministry of Finance did a great job of pulling a team together and galvanising a response and addressing the short term things, and pushing in a deeper long term fundamental change through which these problems were solved. This was all led by Yashwant Sinha and then Jaswant Singh in the NDA government.

 

Similarly in the 2008 crisis, all in all the Ministry of Finance, the RBI, SEBI came together and worked well, there was sound leadership in all three organizations, there was an atmosphere and mutual trust and respect, and by and large they pulled India out of that crisis reasonably well.

 

So we've faced these kinds of things before, and we need to find that kind of capability today. But in these kinds of rescues, you need to think deeper, there's no simple lever such as “we need to push more credit into the economy”, there's a deeper problem that the financial system is impaired.

 

For the real sector to work, we need the financial system to work, and that requires a work program on understanding, diagnosing and addressing these problems.



Coming to debt and credit again, given that many private industries are debt ridden right now, do you think that the government’s decision to sell stakes in PSUs was the right thing to do?

 

AS: I don't see a strong link between the two issues.

 

Yes, you're right, many private firms are facing significant stress - both non-financial firms and financial firms. The need of the hour is to resolve these firms and to move on, and that's the way in which capitalism works. There should be exit, and firms should go through a bankruptcy and resolution process, get sold off, get liquidated and move on. That's normal and healthy.

 

In parallel, there is the question about sale of assets - either factories, land, companies or whatever - but basically the idea of getting assets out of the hand of the government, into the hand of the private sector. I think it is an extremely important priority, because by and large we know that the private sector utilises assets better than the government.

 

Many people get stuck on the problem that when the government sells assets, the government should get a very high price for those assets. I think this is the wrong way to think about it. Yes, there should be an open transparent competitive process through which assets are sold, and I’m not recommending that the assets should be sold in a way that there are accusations of cronyism, and I don't think there is any attempt at doing that. But we should know that the important reason to sell assets is that there will be an increase in GDP when assets come into private hands, and that is a good thing.

 

When Air India goes from being owned by the government to being owned by a private person, the same pilots, the same planes will be managed more efficiently and we will get a gain in competitiveness, productivity and GDP in the country as a consequence. When Air India goes into private hands, large amounts of real estate all over the country will be sold, because Air India has way too much land and you don't need to own that much land in order to run an airline. That real estate will be sold into the market, it will force real estate prices down, which is good for the country, and that land will then be used by other private persons all over the country, which is good, because then they will put better use to the land, and we will get higher productivity, higher GDP growth.

 

The real motivation we should keep in mind, and that is why disinvestment is so important, is to get assets out of public management into private management. Think about this from the viewpoint of state capability and the mental bandwidth of the Indian state. The Indian state has low capability, it is capable of doing 2-3 things. When we ask the Indian state to do 200 things, it will flounder, it will be overstretched. Selling off the PSUs is one element of reducing the range of distractions of the Indian state. We need the leadership to prioritize, to focus, to do a few things well.



In the past decade, it has been observed that the bad loan ratio for Indian banks has risen considerably. Given that banks have still not recovered a large part of their loans, do you think that favouring a monetary response over a fiscal one would be the correct way to go ahead?

 

AS: You should recall that there was a historic reform by this government in 2015. On the 20th of February, 2015, an agreement was signed between Rajiv Mehrishi in the Department of Economic Affairs and Raghuram Rajan in the Reserve Bank of India, which established an inflation target. So now, monetary policy is taken. It is now devoted to the puzzle of how to keep inflation at 4%. The work of monetary policy is now clear, it is to deliver 4% inflation. Now, monetary policy cannot pursue side objectives.

 

In parallel, separately, there is a problem about the safety and soundness of banks. We have had long standing weaknesses of banking regulation in India. We had a significant banking crisis in the late 90s, and after that deeper changes in the institutional design and accountability of RBI were not done. A whole lot of that machinery has been designed in FSLRC, but it has not been implemented, and so we have a second wave of failures of banking failures and banking supervision.

 

We need to ask- How do you do banking Regulation? How do you do banking supervision? Why did banking regulation and banking supervision go wrong? How large is the problem in Indian banking? My opinion is that the size of the equity capital shortfall in Indian banking today is probably between 8-10 lakh crore rupees. Low state capacity in banking regulation has imposed large costs upon the economy. We should think about these things and we should find the energy to take necessary reforms.



Taking this to a rather positive side, which new industries do you see emerging owing to the pandemic? More importantly, how should the government react to them (in terms of creating employment for people, incentives for growth, or should they take over these industries in some manner)?

 

AS: By and large, the Indian state has low capability and it is not easy and feasible to try too many things and make its life complicated. Intuitively think that, you brought a contractor into your house, and you told him to paint your house. The contractor is fumbling and is not really being effective painting your house. Now are you going to give the contractor more work, that I want you to also do my electric work?

 

There is a principal-agent problem. We the people have an agent, i.e. the Indian state. The Indian state has low capabilities, and is fumbling along. What we need to do at this time is to reduce the scope of work of the Indian state. Think of a few fundamental things that need to be done. This is related to what I was saying earlier. There is a role for the government when there is market failure, and there are a few very important market failures. I basically think there are four things, where we need the state with the highest priority. We need the state to do safety, which is to have a Ministry of Defence and a Ministry of External Affairs. We need a criminal justice system, we need a judiciary. And to pay for all this, we need tax revenues, so you need a tax system. This is absolutely basic. And you need to do some amount of economic regulation.

 

In my mind, that is a project that will take 25-50 years for us to figure out. So, I'm not excited to ask the Indian state to do more and more work. Our project for now is to have the Indian state figure out how to do some amount of economic regulation, tax system, judiciary, criminal justice system, Ministry of Defence and Ministry of External Affairs. If we could do that much, with a high competence in about 25 years, that would be pretty cool.

 

Which industries will emerge, what will change after Covid-19 is gone? I think the jury is still out; by and large I think that India will be the beneficiary because if more things are done from a distance, if more things are done using work from home all over the world, then that means that more work will be done from India. So by and large I think this works well for India, that things that were done in person in the rich countries of the world will now be reimagined so as to do them with less of in person contact. The moment you think that there is less in person contact, you're doing things over video, you're doing things over a computer system, and that individual/employee can just be in India. Why do I need that employee in Germany, Finland or England?

 

There's going to be a big real estate upheaval, so I think that a lot of commercial real estate is in significant trouble. We won't have storefronts like this. We won't have Cafés, we won't have restaurants and clubs. So a lot of service intensive, consumer facing businesses will change in favour of more arm length ways on working and I think there will be a significant churn where businesses will close down in those fields and a lot of commercial real estate will come out into the market.



You have criticized the idea of nationalisation of private hospitals fairly in your interviews and articles. Given that it is an impractical solution to solving the healthcare crisis, and that a large section of rural population still relies on public healthcare (as per some data from the National Council of Applied Economic Research), what do you think our country’s healthcare policies should look like?

 

AS: There's a short term problem and there's the long term problem. In the here and now COVID-19 context, I feel that we need to do more in terms of learning how to contract with the private healthcare sector. The idea should not be to commandeer private healthcare firms. The idea should not be to give orders to the private healthcare firms, but rather to do business with them. In this case, the question is: how do you enter into complex contracts with private persons? This is the most important question.

 

I think there is merit in putting public money into COVID-19 treatment, but it needs to be done through a respectful framework of contracting with the private healthcare sector. By and large, private healthcare accounts for about 70% of the healthcare of India. So there's no running away from private healthcare providers. The puzzle is to learn how to interact with them, how to engage with them, and how to get stuff done by working with them. Giving orders and commandeering is not a very good way to proceed.

 

We need to think about the medium term and long term; there are fundamental weaknesses in health policy in India. It's good to use the separation in our minds of what is public health and what is healthcare. These are two different things altogether.

 

Roughly speaking, public health is all about prevention and healthcare is about cure. We need to be doing a lot more on public health, which is much more the work of the government and is about prevention. For example, we talked about data that we need to be doing epidemiological surveillance and monitoring at the pincode level. We need to give data back to people in every pincode, about what is happening to the nature of health and disease in your pincode, so that people start understanding and changing their behaviour. Maybe in my area, the really important problem is mosquitos, and I need to change my behaviour appropriately to deflect those risks.

 

The government is an important part of public health problems like immunisation, vector control, etc. You will be astonished to know that in the late 19th century, in the southern United States, where the weather is much like North of India, malaria was eradicated by controlling mosquitoes. The public health authorities went after mosquitoes and eliminated malaria in the southern parts of the United States. Just think about North India, imagine that we've managed to eradicate mosquitoes - how powerful would that be. That is what public health is all about.

 

Similarly, think of the air quality crisis in North India. That is entirely public health; we need to find ways to improve the quality of air in North India, and that will have a immense and transformative impact on health in North India. This is the work that only a government can do and we need it for that.

 

Similarly, think about roads. We're building a lot of roads in India and that's great. But these roads have poor highway engineering. And there is a surge of accidents, which is a source of health burden upon the country. We need to go to the root cause, we need to build better roads.

 

So I think there's a very big public health agenda; we need to build these “public goods” for health. Through that, people will get sick less, people will need healthcare less- and that is the best of all worlds.

 

We need to also apply our mind to healthcare – we need to think about what is the market failure in healthcare. We need to recognise that there is a largely private system, and it has many problems, it has unique difficulties that come from being a private healthcare system. We need to figure out how to change the incentives of those private players so that their behaviour is better.


(This interview originally featured in Seasonal Magazine's podcast: https://anchor.fm/seasonal-magazine/episodes/Exclusive-Interview-with-Dr-Ajay-Shah--Author--Professor--NIPFP-eg5j80 

Tuesday, June 30, 2020

Federal Bank MD & CEO Shyam Srinivasan's Interview

Dreaming Bigger Now, to be the First Choice Bank

How well each organization is going to perform in the post-Covid world may feel like a mystery, but to a large extent will be determined by how well they were running in the pre-Covid era. Coming to the banking sector, the performance metrics may seem to be all in hard numbers, but in reality is much more, having to do with prudent policies and relationships with each and every customer. This is an area where Shyam Srinivasan led Federal Bank is likely to show much resilience in the coming quarters and years. The 89 year old bank has seen and survived too many economic and political upheavals, including World War II, Indian Independence, Indo-Pak wars, Indo-China war, Bank Nationalization, Gulf War, Economic Liberalization, Dotcom Burst, Kargil War and Global Economic Crisis -  to be fazed by the current pandemic, the lingering effects of the lockdown and the current standoff with China. Even during the last decade, which was one of the toughest for the Indian banking system, Federal Bank swam against the current to emerge as a bank of relevance across India, from being a regional bank focused on Kerala. Even during the current crisis, which is truly unprecedented in modern human history, Federal Bank is staying focused on growing those strengths which are relevant now in this crisis. For instance, on the deposits front, it is doing extremely well thanks to its leadership in overseas remittances and the spike in inflows due to the temporary return of NRIs and the strong rupee. And on the credit side, it is a leading player in the gold loans business, which is witnessing robust growth in this current crisis as the product of choice of both lenders and creditors. At the same time, its extreme prudence or conservative stance in risky products like personal loans, even during boom periods, is now helping the bank in its maintaining its asset quality. At no point in time has Federal Bank crossed a Gross NPA level of 3%, which is admirable in a country where the banking system NPAs have crossed 10%. The bank is a leader in digital initiatives and technology adoption and now excels in areas like digital origination and has implemented EMI products on Amazon’s e-commerce platform. Seasonal Magazine recently caught up with Shyam Srinivasan for a freewheeling video interview, where he talked about the bank’s various strategies as well his suggestions for reviving the economy. The bank which progressed much on his last year’s strategies of ‘Presence to Prominence’ in key geographies and ‘Prominence to Dominance’ in its home market of Kerala, has added a new vision this year, to emerge as the ‘First Choice’ bank for customers by doing every service in a distinguished way.  On the economic front, this veteran banker strongly feels that the banks are flush with funds now and if there is a demand stimulus to excite the private sector and consumers, growth will come back in India.    

Federal Bank could wind up FY’20 on a good note. Despite the marked economic slowdown in the country during the past few quarters and despite the gathering Covid clouds during much of February and March, the bank’s Q4 saw operating profits surging from low single digits during Q3 & Q2, to a healthy 27%. This shows that the bank’s long-term strategies have been working out well.

The performance was well rounded with both Net Interest Income (NII) and Other Income rising impressively. NII grew 10.90% to Rs. 1216.01 crore from Rs. 1096.53 crore in the corresponding quarter last year. The Kerala headquartered bank also made some smart moves on the Other Income front including the timely share sale in Yes Bank shares, that helped Other Income to surge 72.72% to Rs. 711.11 crore in the three months of Q4 from Rs. 411.72 crore a year ago.

The traditional private sector lender’s strategies in combating asset quality issues too are working out well. The fourth quarter saw asset quality improvement with Gross Non-performing Assets (GNPAs), falling to 2.84% from 2.99% in the December quarter and 2.92% in Q4 of last fiscal. Post-provision, the Net NPA (NNPA) ratio was at 1.31% against 1.63% in Q3 and 1.48% in the corresponding YoY quarter.

Despite being a traditional private sector lender, Federal Bank has to its credit one of the most extensive and up-to-date technology deployments, especially in retail banking. This has continued to help the bank perform well on the deposits front, where it clocked a robust 13% rise. This is impressive as the 89 year old bank is not competing head-on with newer and smaller banks on the deposit rates front, but rather leveraging the trust factor, long-term relationships and the conveniences it can offer through better technology deployment.

Even with such overall good performance, the bank saw a 21% dip in net profit during the quarter. Federal bank reported a net profit of Rs. 301.23 crore for the fourth quarter compared to Rs. 381.51 crore in the corresponding year-ago period. This was mainly due to surging provisions.

Provisions rose by more than three times to Rs. 567.50 crore, compared to Rs. 177.76 crore in the year-ago quarter. In the December quarter, the bank had set aside Rs. 160.86 crore in provisions. Like in most banks, the rise in provisions was led by pandemic concerns and Federal Bank made a Covid specific provision of Rs. 93 crore.

Post the moratorium of loans announced by the government, 35% of Federal Bank’s loan book is now under moratorium. While this is slightly higher than some of its peer banks, it reflects the kind of long-term relationships the bank has with its customers, and which it will continue to pursue.

While the trend in banking business has been to beef up provisions at the drop of a hat, Federal Bank has so far steered clear of this, applying provisions judiciously. Due to this, the bank’s Provision Coverage Ratio (PCR) may seem lower at 53.39% , compared to larger and aggressive new generation banks, but then Federal Bank has never been in the business of extending risky loans for pushing growth.

This is a distinction the bank will continue to adhere to according to MD & CEO Shyam Srinivasan, who confirms that the bank will never resort to any outrageous lending in the post-Covid scenario too.

The bank is on a reasonably strong wicket on the capital front. Its Capital Adequacy Ratio (CAR) stands at 14.35% which is comfortable enough to avoid any capital raising this year. Federal Bank’s focus this year will be on preserving capital and growing its deposits franchise further.

The bank has some unique strengths on the deposits front. Federal Bank is a leader in the country on the inbound remittances business with 15% market share. This is a significant business as India itself is number one in inbound remittances from worldwide, thanks to its huge expatriate population, which still cares for extended families back home.

While the remittance business is facing headwinds due to the pandemic, lockdown, salary cuts and job losses worldwide, Federal Bank is continuing to bet big on this business, as its long experience has taught the bank that this business always rebounds after crises like wars and economic setbacks.

With this insight in mind, during the lockdown itself, Federal Bank had tied up with US based world leader in remittances, MoneyGram, for cross-border direct-to-account transfers, thereby improving customer convenience. The appreciation of rupee vis-à-vis dollar and other major currencies also bodes well for this business.

On the loans front too, the bank has an ace up its sleeve. It is a leader in the gold loan business in the banking sector, unlike many of its peers who are only discovering or beefing up this business now. Federal Bank’s headquarters and significant footprint in Kerala is also helpful for this business, as Kerala has been a traditional stronghold of the gold loan business.

Federal Bank expects strong growth in gold loans this year, and unlike most other loans, its full secured nature due to pledged gold at an adequate margin of safety ensures that it won’t contribute to NPAs in the future. The rising gold prices also ensures that this business can also grow due to higher loans to existing customers, apart from wider customer acquisition. And unlike in earlier days, gold loans have been maturing from just for personal needs to being for small business needs.

The bank is also open to extending credit to select corporates and MSMEs, after due diligence. It is now in the process of tailoring specific cross-sell programmes to existing customers who have established track records. While it feels that the credit guarantee scheme is a good way to support MSME clients, it will also apply regular credit judgment before offering such credit.

In these tumultuous times, Federal Bank can also have leadership continuance if it so desires. Even with RBI's new proposal to limit tenure of bank CEOs, professional & non-promoter bank CEOs like Shyam Srinivasan, who has completed a decade, can still have longer tenures if needed. RBI move is to build a robust culture of sound governance and professional management.

Seasonal Magazine in conversation with Shyam Srinivasan, MD & CEO, of Federal Bank Ltd.

Can we start by asking about your bank's moratorium and where it stands now?

Roughly about 35%. That's what we had said when we finished our results. Yes, it is still at the same level. About 34-35% of the book is in moratorium. 

Do you think it is a wee bit more than peer banks maybe?

See the moratorium book heavily depends on what your overall portfolio is like. If you have, let's say, a very heavy gold loan business, then the moratorium - our gold loan moratorium is less than 3%. But the business banking is 79%. So you see a spectrum. So I think 30% is more or less the industry average, it won't be very different. And second, in moratorium, those banks that have given opt-in, versus those who have given an opt-out, experience is different. For business banking, we get an opt out, which means everybody gets it. If you don't want you can opt out. So the moratorium will be higher. For some businesses, we give opt in where it is less than 18%. So it's sort of wide range. 35% looks probably standard and banks would all be in the 30s percentile. Some are 38%, but broadly that's what it is. But the real picture will emerge only in September. After the moratorium period is over, that is, in September which is now the new 'March'. Because September is when you will do what you would have done in March. March is the month of moratorium. So you'd have to see how things are in September. 

You have already mentioned about another dimension which is the gold loan business. You have been very bullish on gold loan business now, 

 I remain very, very positive. It is doing well. And I think it will continue to do well for the foreseeable future. Both because there's a demand as gold prices are high. It's less cumbersome, it's easier for the bank and the customer. And I think slowly customers have understood that banks are good gold loan lenders now as for about four years earlier it was slow. I think it's coming back so we are quite happy with gold.

Can customers avail gold loans from you? Can they walk into the bank and become a customer?

Once they avail, they become customers. There is no limitation on that. I mean certainly we will try to cross sell other products but pure gold is fine as long as the gold is bonafide and it's not stolen gold. We're happy to do.

Where would you peg the growth approximately this quarter and this year on the gold loan business growth? Is it because there are not many other avenues apart from gold loans?

Last financial year, our YoY gold loan business grew 29%. I'm hoping it'll grow higher this year. As I said, it's a win win for both customer and us. We have innovated quite a bit on gold product, in the service and in the distribution. We have our digi-gold, which we had a few years ago. But we have revamped and launched it. So instead of keeping your gold in your own locker, keep it in the bank's locker. And you get an overdraft on it. So you only pay when you draw money, otherwise you don't pay. So it's a win win. We are seeing great success with the product. 

What about on the personal loan front before COVID-19? 

We were not very big on unsecured personal loans. We normally don't do new to bank. We do existing customers based on track record. For almost 18 months, we were doing it digitally. So if you had an account with us, based on your account behavior, we would offer a credit line which you can click on your phone and take the money. But now we are much more tighter on that. Because generally we don't do unsecured credit in a very big way. Our philosophy over many years has been to be more conservative, which is why our NPAs never cross 3%. Even when India's NPAs hovered around 10% mark, Federal Bank has never crossed 3%. Net NPAs never crossed 1.3% or 1.5% maximum. So we've been conservative and I'm happy to be conservative, which is the right thing for a bank.

How is the co-branding of credit cards going on now?

It's okay, but it's not a big part of our business. But in the course of this financial year, maybe by end of March next year, we will certainly have our own card launch. So, yes we are working on that.

What about Provision Coverage Ratio and where does the bank stand on that? Is it lower than other comparable peer banks?

Our coverage ratio including technically the "written-off" is 73%. Without technical, it is 54%. Last quarter we raised our coverage ratio by 800 basis points and we provided extra by 250 crores in Q4. You may have noticed, we provided access because we had some one time gains on investments in treasury and I put the entire money into provision. Otherwise our profits should have been another 200 crores higher. We didn't want to do that. Compared to peer banks, 70% is quite comparable. You must understand that provision cover is created to ensure that when, God forbid, there is a loss you have already provided so that it doesn't incrementally affect your book. Now each bank has a different product mix. If you're a very high unsecured portfolio or your security levels are low, you need very high coverage. When you have a high security, you need a lower coverage. In Federal Bank, we've been doing this reporting for two years based on Indian accounting standards or the new accounting standard - IFRS. Our loss given default, which means when you have a loss or an NPA, the maximum loss on that account if it's an unsecured one, it is hundred percent. Let's say you have a house of one crore and the loan is say 80 lakhs. Even the for-sale value of the security instead of one crore is 60 lakhs, you recover 60 and your loss is only 20 lakhs. So loss given default is only 20 lakhs. Our loss given default on the whole portfolio has never crossed 38%. When I have coverage ratio of 53%, I have much higher coverage than the losses I would ever incur. With all due respect, the media doesn't understand anything too much. They'll simply take one number and report. Provision cover is to make sure in the event of a loss you are covered right?When our provision coverage is 53 or 73%, depending on which number you pick, and the loss given default is 38%, you have excess coverage. I actually can release 15%. This quarter, we took it from 46 to 53% because we expected that in the COVID world, losses can go up & your security value may come down. So the house with just one crore may suddenly become 80 lakhs or 70 lakhs. That is why I said provide more so it gives us the cushion. At 53% loss cover, we are okay.

There was also a specific COVID-related provision of 93 crores. Do you think it is sufficient as of now?

See, COVID provision has to be seen along with credit provision. Both are the same. Just that COVID provision is not in the coverage ratio but treated as a standard provision. When, God forbid, an account becomes NPA, then you will take the COVID provision and put it in standard credit provision. The COVID provison is only an excess extra-provision created as a buffer. The requirement is only 31 crores. RBI mandate was 31% and we have provided three times this mandate. So, it is not an issue.

What has been the impact on remittance business?

Remittances are doing extremely well. Whenever Middle East has any challenges, for instance if people are relocating, they will bring the money in. And we are the best bank for that. Secondly, rupee is at 76. Again, people will send money. So at this point in time remittance is in very good shape. We'll see how the next six months go. We don't know what the situation will be in September or October. How the Middle East is going to be? How, you know, whether job losses are going to happen at big time? Now the good news is oil has become slightly stronger. So they may not be having as many job losses as it was visualized. I've seen that from the time of Kuwait war, we've looked at this whole remittance stuff and that this would drastically affect Kerala. In the last 10 years, I've seen it very closely. There will be some trouble. It was said that around six lakh people will come back but I think three lakh have come back or will come back. Suddenly around two lakh will go back. Maybe not go to the Middle East but places like UK or anywhere people will find livelihoods. But one lakh people coming back is something we can live with. We need to worry about what damage COVID would cause in the next one year. If we can deal with that damage, everything else can be solved. That is the unknown or the wild card.

This would also be translating into deposit growth?

Yeah, it will. In fact, we're sitting on excess liquidity. We are growing higher than the market but there's no market growth because demand has to come here. We'll take some time - another three, four or five months. See, everything has come back to about 75% of the original level if you look at all across the country. A number of RTGS transactions, NEFT transaction, Fast Track transactions, whatever you look, everything is between 65 to 75%. By September-October, it may come to 85%. Maybe by end of the year, it will come to 95-100%. But you are expecting 120% because you want it to grow. So, I think if by 2021, we'll be lucky if business volumes improve. See, one quarter is totally gone. First quarter was virtually no growth for anybody. Next quarter will be like 2-3% growth. So, the full year if you grow at 8-10%, you've done brilliantly.

You have been telling about some cross selling opportunities & how to tap the cross selling opportunities. Can you tell us some specific examples?

The whole personal loan book, which is almost 2000 crores, we did it only by digital origination on existing customers. So say you are a customer of Federal Bank - let us say a liability customer for two years. Based on your average balance, based on your usage, we do a lot of data mining. And we make a pre-approved offer to you and say here is a credit limit of 50,000 available. And you can click and take the money. Now we've launched this with Amazon and a few others. On EMI product, if you are a Federal Bank customer and you're shopping on Amazon, you put in your card number, it runs a back end engine and it immediately computes by saying whether we can give you an interest free EMI for 12 months. So if you buy 5000 rupees or 20,000 rupees on Amazon, instantly you can make it an EMI transaction. So you pay zero interest over 12 months. And this is all done by back-end analytics and therefore the cross sell is based on existing customer behavior with the bank. We are data mining and continuously making cross sell offers. Uusually if you're a card customer, you'll have a liability relationship, we give you an insurer and we'll give you the usual stuff. Basically, everything that is tried to increase penetration per customer.

You are now mulling a new fundraise of Rs. 12000 crore for equity component. Can you take us through the specifics of that? 

In the forthcoming AGM, we're looking to seek shareholder approval for getting a resolution passed. Once we have that, in the course of the next 12 months, we can raise equity, if we need. Right now, we're not looking at any capital raise. It's an enabling resolution. But since the AGM is coming in July 16, we will hopefully get the resolution approved by shareholders. And once that resolution is there, we'll see how the market goes and where the capital requirement is. In our mind, at least till March 2021, we don't need new money. But the next AGM is usually next time this period ie; June-July. So we are trying to get an approval in place so that whenever the need arises, or the next month we will raise money. Normally in my last 10 years, we raised money only once. We are not a bank that goes to the market every three months or three years. We go once in like five-seven years depending on when we need. The last time we raised money was in 2017 July at about 116 rupees. Today the stock is on 56-57 rupees. So suddenly the stock has had its own share of waiting. Hopefully we will come back to at least 100 bucks in the next one year, which is when we should raise money. Even last year we had approval of 8000 crores and we took 300 crores from the market. This was raised about 12 months back.

Any plans for acquiring any microfinance companies or any diversification?

Right now nothing on the horizon, but we are open to making acquisitions if something good comes up. But at this juncture, we cannot rush to anything because we have to see how the credit portfolios or everybody behaves. So, we will be watchful at least three-four months to understand the credit portfolio. So, we have nothing on the cards but continuing to do our basics right. We will wait till September, see how the market shapes up & how the moratorium customers are behaving. Only then we will think about next steps. Because this is very unpredictable environment. So we're not doing anything at this juncture. 

What is the status on the startup fund you had mooted?

I would say it has been very modest. The startup environment is facing a lot of changes and challenges. Either you make it very big with private equity support or you are not able to scale up and you're just folding up. The whole environment for startups is different from what it was three or four years back. So we are having fun but we have no major action going on. Along with two other funds, we have put in the money but that's not a core expertise of our bank. So we will let them do it but we are feeding into that.

You've been seeing how the economy has been shaping up over the last few quarters. Any suggestions or improvements required?

The main thing is that demand has to come back, right? There's a lot of liquidity. So that's not a problem. Banks have money and banks are willing to lend provided there is a demand. For the demand side, banks cannot do much. So it has to be a bunch of things like the government intervention, the private sector getting excited by the opportunity and beginning to invest. And to some extent, like you said, there is a fear also that people are nervous about what is going to happen in terms of health. So economic activity is not at full blast. But having said that, like I said, 70-75% has come back. Some of the bigger cities like Mumbai, Chennai are all still in very precaurious states. Meanwhile, Tamil Nadu has gone into very severe lockdown. While Mumbai & Delhi have opened up, unfortunately, they are facing extreme health issues and challenges today. Virtually, everybody we know has somebody who is faced with some challenge in Mumbai. To that extent, movement is still modest as people are quite watchful. So the full blast economic activity is at least six months away or till when one of these vaccines or medicines work. In that context, demand stimulus is the most important thing. But even if you give a lot of money, demand comes when people are feeling better. And you will not work to buy that extra shirt, pants, TV, fridge and car if you have little nervousness. Everybody's just buying essentials food and medicine. This is a psychological challenge more than financial challenge. So emotionally we have to be charged up. And that takes time. What will inspire people to spend more? Some confidence giving is required. The only good news in all this is if the stock market starts doing better. Psychologically, people will feel like okay thinking that the world has come back. For somebody holding a Reliance share, for him/her life is fine, right? In fact, it's doubled. The stock value has gone up twice. Unfortunately only when western India ie; Mumbai & Gujarat gets full blast, India will fire on all cylinders. Unfortunately that part of country still needs some more actual health related intervention. Demand generation happens in Maharashtra & Gujarat in a very big way. Having said that, I think rural India is doing better, farming and agri income will be better. So it won't be all bad news, but it will certainly not be what it should have been. You know, if we were expecting India to be, say, from 2.8 trillion to 3.2 trillion, it won't happen. It may become 2.5 trillion and then you have to work one more year because everything will get reset only by 18 months. And it goes back and then climbs back up. That's an unfortunate outcome of COVID-19 and I don't think anybody can escape it. So we just have to wear a wet towel around the stomach and sit quietly for a while (laughs).

What all are your new strategies for steering the bank in this tumultuous time?

Last year, we focused on two strategies, 'Presence to Prominence' in chosen geographies and 'Prominence to Dominance' in our home market. We have seen consistent gains and recorded a healthy increase in market share across key geographies and segments, and our visibility among the top quartile banks, both in terms of business and governance has amplified in the last financial year.  While these twin strategies will continue, we have added a new one this year, to be the ‘First Choice’ bank. Our bank has always been respected as a thought leader in customer-centric approach backed by relevant innovation. While we continue to be deeply rooted in our fundamentals, we realize it is time to dream bigger. The last decade saw us emerge from a regional player to a bank of relevance across India, and now we are determined to build ourselves to a bank that is First Choice. It is not just being the best in customer service and having the right set of products and processes; but being able to distinguish ourselves in everything that we are and do, be it products, processes, design, people and value creation. We are mindful that being the First Choice is a tall task. This is a pursuit of excellence and there would be no finish line until we become the most admired bank, digitally enabled and serving the micro, small and medium establishments in the country.

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