New Delhi: With its market capitalization crossing Rs1 trillion for the first time on Monday, ICICI Bank Ltd has come a long way in a very short time under chief executive officer Kundapur Vaman Kamath.
Just last month, Kamath’s well-oiled team reached out simultaneously to capital markets in India and overseas, raising $5 billion (Rs20,200 crore) as large investors scrambled to buy a piece of what he says is a part of the “India story”. Indian investors took all of 20 minutes to bid for the entire offering, which was eventually oversubscribed by about 11 times. Overseas investors also sought more than four times the number of shares on offer to them.
For good reason. ICICI Bank has doubled its profits in four years, riding on India’s annual growth of 8%, and its share prices have more than tripled in just three years.
Still, Kamath says the story has just started as he sets his eyes on behemoth Chinese banks as benchmarks rather than, say, the much-larger State Bank of India.
In his first extended comments even as his Mumbai-based staff was closing out on the bank’s successful follow-on public offering, Kamath laid out the agenda for ICICI Bank, going to considerable lengths to discuss his idea of how the bank could tap into India’s large, rural population. Edited excerpts:
So, how did you celebrate the successful follow-on public offering (FPO)?
We don’t celebrate. We believe that anything that we achieve is a milestone, so you record it and you move on. That is the philosophy that I am now trying to push my colleagues to. We have so many milestones to achieve and so many things to do, that if you pause to celebrate, you will fall behind. We will congratulate people, give a pat on the back but, honestly, there is no formal celebration, no get-together, and no high-fives. Just a short note congratulating the team on what they achieved.
Is it partly because there were no surprises left and it was so well planned?
I think we have now made the FPO a process. The first time ICICI Ltd did a NYSE listing, it took us 72 days from the time the board approved, to get it done. We had to get our accounts US compliant.
When ICICI Bank Ltd did an issue a few months later, we got it done in 62 days.
This latest issue is now coming in at less than 52 days. We took the decision on 28 or 29 April at a board meeting, and the issue was done by 30 June.
Basically, it is a process. Everything is set and we know who writes what and who is responsible for what.
Were there any surprises in the FPO, either good or bad?
I don’t think there were any surprises in the issue at all. It went exactly as I thought it would. When I launched the issue in Mumbai, I said this is really the India story we are talking about and we are an actor in that story and that is how it really worked out. The big story is still India. Without that story ticking, we have no story of our own. That is the perspective we took and that went down well with the investors we met across the world.
Some people would look at the retail investor response to DLF Ltd or your issue and say that it looks like investors outside India are a lot more bullish because of the amount of money they want to put in versus the response of investors within India to the offerings…
It is historically true of FPOs. The Indian retail investor basically looks for a quick gain. He may stay in the stock, but he is looking for a quick gain. Whereas, an overseas investor is in it for a longer period. That has been our experience. It may be counter-intuitive and one may feel that FII (foreign institutional investors) that comes into India is short-term money that goes in and out.
But, generally, if you look at financial investors out there, they are long-term investors. They want to stay (in) the story and be with the story. That’s what is the difference between the domestic investor and the overseas investor today.
But we are also talking of the domestic, lay investor. The lay investor today is not the prime mover.
The prime mover is the informed investor, which is the mutual fund investor.
But the mutual fund investor is to grow in size in India to a scale where the global mutual fund investors are. Then, that would be a significant contributor.
Once that happens, we will have a better picture of what our domestic support is.
But for that to happen in the Indian context, we need another five years of asset build-up, for mutual funds to create the muscle to get into large deals.
You have been tapping the markets on a somewhat regular interval. Will we see the next offering in 2009?
No, I don’t think so at this point in time.
Our assessment is that this (money raised) should last a little while longer than that.
The issue that is always raised by investors is: “Why do you keep coming to the market?” The answer is very simple. When an economy is growing at 10% and the banking sector is growing at 25-30%, this sort of growth cannot be fuelled by what you throw up as profits or as surpluses. It has to be driven through outside injection of capital.
The key, then, is a trade-off between growth and ROE (return on equity), and that line has to be carefully walked.
As you grow back the ROE to what could be threshold limits, you end up with dilution because of growth. Some investors don’t like that.
I think you have to make that careful trade-off between growth and hitting a desired return.
Given that in countries like India we have no option but to grow, we have to create organizations, banks and institutions that have the (financial) ability to take on opportunities and challenges ahead of us.
While the reason for tapping capital markets is to raise capital adequacy ratios, some say that ICICI’s own growth depends on how well Indian capital markets do as it is also a function of not being able to raise low-cost deposits.
No. If you look at the capital you raise, you will end up leveraging it 10 times more. The amount of capital you raise is not going to last you long if it is a substitute for deposits. So, that view is not correct at all.
So, what could be the time frame for the next trip to the capital markets?
We don’t expect to come to the market for three years or so. That is our general horizon—three years. If there is a regulatory action in between and we need to come back earlier, then sure.
This time around, let us say we came back earlier, in a little over a year and a half. Why? We immediately decided to raise capital because tier-I capital ratio has been raised from 4.5% to 6%, basically a 33% increased risk weighting on your entire book. So, I have to correct for that immediately. That is the trigger for this capital access. Not that we were at a gasping level. We had a comfortable room. But we like to keep a comfortable room knowing that we are operating in a growth environment and anything could happen.
If you look at risk weight ages of assets, they have been tightened. General provisions on assets have been tightened. Given these challenges—either on the balance-sheet side or on the P and L (profit and loss) side—have been imposed from a regulatory context, I do not question why they have been imposed. Once it is there, it is there. It is then for us to respond on how to manage our business. That is how we move.
My gut is that almost every bank in a growth phase will have to come to the market because of these reasons.
Provide us with a roadmap if you will, for the next year or two, for ICICI Bank. You have talked about four pillars—consumer credit products, remittances from Indians overseas, corporate lending and rural banking. But you only have some 130 of your branches in rural areas.
Clearly, the four pillars of ICICI are in a sequence in terms of growth. The first pillar—consumer credit products—came out of necessity as we had to diversify from a single product company. The other pillars came in a strategic context, looking at opportunities, scanning what you could do. Most of these pillars are now fully fleshed out and the opportunities around those pillars are fully explored. But the rural pillar is the one where much more can be done and needs to be done. Not only by us, but by all players in the system. Clearly, in the next two years, the focus will be on building the rural business, but other businesses continue to grow as well and they are not growing at slow rates.
They continue to grow at double digit rates. But the unexplored opportunity is clearly rural areas.
We look at rural India as two or three opportunities in one. There is a rural opportunity to lend. That is what I would call sustainable operations. By sustainable operations, I mean giving money to individuals, to create livelihoods. That will essentially be through microfinance. Then there is what I would call bridging economic needs. For example, a farmer selling sugar cane to a mill is paid after six months. So, can you fund him in the interim, otherwise he would probably turn to local, indigenous sources that would be significantly higher in costs? He already has a livelihood, but can we ease his life?
Then, a stage will come when they will start becoming savers. Then, you will need to figure out ideal financial instruments, be it deposits or any other instruments. We have to work on those and we are working on those, but we expect this business to happen in the second round of the rural push.
A third rural push is when he has saved enough to become a consumer. He will aspire to want to have a house. He will aspire to want things in the house—transportation and so on. In some situations, this accelerates very fast. For example, if you have seen the agriculture belt in Maharashtra, I think we are already at stage three. You have seen the farmer generate wealth, he now has savings and he now has got a house, a motorcycle. You see a proliferation of motor cycles.
My belief is that this is the only sequence in which it can happen. Otherwise, how much can you try to push? For example, if you want housing in rural areas, it has to be affordable for him to have a house. By affordability I don’t mean cost of housing has to be low or that interest rates have to be low. He has to have sustenance to actually live in the house. So we have to facilitate that, create sustainable living, create sustainable savings and then meet their aspirations. These are the three steps.
Rural India is not a quick fix in the sense that in a year’s time, we roll out and we are there. It is going to be a layer that needs to be created one at a time.
Other challenge is you cannot go in with (a) conventional delivery mechanism. You will need to look at alternative mechanisms. Alternatives are partnerships and technology, and that is what we are working on. Our own branches have a secondary role in this. They will be hubs, in a way, and manage what I have described. There could be one or two in each district to look after various initiatives we have got going in that district. This is how we have run our business.
Give me an example of a partnership in reaching out to rural areas.
We are working with over 100 microcredit institutions. That is one type of partnership where we are working with them to initiate microcredit programmes, get self-help groups going, nurture them and fund them. Our aim is to have something between 250-300 microcredit partners so that of the 600 districts in India, you have one microcredit partner in two districts and he goes deeper into the district.
The second is we work closely with tractor manufacturers, seed manufacturers and fertilizer companies. We work with buyers of grain, fresh produce and, increasingly, supply chains that are coming up in rural India, the retail chains.
In the early stages, most of these were not in place. As retailing comes of age, this opportunity is going to grow in geometric progression. That is what we believe is the big opportunity.
You talk of market shares, such as 30% in credit products, for example. Where are you in rural banking and where would you like your share to be?
If you look at our overall lending book, rural is probably around 10%. We should head toward 15% in the next 2-3 years, but you should remember the overall book is also growing at 35% annually.
We will see how to scale it up thereafter, depending on growth opportunities and, honestly, the opportunity is much bigger and we could do much more.
I think the challenge is to understand risk fully—understanding operating risk fully and credit risk fully, and then scale it.
Speaking of scale, you have talked about looking at China rather than, say, State Bank of India. But focusing on rural markets seems like a very long way to get to that scale. After all, you are talking about a lot of little businesses.
When scale starts kicking in, it kicks in very quickly. It is a lesson that I have learned in banking and in observing companies not only in India but around the world. It doesn’t take too long to scale.
For example, the scale we have built up in consumer credit, if I were to have taken a shot at predicting it five years back, I wouldn’t have thought that we would have got where we are in the short time that we have. That is an important lesson.
When things fall in place at the consumer end, then the momentum is extremely rapid. I would think that in India’s context, at 10% overall growth, what it does to the chain, we are yet to fully comprehend.
I think we are all learning as we see what it does to us and we will all find that we have to run a lot faster and faster. For example, the $500 billion (Rs20.2 trillion) pipeline of investments in the country, nobody thought that would happen.
Similarly, look at remittances into India. Nobody thought it would grow at 30% a year compounded for the past five years and reach $30-$35 billion now and still grow. These are the sort of things that teach me that scale builds up extremely rapidly.
That is why I say that benchmarking China is a good strategy.
All you have to is to move the pointer back to 10 years to see where they have come from and then say that from this map, I would hit 100%, 75%, 50%, 25%, whatever. You have a general map of where you came. I don’t think it will be significantly less than 75% or somewhere in that region for us.
For that matter, let us look at a very simple indicator—foreign exchange reserves. We are now at $210 billion or so. China was at this number five years back. So, it is very easy to calibrate where you could be or ask where should you be five years from now against China’s $1.2 trillion or $1.3 trillion. Where would you be? Would we head to $1.3 trillion, $1 trillion $750 billion? It becomes easy to set a broad goalpost for yourself and then move.
Do we have the financial infrastructure to compete or even benchmark against big Chinese banks?
Yes, except when we were a closed economy and, honestly, we were one up to the mid-1990s, where getting anything done is an exercise in entering battle with your hands tied behind your back. In a market that has otherwise opened up, there could be some constraints in some areas. But these constraints are understood and resolved once they are seen to be constraints to growth. I would look at it that way. Take our own case. We have grown despite all the constraints. We are growing at a pace, which I would call probably a pace at which a bank should normally grow. What I mean is that banks can’t grow at 100%. We are growing at a pace that it is normally expected to grow, despite all the challenges that we are seeing. What is helping is all the tremendous change that has happened (in) the way the customer deals with us. If the status quo continued and (the) customer is only coming through a branch and you have a branch constraint, then you would have had a problem.
Compared with other banks, particularly peers such as HDFC Bank, ICICI’s low cost deposits such as current accounts are very low. How do you react to this statement?
I would react to it in one word: statistics. Last year, we aggregated more current accounts than anybody else except State Bank of India. And our number isn’t a small number; it was half of the largest bank in the country from just a few hundred branches compared to a few thousand branches. And it was significantly more than the other bank that you mentioned with more or less the same branches. That is not f
actored in. Whatever current accounts we can add, we are raising.
Let us look at global balances. In three years’ time, we are (the) largest bank in the country in terms of global balances. We look at business differently. We believe that there is money out, it is there in a variety of ways. You need to have a skill to raise it, to deploy it and to manage it. And that is what we are bringing to the table. If we have deployment capabilities for various types of money, we will use those capabilities for various kinds of money. This is a strategy we are working on. For example, historically, we talked of 30-70 corporate and retail ratio. That has almost turned turtle. Now it is almost 30-70 or at least 40-60 retail to corporate. The retail flow in the system, or retail accretion, is significantly lower than corporate accretion so you are going to have a distortion.
If corporate money is coming in, that money is predominantly going to come in as a term deposit. These are surpluses. Corporate current accounts are mostly money sitting idle or working capital. In a situation where corporate money is surplus money, then it is going to sit with you or with mutual funds as long-term deposits. There is a structural shift in deposit accretion in the system. We need to recognize that and work within that opportunity or challenge, whichever way you choose to see it.
ICICI Bank’s non-performing assets have been growing and you have always maintained that NPAs will also grow if you grow your assets. Still, there are some who look at your coverage ratios and say it is not very good.
Today, if you look at retail entrants, there is no difference between various players because the rules (on coverage) are standard. We could have talked about that in the past, but even earlier, the comparison was not against banks in India. Once you have a regulatory set-up that requires you to provide in a particular manner, then the coverage ratio has to be same for everyone, unless you provide more. Today, there are very set provisioning norms. For the fourth quarter increase, there is a very simple explanation. General provisioning on unsecured debt was raised from 100 basis points to 200 basis points on the entire book, so we had to provide for that. We have the largest consumer book, so it is a simple equation.
When will you take your insurance firms to the market?
Two other things need to happen to bring them to the market. One is that there needs to be clarity on foreign partners. Only after that will the entire insurance business, not only ICICI Bank, be able to take a call on when to reach out to the markets. Second issue is that we need to understand whether we need to show a profit before coming to market or not. What has happened in insurance, particularly on the life insurance side, is that growth has been much faster than what we had anticipated. Given current reserve requirements, the faster you grow, the longer you are going to take to break even. This is the dilemma that most insurance companies will face. Once there is clarity on holding structure between partners, probably the process of going to the capital market will start.
What do you look for in investors, especially when it comes to big ones such as Temasek and Singapore’s GIC?
One is what is it that each shareholder is permitted to have. Most people can’t have more than 5%. Secondly, how much has each investor applied for and within that, what is the allocation. What (do) we look for in an investor? How stable is the investor as we don’t want people who come in and go out from the stock. That is our ideal investor. Temasek has indeed held our stock while, in the past, GIC has held our stock and they have sold it as well.
Separately, when it comes to your successor, you have always said it is the board’s decision and not yours. But having just done a successful FPO, do you sometimes feel that I have done what I need to do and it is time for people that I have been grooming to take the ball and run?
It is the board’s decision. You are right in that, as somebody who is closely involved in it, I would at least put forth my views on this. We clearly have built several leaders and the only decision that the board needs to take, as I see it, is whether these leaders have been groomed enough and whether they have seen them under various situations of building businesses, succeeding in building that business.
What is required in a leader? It is strategic thought, lateral thought, and ability to translate strategy into action plans. And an ability to have it executed and, once it is executed, then the ability to monitor and sustain it.
These are the basic qualities of a leader. What the board has to do in ICICI is to ask have we seen enough of each of these leaders to take a call? That’s all there is to it.
In ICICI’s case, the challenge has been very simple. Most businesses are young businesses that we have built. We are blessed with leadership talent. I still have two years to go (on my contract), but I have a good set of leaders who have been prepared.
But isn’t it difficult to measure leadership in a ‘rising tide lifts all boats’ kind of environment?
No. If you go by the yardsticks I have indicated, it is not just measuring in terms of growth. To reiterate, it is strategic thought, building your action plan, executing the action plan and then the results. The results are your function of a rising tide, but not all these other things. Take our businesses, whether it is consumer credit or our insurance business. All players (in the industry) were on the same footing, but we have clearly built a leadership position, a distinctive leadership position. That means that each member here has played a distinctive role in strategizing, actioning, implementing and running the business.
The question is do we need to see this for a little more time or not? That is the call the board has to take.
Is there also an element of do you need to see them perform in adversity than just growth?
Then, you may have to wait for a long time. My job was to prepare a set of people. This is a strategy I adopted in 1996. I was criticized then that I picked youngsters and promoted them at a dramatically fast pace. You had people in their early 30s as general managers and in their mid-30s as directors. But I have continued with that strategy.
We are a young organization and we have nurtured leadership at a very young age.
You have to remember that post-merger, ICICI bank is just about five years old and the first years were spent in struggle to effect change in terms of our business focus and story.
As the bank grows larger and larger, is it personally difficult to keep up with the business, get information that comes without filters?
The key interaction point has to be the customer.
You have to know what is happening at the customer level and technology has helped with that as the customer is very smart. He knows how to get to you.
When this sort of a contact happens, I get a trend of what is happening. Not individual problems, as those will be resolved, but more as generic problems in a particular business. Then you have to go to the root cause and fix it and that is key.
Today, with connectivity, it is very easy for staff to write to you and tell you what is wrong. Finally, I make line visits down to the branches quite frequently to get feedback from people as to what is it that bothers them. That gets you into a fix mode.
For example, one key issue whenever I went to branches was that we work late—we close at 8. Then, we stay open until 9pm or 9.15 to close out. I made it a mantra that I want everybody out at 8.20pm. We may not get it done by 8.20, but I will not take my legs off this brake.
People used to hand over the system for night time maintenance between 8.15 and 8.20pm. But why can’t the system be handed over for daily maintenance at 8.02?
Then some smart branch manager came up with the brilliant idea that, at 7pm, we have the main tellers start collating cash. All desks that are open become cash desks. We usually only have 4-5 transactions at that hour so, within five minutes, the collation is completed. It is a simple change but, in the process, people can go home early.
One major challenge that comes up and which, frankly, in today’s world, is a difficult one to resolve is work-life balance. That is the most difficult one.
So, are you leading by example?
Work-life balance in today’s world is very difficult to achieve. One has to make some compromises. Try to do the best you can.