Mumbai: The Kamath era of Indian banking is coming to an end. K.V. Kamath, managing director and chief executive of India’s largest private sector lender Bank Ltd will formally pass on the mantle to Chanda Kochhar, the bank’s joint managing director, on 1 May.
Ahead of that, Kamath, 62, the main architect of India’s retail banking, spoke to Mint on the next big theme for ICICI Bank and its obsession with growth. In a no-holds-barred interview, Kamath also explained why ICICI Bank cannot bring down its loan rates. Looking back at his 13-year inning at the Bank could have done differently.
According to Kamath, who just finished his term as president of industry lobby Confederation of Indian Industry, businesses are convinced that the worst is behind them.
In 1996 when you took over as the head of the erstwhile Industrial Credit and Investment Corp. of India Ltd, the industry was going through a severe liquidity crunch and interest rates had hit the roof. And ICICI was the worst hit. Coincidentally, when you are stepping down, again ICICI Bank seems to worst hit among Indian banks in the global credit crunch. Are you paying the price for your obsession with growth?
Weighing gains: K.V. Kamath says while the domestic growth story is intact, ICICI Bank needs to grow its global book cautiously. Abhijit Bhatlekar / Mint
Let’s put things in context. We have to see two things – the organization and the nation. The view that I have taken right from 1996 till today -- and I am sure that we will continue to have the same view within the bank – is that the story of the nation and its economy has to be inter-linked with the story of the organization. At times, when you create something for the future in the context of opportunities that you see opening up in the economy, it might look like obsessive growth but frankly, if you’re planning for the future, you’ve to plan two to three years in advance. There are headwinds and when you take that step, you’ll be the first one to be impacted. Flying out on your own way ahead of the rest of the system is the right way to describe (what’s happened at) ICICI Ltd and later ICICI Bank from 1996 to 2009.
You’re simply justifying it.
Each company has to determine its growth path. And if you believe that this growth path is closely woven with the opportunities that the economy provides, then you will have to be fast mover. The fast movers face challenges but when the challenge evaporates, the fast movers move far ahead of others. What needs to be checked is while taking those steps or planning horizons of growth, have you prepared yourself for the future?
And preparations in each company’s context can be different. For a financial services company, the preparations are for creating two or three pillars -- financial capital, human capital, and technology. Then, there are products, processes, etc.—the enablers, the nervous system of an organization.
The Chinese banks have been your model of growth, both in terms of assets as well as market capitalization. But now that ICICI Bank is consolidating and its market cap is shrinking, are you changing your philosophy?
Several banks in India will have to grow to the size of top five Chinese banks if this country has to raise the per capita income of its people from Rs1000 to Rs2000 and beyond. As China has gone to $2500 per capita income, the top banks in China can be counted among the top 15 banks in the world. That needs to happen if India’s GDP (gross domestic products) has to grow. As we move from a $1 trillion to $3.5 trillion economy, which is roughly the size of Chinese economy, you’ll see expansion in the banking system. We have taken steps to get there.
The theme is constant. The nation’s growth and your opportunity are interwoven.
What’s the road map ahead?
Let’s look at what has changed in the current context. A whole set of global competitors has become weaker and it will take them a few years to get back to their aspirations to move into a country like India. This is because India calls for a fairly large capital commitment and you cannot grow business here overnight. Given the challenges they have, it’s going to be a slow entry into India. That gives Indian banks an opportunity. There is no need to refocus our objectives. We need to continue to do what we have been doing.
Weaker foreign banks also offer you an opportunity overseas.
We need to grow our global book cautiously in the current context. While the domestic growth story is intact – we are back to an 8% growth in 2009-10 and hopefully to 10% thereafter – globally, one cannot be that bullish. So, when I talk of global opportunity, I have to basically factor in the economic conditions. The West is probably going to have negative growth till at least the end of the year, if not the middle of next year. In international business, it’s time for consolidation. We will continue to serve Indian businesses but may be slowing down growth.
What’s the next big theme for the bank?
Each business goes through cycles. In 1996 when I came in we were at a down cycle at the corporate front. That was corrected. In the current down cycle, corporate India has not been impacted seriously but consumer India has been impacted, particularly unsecured consumer credit. I am sure that as the economy goes on to a slightly higher gear, this part will look up.
Agriculture is a growth opportunity. We have been talking about it for about three years and I must admit that this is one area where growth has not been as quick as I thought it would be. Taking a viable banking proposition to 600 million people is a challenge and it has still not been successfully met. The challenge can be met through technology but (for this) the technology has to evolve. What is giving us hope now that we could do it in next 18 to 24 months is the advent of cell phones. Now cell phones are there in almost every village in India. Along with this, if we can bring in quasi-branches, which Reserve Bank of India (RBI) has allowed, we will have the ability to service this sector.
Based on our last two years’ experience, we have understood the challenges in rolling out this business and doing the business profitably. I am optimistic that this business will take off in next 24 months.
It is indeed the next big theme in the financial services sector. The insurance companies are actually doing this faster than banks.
Is the worst over for the Indian economy?
Around August-September 2008 when confidence suddenly seemed to have evaporated, I said we will see in India a painful price correction and all inventories – raw material, finished goods – will be repriced. It had been dramatic for steel making companies. They had to clear all by selling stuff at a loss. Do Indian companies have the strength to go through this process? My view is they have. Ten years back, it would not have been possible.
I did not think that demand would evaporate. The growth cycle that we have unleashed as a nation cannot vanish after three-four years. There will be ups and downs but the growth will remain fairly high.
Indian companies in the past two quarters should have cleaned up the inventories.
The demand cycle was sustained by rural India. As you unleash the economic transformation, there are different drivers – urban India, middle India, rural India. At this point, urban sector seems to be slightly under stress. Of course, there are certain sectors such as textiles, oil and gas that have been impacted by the global meltdown and they will take time to recover. The rest of India is doing fine. The impact of global meltdown on India is limited.
Also the drop in commodity prices has pricked the inflation bubble. I will say upfront that there is no fear of deflation. Blue skies are clearly visible. The industry has accepted that the worst is behind us.
Have interest rates bottomed out?
Deposit rates have clearly moderated and they could moderate even little more. But the government bond rates are out of sync. For lending rates to moderate further, we need 10-year bond yield to correct itself. This year’s government borrowing programme is causing concern in the mind of bond traders. Post elections, we will have a new government in place and I am sure the situation will be assessed. There are other ways to raise money .. by selling stakes (in companies). To start with, there is a 3G spectrum sale to happen. The new government will look into the possibilities of divestments . Communicating this message to the market is important and I am sure the new government will do this to make it clear that its borrowing will not crowd out private investments.
What about the policy rate?
The policy rates are not being adjusted because of these uncertainties. Once these uncertainties are cleared, the policy rate will go down.
You are not lending and your rates are much higher than public sector banks.
Second thing first. Interest rates are purely function of your cost of funds and whether you want to or don’t want to lend below a particular rate that you’d like to charge your borrowers. We are pricing our loans in accordance with our funding cost which is a function of two things – one is CASA (current and savings accounts) ratio and the other is the cost of the rest of deposit portfolio.
When we grew at an accelerated pace for seven years the interest rate was either stable or low. From a peak interest rate in 2001, the rates have been dropping. So, we could very well mix one-year deposits with CASA and grow. Our ability to raise CASA was limited because we have a limited number of branches. We relied on long term money – bulk deposits -- at slightly higher interest rate but still sustainable to grow through the period between 2001 and 2007 till the bulk deposit rate became untenable.
In 2007 when the cost of one-year money rose to 12.5% we decided that we needed to correct this. There was a scramble for branches. We acquired Sangli Bank to get 200 branches and RBI became more liberal in terms of granting branch licences. We got 500 branches last year and some 600 branches this year. It’s only in last two and a half years that we have been able to increase the branch network. This is true for some of the other private banks also but some of them may not have grown as fast as we have grown.
We have to first grow the branch network to raise CASA and bring down the proportion of bulk deposits. The bulk deposits have not created any systemic risk but in a rising interest rate scenario, they are certainly costly. This is why our lending rates are higher. We need to correct it. We have tempered growth over the last one year so that we will have a correction in CASA. We will have to be a little bit patient to have a one-time correction to get a balanced funding mix and interest rate. That’s our immediate challenge.
You have also stopped lending
We are not out of the market. We will still be lending more than any one else, probably except for the largest bank (State Bank of India). This is not transmitted to growth in balance sheet. Loans get repaid and we are giving fresh loans to that extent.
Will your loan portfolio remain flat for long?
If we are looking at a correction, then there will be a pause. We have pressed the pause button and we need to see when we release it.
What are the pressure points for ICICI Bank?
The challenge is what we discussed in the beginning – you said it was a obsession for growth, I say it is setting the horizon for growth. You have to be a front runner. As a front runner we are facing the headwinds at this point of time. There is turbulence, slowing you down. But when I look at the dash board all the indicators are reading well. We are seeing blue skies.
Looking back, is there anything that you could have done differently.
It’s a difficult question. Let me see what all I have done. We diversified into retail. Was it a wrong move? Certainly not. Should I have picked up all the products that I have done in retail? On hindsight, I probably would have gone very slow on half of the retail products that I have now, particularly unsecured ones because we probably did not read the challenge that would arrive later years, for a variety of reasons.
Should we have gone global? Yes, indeed, we should have. Should we have done things differently in a global context? May be a few things. A triple-A or a double-A overseas asset suddenly turned untenable. That has been a challenge. In hindsight, we would have been better off putting the money in Indian assets with triple-B minus ratings. Is that a lesson?. Probably. If you are in the global milieu there is certain things that you need to do. You are to rely on a rating process and make investment on that basis. I see very little that we could have done differently
The agri move was probably a little ahead of time. We should have gone a little slower. If we had done this, the balance sheet growth would have been slower and the funding mix would have been better.
You spoke about people assets but ICICI Bank is disintegrating with so many group heads, including the head of life insurance and private equity businesses, planning to leave the organization.
We have always said that the organization is like a living organism. It has to change shape and character like a tree that sheds old leaves and flowers and grow new leaves and flowers. This is a continuous process and I do not think any organization should be worried about it.
There is an internal process for leadership development and you have a core of people who can take these positions. I guess 13 years is a good time to look at internal leadership. We are now coming in with a new leader who is 15 years younger than me and we need a slate which is appropriately younger across various businesses. So it’s a normal process. We have great leaders and if there are opportunities outside I am sure they will seek opportunities and the new leaders will come in to take the organization forward.
I would have been worried if we did not have leaders. That’s not the case. Look at what happened in GE (General Electric) when Jack Walch left? Three of his lieutenants went off and they built great businesses elsewhere. In several ways, we have modelled ourselves on what GE has done in terms of building leaders, evaluating people, growing people and indeed in the whole selection process.
What’s wrong with ICICI bank’s image? Why do you have to appear to TV again and again to sooth the frayed nerves of investors and depositors and tell them everything is fine with the bank?
There is a price you pay for being a front runner in an emerging economy like India. If you’re a front runner, potshots can be taken at you. As I have said, I look at the dash board and all the instruments and I do not find any of the instruments reading things in a different way. We just to need to carry on. These things will come and go but we need to be focussed and keep going.
Your message to Chanda Kochhar?
Chanda is a great leader. She has her own mind and she should exercise her mind. That’s how organizations are built. You add value when you are able to break away from the mould and create your own future as well. I am sure she will do that.
Finally, how will life after ICICI Bank look for you?
My first priority will be try to get at least one-third of my time for myself and my family. When I say this people laugh at me but that’s my number one priority. Given the current requirement, roughly 20-25% of time will be taken by this office.
I need to think of what I should do with the balance –about 40% of my time. There are a whole lot of things that could be done. I am not into writing books or getting into the academic circle. I would prefer more of learning than teaching. I don’t know so many things. I am an engineer and an MBA and I used both degrees for my job. Then, on the fly, maybe I learnt economics. That’s it. But I have no knowledge of liberal arts. For the last 20 years I have been feeling that life is incomplete if I am not exposed to art, literature, music, dance, history. Prior to that I thought being an engineer is everything and I don’t need to know any thing else. That was a big mistake.