Lend against cash flow, not asset bubble8 min read . Updated: 15 Sep 2009, 11:10 PM IST
Lend against cash flow, not asset bubble
Lend against cash flow, not asset bubble
Mumbai: The fall of Lehman Brothers Holdings Inc. on 15 September 2008 triggered panic among customers of India’s second largest bank by assets, ICICI Bank Ltd, who rushed to withdraw their cash, fearing its imminent collapse. That fear, it’s clear a year on, was highly exaggerated. ICICI Bank, which had a minuscule exposure to Lehman, appears to be safe and sound.
In an interview, the bank’s managing director and chief executive officer, Chanda Kochhar, recalls those challenging days and tells the story of a dramatic turnaround of investor sentiment. The bank’s shares, which dropped to Rs262.95 apiece in March, have risen around 220.33% since then to close at Rs842.30 on Tuesday, outstripping both the bellwether Sensex and the Bankex, which comprises lenders. The Sensex has risen 101.64% and the Bankex by 152.64% in the period. Edited excerpts:
Among Indian banks, ICICI Bank was the most affected by Lehman’s collapse. What was your exposure to Lehman?
Our exposure to Lehman was less than $80 million (around Rs390 crore), very small in comparison with (the) total size of our balance sheet, our networth and profits. There was nothing that should have caused anybody any concern. But I guess that the concerns that arose that time were more of perception and (it was) fear of the unknown that got people worried. That’s where the whole problem started.
Have you written off the exposure?
(The) recovery process would take long...proceedings are going on. Gradually bondholders would get some money. We have written it off. It’s been one year now and we have healthy profits and capital. It has made no dent in our books whatsoever.
When did you sense this was coming?
We sensed there was a problem right from January 2008. I remember we were at the World Economic Forum and there were initial signals from the mood of the bankers that things were not okay. The US banking system was having some problems.
If you remember, around February-March 2008, we were pretty vocal in saying that the environment was getting risky and we started slowing our growth rates in all products.
We were ahead of time and people had not envisaged what is happening to the global financial world. They thought we were saying something because there was a problem with us.
Were you ever scared that the bank might collapse?
Not at all. The scare was more in the outside world in terms of perception. I knew that the size of the issue was very small and we were adequately capitalized. Our capital adequacy at that time was at least 15%, our profit was over a billion dollars per annum. Clearly, in financial and economic terms, I was not scared at all. My concern during that period was (that) we should very quickly address the fears and unknown questions that people may have in mind. The only concern I had was how quickly and how fast we could communicate (with) and allay the fears that people had in their mind. I was never scared that there is anything that can take the bank down.
What was the climactic point of the crisis?
I again don’t want to use the word scared, but yes, at one point, the size of the challenge became big, around October, when very small investors and very small depositors thought there could be a problem with the bank. We did see in some specific geographies some queues building up and so on outside our ATMs and branches. It continued for a couple of days.
We communicated as much as we could and in every different form and segment of the population that we could. For 48 hours, we were communicating in some form or other 24x7. We were on TV, talking through the print media, we were talking at the ground level through our branch managers to the customers.
We probably did not shut some of our branches for the whole day. We wanted our branch staff to be present and answer every query of our customers and if any customer wanted their money, they were free to take it as the bank had adequate liquidity and we were solvent.
Did you create a special cell?
Yes, my room was the cell in that sense. Everybody was there. We were communicating with every segment—the depositors, small and big investors, government—to make our position absolutely clear.
When did you feel the worst was over?
The most challenging were probably about two days or so. However, we continued with the communication exercise with our customers. If I look back today, I would say that this is entirely behind us.
You had sensed the problem much ahead of others, but when Lehman collapsed you were the worst affected in terms of liquidity.
Not really. The problem was in the global financial system; it had nothing to do with (the) Indian banking system. However, by September-October, the liquidity in the Indian financial market became very tight. That was true for everyone; not just for us.
I would say that ICICI Bank gets talked about much more (than others). During that period, every bank was borrowing at pretty high rates. We were not very different.
In fact, from the end of 2007, when ICICI Bank had an equity issue, we followed a very conscious strategy of maintaining excess liquidity as we were seeing globally (that) markets were drying up. We planned our liquidity well in advance.
There was no problem and we could meet every commitment that we had to. We have paid all our foreign currency debts without having to resort to any backup lines of credit.
There has been a change in investor perception about ICICI Bank. You seem to be a stock market darling. What has changed?
At the beginning of the year itself, by January, I started communicating to the investors on what the focus points would be for the bank this year. I presented a three-year plan and a one-year plan to the investors. The three-year plan is to double the return on equity (RoE) and the one-year plan indicates our four-five focus areas this year to take us to the path of doubling the RoE.
Every few months I give an update to the investors on these four-five focus points. There is, therefore, a lot of confidence as there is clear articulation of strategy and there is a clear check every couple of months to figure out how fast or how slow the bank has moved on the path.
How did you handle the credit derivatives problem? Your total exposure was around $2.2 billion.
We sold the credit derivatives in 2007-08. The non-India exposure we sold very, very early, much before the Lehman crisis hit the global economy. Had we held on to them, we would have incurred losses.
We continue to hold the Indian exposure as they are good high-yielding assets and we understand the credit risk associated with the India credit.
Last year, the international assets were one-fourth of your book. Does it continue to be at that level or has it shrunk?
The proportion remains the same as the rate of growth, both in our domestic and overseas business, has been a little muted. However, within the domestic book, some of the businesses are growing faster than the others. We are growing our housing loans, auto loans, corporate loans, project loans and infrastructure loans.
We will bring down small-ticket personal loans and other unsecured retail loans.
You are probably the most international among Indian banks, in terms of assets and ownership. Is there any concern anywhere?
While we are the most internationalized bank in India, our global business always focused on Indian clients. We focused on non-resident Indians for the remittance business and the Indian corporates.
Our entire global footprint was to assist the Indian corporates in their global endeavour. In that sense, the focus of our strategy is correct and will remain correct.
Currently, our own Indian corporates’ global aspiration has become slow, hence the pace of our growth has also slowed. The pace of our global operations moves with Indian corporates’ global activities rather than the global financial world.
So the worst is over...
I would not count on the global greenshoots so early. There are some signals in terms of some indices which are looking good. The liquidity in these markets has become very comfortable as everybody is deleveraging. But we have to remember that there are still possibilities of credit card losses emerging in the global world, commercial real estate losses increasing. The impact of job losses in the Western economy will lead to lower consumption.
On the domestic front?
The green shoots for India are very encouraging. Profits of corporates are stabilizing, promoters who had put projects on the back-burner last year are bringing back their projects and reviving their capex (capital expenditure) plans. India from here will see domestic consumption-driven growth and we will gradually see investments coming back.
What are the lessons from the Lehman collapse?
The lesson for banks in general is that basic banking of lending against cash flows is the most sound way of banking. We lent to individuals and firms if they have the income and cash flows to service the loan, unlike in the West where banks would lend to a customer because the value of his/her home would keep going up every year. Nobody would check whether the person has the income to service the loan. So when real estates prices crash, you have a problem. The lesson is: lend against cash flow and not an asset bubble.
Individually, a very big lesson I have learnt is to be nimble-footed. It is very important to reorient your strategy to the prevailing economic environment.