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He’s a veteran banker who led ICICI Bank’s rise, building it up from an institutional lender into one of India’s biggest corporate banks after liberalization in 1991. In a career spanning five decades, K.V. Kamath has also headed the New Development Bank of BRICS countries. He explains how the banking sector evolved since the 1991 reforms began.

How did the liberalization process transform banking?

We had a problem in access to capital in the mid-1990s. When I took over as CEO (of ICICI Bank in 1996), we had to see if clients had surplus funds that we could lend to others. It was so tight. Lending rates were 18-20%. Cut to 2000, you had uncompetitive industry. Banks were struggling. Some of us bet on the retail engine. A helping hand came from the Reserve Bank of India (RBI) through the first restructuring (of bad loans). This was not enough. Interest rates were high which was killing industry. RBI and the finance ministry brought the 10-year bond to 5.5% from 11%. Suddenly funding costs for a home loan went from 14% to 7%, car loans from 18% to 9%, motorcycle loans from 24% to 12%. Customers were able to afford the low interest rates.

How did lending to industry change after 1991?

As scale of operations became bigger, the ability of the banking system, which was primarily collecting short-dated money to lend long-term, started shrinking. Commercial banks took the role from development banks for the first 8-10 years of the decade. But in 2010-2020 several issues slowed banks. The major challenge was tenure mismatch. The tenure was manageable in the early 2000s, as lending was to the manufacturing industry. In eight years you could get your money back. In the 2000s, when infrastructure funding started, the tenure requirement became 12-15 years.

Banks were not in a position to address this. The last 15 years have been a huge learning curve for the financial sector. They had to learn technology-driven banking, retail lending.

Public and private banks often make poor decisions. How do we avoid this?

Credit risk was a learning curve. We did not expect negative things. We worked in good faith. When I say, we, it is the collective banking sector. Given the nature of economic evolution in this country, some of these things we continue to learn. If you look at the top 10-20 companies in any country, they will churn. All this means your ability to identify the winners and losers is under continuous strain. So the answer is that you keep learning.

How have attitudes towards credit changed?

There has been a sea change. Up to 2008-09, corporate India’s position was “it’s the bank’s duty to lend. I will repay, and if I can’t, the banks will give me a hand". Today the situation is different. Surprisingly this has happened during covid times.

Corporate balance sheets have become healthier. The first thing a corporate wants to do is repay debt. On the retail side, typically, Indian borrowers were risk averse. By culture, we are not inclined to borrow. When credit became affordable, when the EMI became manageable, people took loans to buy a motorcycle, a car, a home. Has the retail borrower gone over the brink? I don’t think so. If you are over the brink, the covid challenge would have thrown up more small retail borrowers unable to repay. Behaviour has changed but remained within bounds of prudence.

What are the most urgent reforms required next?

We need to look at making the foundation of our banks sufficiently strong for a $5-trillion economy. We need to build scale and size in the financial system. There has to be dialogue between banks, capital market, insurance companies and regulators to make sure that we create institutions of a sufficient size to hold hands and evolve.

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