While India remains a bright spot amid global volatility, it’s time for local lenders to pull up their socks on unsecured retail loans to prevent damaging an otherwise healthy banking system, KV Kamath, veteran banker and chairman of Jio Financial Services, said in an interview. Kamath also commented on the US elections, the Chinese economy, and whether capital spending by companies will revive in India.
Kamath, who spearheaded ICICI’s transformation and eventual merger into ICICI Bank, also helped set up the Shanghai-based New Development Bank, previously BRICS Bank, a multilateral development institution created by Brazil, Russia, India, China, and South Africa.
In 2020, he returned to India from China to build the country’s latest development financial institution, the National Bank for Financing Infrastructure and Development (NaBFID). Edited excerpts of the interview: Edited excerpts of the interview:
There is the expected Fed cut in rates again. Then there is the big China stimulus. Amid all this, does India continue to be the bright spot in the global economy?
There is no other economy which is currently probably doing as well as India. I find it difficult to find another economy as good as ours. We have a long runway for growth and that runway is a good stretch of 25 years. We are going to be economically important for everybody else around the world.
How much should Indian investors care about the outcome of the US elections?
What we probably need to look at on an ongoing basis is what sort of volatility any event globally can have on us and how well are we prepared in a way to handle that volatility.
We have seen that over the last two years and I think we have understood how to bear these shocks and get there.
We have managed inflation pretty well, so we continue to ride it out. This (volatility) is probably going to be the norm in the economic context.
Also read: RBI would take steps only when situation warrants such an action: KV Kamath
You are an observer of the Chinese economy and the founder-president of the BRICS Bank. Can the Chinese stimulus have an impact on the Indian economy?
It is in their (interest) to make sure that they (China) get back to their growth rates. For an economy of this size, a $18 trillion plus stimulus is required. Given the context of changes happening at a global level, this could be a step to strengthen the economy.
How should the Reserve Bank of India react in such circumstances?
The Reserve Bank has managed the economy beyond a textbook case of management. It is extraordinarily well managed between the government and the Reserve Bank.
Right from the time of Covid by not doing anything knee-jerk and being very supportive, holding rates, every single step was taken in the right way…
There is a nagging feeling that we need to see inflation behave before we take a step towards addressing the issue. They are probably taking the right step in being watchful.
Private capex still remains patchy, barring some big industrial groups. While capacity utilization is going up, what would it take to revive private capex? The government capex has been taking up the slack, but this year, that has also slowed down.
Manufacturing will be a key area. I think infrastructure (building) will happen.
Private capex or capex in manufacturing is a function of two or three things.
The most critical is how long does it take to add incremental capacity. When I started my career, greenfield projects (took) five to six years and what we call modernisation took two, two-and-a-half years.
Today, greenfield project probably takes two, two-and-a-half years and plant modernisation projects take less than a year. Companies don’t take time to increase capacities to meet the actual market (requirements). At this point in time, they are sitting on capacity which is still to be utilised.
(One) other point that I believe, which has not probably been talked about, is that during Covid, Indian companies managed to increase productivity dramatically because they had no other option. The workforce went home and they had to ramp up production quickly. This magic happened through productivity increase, process changes, automation, and so on; not necessarily by investing in a large way but (by) investing in a meaningful way, in automation and other routes.
The second reason could be that there was an early indicator earlier available to us, which was a drawdown from bank loans. Now, since the last two-three years, cash flows have been healthy and corporates are deleveraged. They now use cash accruals for investing in new capacity. You will find that the increase is happening through addition to gross fixed assets or capital working (in) progress.
Also read: The case for divestment is now getting a little grey: KV Kamath
Let’s bring in the China plus one theme. There is anecdotal evidence such as iPhone production out of India but at the aggregate level, FDI has been negative this year. A lot of the FDI which seems to be happening is private equity companies buying from each other. What are your thoughts?
I think FDI coming in would be for two reasons. One is people investing either see an opportunity in India or an opportunity abroad. For the reasons mentioned earlier, for opportunities in India, if we still have idle capacities, I think probably investors are holding their investment proposal till when capacity is up and fully utilised.
For exports, it's a slower cycle. You cannot suddenly change from wherever you are getting your supply chains to a new destination.
Given the vastness of our country, for a foreign entity to set it up as a plus one, we need to look at this logistics of the supply (chain). That is creating a slight lag in that capacity coming up.
The health of the banking industry has been stable for a few years but concerns are emerging on the retail side such as credit cards and microfinance. Can it rock the boat for banks, as 60 percent of loans across banks are aligned to retail?
It would be right to say that there is a challenge on three fronts — the third being unsecured personal loans. I would think that an asset, which cannot be repossessed by a bank, is also an unsecured loan. If you add that to the two that you mentioned, I think a good part of that 60 percent exposure could be at risk. That is one reason why the RBI governor has been very increasingly open about it. I fully agree with him that caution is required. We need to have an understanding as to what and where this money gets spent. What sort of activity did it go into and then try to be on top of that situation. A red flag has been raised. I hope the banks take note of it, for their good and health.
Earlier this year, there were concerns raised, including at policymaker levels, that money is moving out of deposits because of people putting their money in equities and mutual funds. Do you agree?
Banking is largely a business, which is in equilibrium. If money goes somewhere else, it has to flow back somewhere (in the banking system), unless it is trapped as cash outside the banking system. I don't think we see that. To me, the incremental flow that would have come from government expenditure has probably slowed down but I would not be worried about that.
There are three critical NBFCs larger than some private banks. Is there a case for the government and the regulator to relook at bank ownership norms?
Reserve Bank’s message for such NBFCs is very clear — that you have to behave like a bank. All incumbents now are supervised to that level. Now the next step on whether they should be banks or not, is a policy decision and one will need to wait for it. I would have been more concerned if the central bank is not regulating non-banks almost like a bank but that is been done already.
You have built many institutions in your career including one in China. Until very recently, you chaired NABFID. How has this experience been?
Every institution that I've built has been a learning experience. The BRICS Bank was an exercise in learning cultures and working with different cultures when building a bank. My key take from BRICS Bank was that countries of the south when they get together are much stronger than on their own.
BRICS Bank had AA rating and it meant that there was no differentiation in pricing when I raised money from global markets.
China was the only country with an A rating, and others were all BBB minus or below. The strength of the south came out very clearly.
The other two institutions have been very interesting experiences where you could build teams from the available leadership in the country, whether private sector or public sector and build them at great speed in a way that is fit for purpose.
Funding was an issue in the 1990s. You had to course correct and become something else. Now, with the flow of funding coming in from pension and insurance moneys, long-term funding is available in ample measure.
In a way, it's (NABFID) kind of Back to the Future…
Yes, and it is to the government's credit that they realised that we need Back to the Future institutions to be created given what is happening to our growth story. Infrastructure is going to be the main driver, and we needed an institution to put that on the map.
Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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