Banks may need to cut their cost-to-income ratio to one-fourth of current levels: KV Kamath

Banks may need to cut their cost-to-income ratio to one-fourth of current levels: KV Kamath

Indian banks need to cut their operational cost to one-fourth of their current levels given the fact that the era of lazy float is over, veteran banker KV Kamath told Latha Venkatesh in his interview for Moneycontrol. The veteran, who is currently Chairman of Jio Financial Services Ltd, and who led ICICI Bank for two decades, also argued that in the days to come, Indian banks will only lend retail and market instruments and other entities will finance infrastructure and corporate capex.

Latha Venkatesh was interviewing Kamath for Moneycontrol’s new series “Latha & the Leaders”.

“A big, fat part of the profit of the (banking) system came from idle money that was around. And then comes UPI and the payment mechanisms that we know today. And there's no more the word “float”. Float is gone now,” Kamath explained. “Banks need to reinvent themselves,” he argued. Since idle fixed deposits are no longer the way people save, banks need to cut operational costs with a rigorous use of technology and new products. “The key challenge that banks are facing and will face is this cost-to-income ratio. So, unless you disrupt that cost-to-income ratio to one-fourth of what it is today, you won't survive. I'm saying you cannot operate; you will have to be well below 35 to 40%; And some people, you know, are higher than that. I'm saying if you are operating at more than one-fourth of that, you are vulnerable," Kamath said emphatically.

Kamath referred to the evolution of the broking business in India, where in the past 7 or 8 years, players like Zerodha and Groww have completely changed broking from what it was, to a new order. “The old players, to be relevant, they need to reinvent themselves technologically, product-wise and reposition them and then do the broking business. Likewise for banks,” he said.

Kamath isn’t the only one to worry about the dwindling term deposits with banks over the past few years. RBI deputy governor Rajeshwar Rao also recently pointed to the much lower maturity profile of bank deposits in recent years: “From 2016 to 2024, the contribution of term deposits has declined from 65.8% of total deposits to 60.9% while the shares of savings deposits have increased from 25.3% to 29.2% and that of current account deposits from 8.9% to 9.9%,” Rao said.

With maturity profit of deposits shrinking, banks run into major asset-liability mismatches if they try to fund longer term loans for corporates or infrastructure. Kamath argued that banks must therefore become only retail loan giving institutions, as they are becoming world over. “If the banking money is really short term saving deposits and some fixed deposits and the average tenure of a bank deposit is about a year. And, and you expect them to fund infrastructure over seven years or a corporate loan over five years, you are sitting on mismatch.” Kamath said

As Kamath sees it, increasingly, corporates won’t even need too much money for capex, since capex has become “just-in-time” and very efficient. A decade ago, brownfield expansions were taking 3 years and greenfield even 5 years, said Kamath. But now, corporate expansions have become very efficient and completed in far shorter time duration. They are increasingly being financed by corporates themselves or through the bond market.

“Would you have believed five years back that NHAI will be in a position to say I can spend as much as I want, and I will not need to borrow?” asked Kamath. He pointed out that instruments like INVITs have allowed infrastructure builders like NHAI to convert their finished projects into INVIT securities and thus find the money for new projects. Besides INVITs, pools of long-term savings like insurance and pension funds in India are also looking for good investment opportunities. To be sure, they are currently worried about implementation issues in infrastructure that may endanger their loans. But Kamath expects that the National Bank for Infrastructure Finance and Devt or NABFID will be able to provide credit enhancement for infra loans and thus make it attractive for insurance and pension funds. In short, Kamath sees infrastructure being finance entirely by market entities outside the banking system and banks becoming entirely retail loan financiers.