Kamath believes in 12-18 months time growth will be back to normal, to the levels India has got used to.
An internet joke 'Are we back to the 1990's?' is doing the rounds highlighting the return of Madhuri Dixit in films, Narayan Murthy in Infosys and weak growth rate of sub 5 percent. The rupee is also under pressure. But KV Kamath, Chairman, ICICI Bank, does not agree with it. He believes in 12-18 months growth will be back to normal, to the levels that we have become used to.
His belief is bolstered by the fact that corporate India is better placed for brownfield expansions not only in terms of removal of red tapes but also in terms of availability of an efficient infrastructure. All the achievement of last 10 years has to be taken into account while talking about sustainable growth. But to transform in a meaninful way, India needs to grow in double digits, Kamath says.
Kamath does not think the government will allow the rupee to depreciate much beyond 60 since everything that has happened so far has been done consciously. The efforts to stabilise the rupee has not been through market intervention, but more structural. Whether it is allowing FII flows or access to domestic bonds by global investors, every decision has been taken with eyes wide open.
On banking licences, he says if large players come in, they could move fast. But there is a risk of moving too fast. "So I would think, generally, in banking, if you are trying to grow anything over 25 percent, however good you are, the probability of taking mis-steps multiplies in a geometric way, non-linear way (exists)," says Kamath.
Below is the edited transcript of KV Kamath's interview with CNBC-TV18
Q: Does it looking like the last 10 years was a dream and we have to get used to a 5-6 percent growth for a longish period and rupee depreciating every year by 5 percent or so.
A: I don't agree with that. I think we have challenges for the immediate future; in 12-18 months, we should be back to growth rates that we have been used to. I also do not believe that we will fall anywhere below the current rate of growth because there are too many things happening in the economy, which will prevent it, but there are also too many things happening in the economy, which prevents it from growing faster.
Q: There was a belief consensus growing that we perhaps have seen the worst already. Q3 of FY13 was 4.5 percent, we crawled perhaps to 4.8 percent in Q4. There was a feeling that from here it is 4.8 percent and then 5 percent perhaps, and more. But with this huge meltdown in asset prices and the depreciation of the rupee, do you think we could be sub-5 percent for FY14 as well?
A: The events that have happened in the last few weeks as it were, if I don’t factor that in I don’t see growth actually dropping below 5 percent. So probably the steady growth would be around 5 percent. I am saying this because there are too many things that have happened for the good which cannot be suddenly yanked away to push us back into 4.5 percent or 4 percent growth. There are too many positives that have happened.
Q: What would they be?
A: For example, start with corporate India. Corporate India is deleveraged except on the infrastructure side where we thought that they are leveraged appropriately the business that they are in, but by and large corporate India is deleveraged. Corporate India can invest at speed, which it could never do earlier because it had to get licences, it had to get clearances, it had to raise money, etc. Today there is cash surplus, by and large most in industries, if it is a brown field site, you do not have to deal with too many clearances.
On the manufacturing side capacity can be built up very quickly. There is a vast infrastructure already built up. Take for example the rural road network, that is what I would really think is the backbone of India. 300,000 km of road built over the last 10 years or so, 60,000 km of highway. The entire telecommunication network, ports, which are significantly more efficient than they were 10 years back, airports which are multiple times more efficient than they were. So we take these for granted at times, but all these put together sustained growth.
We need to study the events of the last few weeks, in the context of exchange rate movement, but at this point in time, we have not had any feedback from any client saying that this could impact us adversely. Indeed, it could impact a few clients adversely, but not system wise because that ways the borrowing impact is still not that severe. People have been careful or have been asked to take care because ECB was not freely accessible and they have behaved in an appropriate manner. So we will have to see what that impact could be, but I don't see growth coming down significantly below where it is.
Q: China has come to terms with the fact 10 percent growth is not good for the economy, it is creating severe imbalances. They have sold the idea to their population that 7.5 percent is good and 11 percent is not good for you. Do we also have to accept that rather than continue to bemoan an 8 percent for which we couldn’t find the coal, for which we were scanning away mining rights. Do we need to sell that the proper growth which India’s administrative executive bandwidth can manage is not 8 percent, it is really 5-6 percent?
A: China is saying this now and they are already a five trillion plus economy. They went up to 5 trillion, they were very happy looking at 12 percent or low teen growth.
I think for India to transform, we need a growth in double digits, whether it is going to be 10 percent, which is sufficient, or 12 percent, time will tell, but we need to touch that double digit growth for us to transform in a meaningful way and meet expectations in a meaningful way.
Q: I am not asking you to be a soothsayer, but still mentally what do you think the rupee can go to, is most of the fall over and the real economies problems priced in?
A: I think the government has got a few things up its sleeve, if it tries to breach 60. And I am sure they will reveal it as we go along, but from what I can see, because whatever easing we have done we have done consciously. Our efforts at stabilising the rupee cannot be through market interventions and I don't think it is going to be through market interventions, it has not been. It has been through structural things. So what are the structural things?
We have allowed FII flows with our eyes open, we have now allowed access to domestic bonds by global investors with our eyes open. So everything that we have done, we have done it in a calibrated way. We can also tighten in a calibrated way as necessary. I am not saying they have to do it tomorrow, but they can tighten it.
ECB opening up was in a calibrated way, but we probably were relaxed looking at the current account deficit (CAD), but if you have other ways in which you can pluck CAD, then a whole lot of tools open up. You tighten them and you can see rupee tightening dramatically, may be they don't want a dramatic tightening of the rupee. So I don’t think that they will allow it to step beyond 60 because pain is certainly there at 60 as far as the government is concerned.
Q: The other issue about banking sector really and the deadline is July 1 for new bank licences. Non-bank financial companies (NBFCs) have already said they are not interested, a few big business houses have also said they are not interested. Do you think it will be a game changer if some of the big guys came in with really deep pockets? After all, the raw material for banks is more cash? Do you think the Birla’s and the Tata’s can seminally change banking?
A: Let me put it this way, if you are going to start small, your impact is not going to be immediate, and that is a no brainer. And if you are small, it is going to be a long time before you yourself in today’s context can make if worthwhile.
Two things impose a penalty on anybody starting small, one is the technology cost today and second is the branch cost because branches will be under remunerative for two-three years, not profitable. So you will have to allow for this overhead. You will be always thinking what is it that I can do to balance this out. So players who are going to come with limited capital, I do not think they are going to make a substantive difference to what the system is.
The large players who come in, indeed, yes, they could move fast, but in banking, there is a risk of moving too fast. So I would think, generally, in banking, if you are trying to grow anything over 25 percent, however good you are, the probability of taking mis-steps multiplies in a geometric way, non-linear way. So even if you start very big, then you need to go only at a particular pace, you cannot attempt to go beyond that. So in a short period, them making a seminal difference is not going to affect.
Then of course we will have to see who are the clear licence seekers in this because of the licence value and I am sure all these things the Reserve Bank of India (RBI) will keep in mind. So, whoever comes in finally, whatever be the number, it is going to be a slow and steady growth, without too much of an impact on existing people for at least 10 years. Beyond 10 years, we cannot say. Having said that, there could be a separate opportunity as it were in banking, which could be an amalgamation of technologies available today, the communication set available today, but that is not addressed in this current licence. That could be a game changer.
Q: If they gave some micro finance companies (MFIs) some licence, may be it will work?
A: No. I am talking of if, they gave a telecom company a licence, it could be a game changer because they have the ability to reach, some of them have 200 million customers or more and they have the connectivity. They have everything that you ride on today, but they are not a bank.
Now, there are stray attempts happening all over the world. So, if somehow, these things actually catch on at a rapid pace then there could be a game changer there. But it has not been experimented anywhere and I don't think we should experiment with it at this point in time because the discipline of banking has to be there as the given condition and for that you need to be a bank.
Q: I have two questions on this. I was talking to a finance guy from a big business house, when the initial new licence project was announced, his point was just really welcome for us because big houses generate something like Rs 15,000-20,000 crore very easily in a year and therefore they have the capital, but later on when the rules fructify you realize that okay I am able to find a home for this surplus that I produce, but in ten years, I have to bring down my stake to 10-15 percent. Do we have to relook the rules?
A: I think those rules won't be changed because the dilution rules have been in place for a long time, they should not be changed either because by and large in almost all domains, banking is a widely held business rather than a single controlling stake holder held business. Having said that, this point that whoever it is made to you, we generate so much and we put into the bank. First of all, it is welcome you put it in a bank, but my challenge is going to be how do you raise assets against that if we use the same yardstick that I mentioned that growth beyond a particular rate is not going to be something that you will be comfortable with. So you get back to that check.
Q: Another offshoot which has suddenly come into the limelight, if you have families and conglomerates as promoter owners, as we are seeing in the Yes Bank case. Until now, we never saw this kind of a problem in the banking sector. We do have boardroom battles in non-banking spaces. What should the RBI or the government takeaway from this when they give the licence, is there any lesson at all?
A: I think regulators certainly need to look at stability of capital in a bank. Is it going to be an issue later on as to fractures within promoter sets impacting the business. I am not talking of any particular bank, but generally in a banking context. As far as the next step going beyond that is concerned, board representation, I think the RBI rules are very clear and I don't think any change is called for there. There is a criteria as to what should be the makeup of bold and there is a criterion for fit and proper, that addresses most issues.
Q: What are the options before the Reserve Bank of India (RBI)? With a declining currency do you think the option of rate cut is not there?
A: We should delink the interest rates from the exchange rate front. Classical economics tells you that they are both connected, but we need to look at our case as a nation very separately. I do not see the two as something that we should mix in our mind. We will stick to the interest rate. Interest rate should be addressed depending on policymaker's comfort on the inflation front. That is the single instrument we will use and I do not want to second guess the policymakers on this.
We could have speeded up the process, but at the moment we have not and should stick with that. If inflation shows tendency to abate, we should then cut. Inflation certainly will abate, because given global product prices I cannot see how that could have a negative impact. Similarly, given the domestic situation in terms of various things that are happening here, the rain and the transmission effect, we should have a conducive climate going ahead.
Q: What has been cut has not been transmitted by the banking sector. What is the problem? Are banks too hung up on net interest margins (NIM)? What is the issue that the transmission is so bad?
A: They are not only hung up on NII but on a lot of things. They are now stuck on the bottom-line and maintaining the return on assets (ROA) given that credit costs are going to shoot up. They have already shot up for a bunch of banks which constitute 75-80 percent of the economy. These costs have gone up completely out of scale to what they were two or three years back. I would not grudge that they want slightly higher NII. It is part of management of your P&L and balance sheet because this flows straight into your reserves.
Q: Speaking of the banking sector, one of the shocks that banking viewers got or even the common man got was the sting operation and the fact that a whole host of bankers were quite brazen about offering certain products. What was your key takeaway from that entire operation?
A: We are enormously shocked at what an officer sitting across the desk could talk to a client. The shock was even more when we realised that evenly across the entire banking system this is what was being said. This is the single most important thing we talk of in training a person and spend the most time on, but despite that this loose talk was there. When the person making the statements well knew that there is very difficult probability of being able to sell any of this within the system.
Q: The RBI report after their surveillance said that in so many banks across the spectrum so many of these alerts are not there. Either the computer system is not in place or the alerts did not function. So, a lot of transactions could have got in, suspicious transactions, cash transactions. What do you think is the answer? In ICICI itself what was the learning, retrain?
A: In our case, the process slippages were very few and far between. It was a front-end issue. Retraining has already happened and it is an ongoing process. It is a matter that you are not proud of at all. I still cannot overcome how somebody could sit across the table and give the replies that he did to a person who is purportedly a customer. So there is a whole lot of retraining, a whole lot of introspection and what type of training we need to give.
The rest of the system if indeed there have been slippages that you have mentioned and once we have RBI report on all the 26 banks or so, we will have a better picture. This can be caught only through process and systems and a whole lot of them are to be automated systems.
Today, if you look at every remittance that comes through, before it is allowed to come and is pinged to see whether the originator is on any list which you are not supposed to be on and if it is you are screened out at the first instance. All of us have the same sort of systems. Do we have it for the rupee side of it? What are the exceptions? There will be whole lot of stress on the audit of the process as we go along.
Q: A veteran banker was pointing out, initially when the first set of the sting operations came the thought was that there is too much pressure to perform in private sector banks. That is why people go all out to get deposits, but then we saw that the entire banking system was on the same plane and is not a performance related pay. Is it that across the banking sector and perhaps even in other sectors there is a lot of penalty if you do not perform, but there is no severe penalty when you break the rule?
A: Once across the system I do not think it is that at all, because there was no incentive to do this as far as the system is concerned. You would not have all 26 banks talking the same way. I do not think there is an incentive to do this. I would also like a part of introspection process to see whether it is the pervasiveness of money which is unaccounted which is causing this, because this is a routine part of things as far as lot of customers could be concerned.
We have routine queries that come up and some part of it has got routine solution also which is well within what is accepted. This could be the exploration that was taking place and is the most charitable look that I can take. If charitable look is right then we need to look at the origin of this parallel money as it were. Why is it happening, why are you not able to curb it at source, that will be the issue. At the banking end, no excuses at all, we need to do it. But is this a reason, is also something that we need to ponder.
Q: Do you think this slowdown is going to last long primarily because next year we are getting into an election and from the look of things now it does look that we may not have a combination with a stable mandate, whatever the combination? Therefore, are we going to postpone the end of uncertainty and is this likely to be a long-drawn slowdown?
A: This is not a cyclical slowdown. This is a structural slowdown because of various issues. Until that is addressed, we will not grow and we will see the slowdown. So whichever government is in place and I hope this government before the elections is able to do a lot of things, so that once whoever has the mandate you can carry it forward, the nation does not impact this correction takes place.
Secondly, in terms of the fracture end that you have talked about, this country is looking at government since 1996 and I have found that governments end up doing much better than what we give them credit for a priori and that is my hope that that is what will happen in 2014. So on that, I am an optimist and I am still an optimist.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.