KV Kamath: The runway for India is another 25 years, digital supercycle is going to come like a wave

You had a very interesting career trajectory, you left ICICI in 1988, you joined ADB and you came back to ICICI in the mid-90s when reforms were taking off. So what was it like then, because Government-owned banks dominated the banking sector pre-liberalisation?

So in the mid-1990s when I came back, there was a liquidity constraint, there was no money at all in the system. You won't believe it, we had to actually ask clients whether they had surplus cash that they could give to the development bank, which we could lend to our customers. 

Interest rates were 16% to 18% and inflation was raging, the capital market was dead. So you came back to India in the financial context I think full of pain. And on the other side, if you look at the manufacturing or the industrial sector, there was even more pain, because the liberalisation of 1991 was starting to bite. They realised that they were not at scale, they were not competitive in terms of cost and they didn't have the quality required to really stand up. So the first four years were very painful from 1996 to 2000 because we had a trajectory of increasing NPAs and all these problems around that I mentioned.

So we had to work around this and the new private banks were fledgling, they were just starting. And at that point in time, the commercial banks were mainly providing the working capital finance, they were not providing capital long-term capital for industrial growth, and so on. So it's a very interesting milieu from where we were 25 years back till today.

In fact, we also spoke to Narayana Murthy on this theme and he said 'one's context limits their aspiration.' So, the liberalisation liberated Infosys. How did it liberate the banking system?  

He is right in what he said. I also call it the theory of constraints, you had a constraint so you jump higher. So liberalisation gave you the means to do business, whether it was corporate India or the financial sector in India. By that I mean it gave you the ability to not be constrained by the past. So for example in the context of manufacturing to build scale, large plants, no license and so on, and I think there was another thing that was happening in parallel that was the technology acceleration, particularly the advent of the internet and the way it grew, all these happened in parallel.

So in our case, if you look at the banking sector, the advent of technology, the advent of new banks meant that you now had a structure with which you could experiment. For example, ICICI Bank said that we will experiment with going into retail and retail became our focus at that point in time and we drew a blueprint as it were for growth on the retail side and executed on that blueprint. Since you mentioned Mr Murthy, Mr Murthy was a part of that blueprint and he still recollects how at the Board we presented a blueprint really for going into retail in a large way and how we executed thereafter.

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So I think if it was pre-liberalisation these degrees of freedom would not have been there for players in the banking sector. So if I were to quickly run two to three years into the or four-five years into the banking sector, the internet, ATMs, call centers, and in the space of five years a bank where typically 100% of the transactions happen in the branch you had a situation where less than 15% of the transactions happened in the bank branch and the rest of it was on I would say newer channels which came up.

So a huge change in a very quick period of time, in a span of five years on the financial sector front, at the same time the capital market got momentum. One last change there, working in a concerted manner the Reserve Bank and the government, the Ministry of Finance, brought down interest rates and I think to the whole reform process and thereafter this is a key element and that what it did was it brought down interest rate from almost, the government bond came down from 11.5% to 5.5%, a mortgage dropped from 14% to 7% or 7.5% and all loans; car loans, motorcycle loans, industrial credit, everything dropped dramatically and that provided the momentum starting the year 2000.

Side-by-side the reforms and the pain that I talked about earlier in the manufacturing sector went through well-thought-out restructuring which was facilitated by the Reserve Bank at that point in time, we could clean up the manufacturing in the industrial sector in a large way.

So within 10 years of the reform process, you had a banking sector that is now able to lend properly and I would say the industrial sector, the manufacturing sector which was able to clean up whatever needed to be cleaned up and then get on to a different path. And then in 2000, the government opened up a whole lot of infrastructure effort which actually provided the momentum for the next 10-20 years.

You've often spoken to us about how India is in a digital super cycle. So if you have to give us a sense of what the next wave of reforms has to be for India, a blueprint for the techade as Prime Minister Modi called it, what would they be?  

I think clearly the runway for India is at least another 25 years, for that all you have to see is what happened in the far East, that is Japan  Southeast Asia, more recently China. The runway is very long and I think we are just getting onto that runway for 25 years is a given. Certain things have been already done and put in place and I think we need to recognise that.

We now have you know a liquid situation in the country and the Reserve Bank has taken a position that they will provide liquidity and keep it liquid for as long as it takes and I think it'll take a longer time than we think because that's where the growth happens with liquid conditions being conducive.

Secondly, a conducive interest rate environment, which also the Reserve Bank has indicated. I think thirdly, we are coming to learn to live with low-interest rates and maybe moderate inflation and understand that it doesn't really harm us in that way, very high inflation then corrective measures might be required. But by and large in our case the correlation between interest rate and inflation to me is not very clear so given that one can afford to have moderate inflation in low-interest rates, this provides momentum.

Indian industry is modernised, just look at Corporate India. 20 years back at the start of the momentum year 2000, Corporate India was still leveraged 2.5 to 2.8:1; by 2010 they brought down the leverage to 1.8:1. Today if you look at the top 50 companies in the country they have no borrowings at all virtually. The next 50 have hardly 0.5:1. I think everybody has learned the virtue of being debt-free. So you will have I’ll say a very strong foundation for these companies to grow given that they have cleared up their debt. This is one.

In the banking sector, I think at the moment Reserve Bank has done whatever needs to be done and given full reign to our players and also allowing new players to come because that also is important, we will talk about that not only in banking but in financial services.

The third momentum driver, I’ll complete the older one first, agriculture, is strong modern and reforms have been done. That brings us to the fourth driver which you mentioned, the digital super cycle. The digital supercycle to me has got acceleration like never before because of the one year of pandemic adjustments that we did, starting in the payment space, starting in the broking space and I'm sure learning to do things outside of the office. The entire space has got acceleration like never before. Now there it is not just a financial services business, it is a myriad type of enterprises that are coming up and driving momentum. 

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I used to say in the year 2000 that every white-collar job says that an Infosys, or a TCS, or a Wipro creates, it leads to three or four more jobs. I'm sure the digital startups that are coming up today the 160,000-170,000 jobs they're creating has got a multiplier effect and they are creating another maybe two or three jobs so you're talking a half a million jobs coming out of the digital supercycle and we are not reckoning it, we still believe that there is more to happen there. 

So I think that we will find in a very pleasant way that new things that are happening in our economy will be momentum provided as far as employment creation is concerned. And these are not necessarily just the e-delivery jobs, these are people who will work, even if each of these enterprises has three or four or five people and there are 50,000 enterprises there are a quarter-million jobs every year that is coming up.

Another beauty of the digital supercycle is that there is no reliance on debt you are basically funding yourself on equity. So I would think that and equity is coming from all forces, initially, it came from abroad, now it is coming from domestic investors also. So you have players coming in and supporting the economy, but we are not fully counting this part of growth because it is just happening and I think these are some very faint dots that we can see, in a year's time you will see the dramatic impact of this.

Let us take two areas wherein the digital finance space or a Fintech space is visible. The first one is the growth in payments, it's a remarkable growth in payments, and it is not reversible. Now very interestingly in India when there are multiple players who are able to bring the cost down and as far as I am the user or you are the user of these services, we are not paying anything, virtually coming free to us and our system the incumbent system is getting disrupted to that extent.

You then look at the second part of this, is let's take the example of broking. Startup broking companies working at very low margins are able in a technology context these are really digital forms to disrupt existing players.

The third very interesting thing I would see or we will see is asset management. You are used to paying an asset manager a fee of 1.5% or so for managing your money. With the advent of ETFs or index funds, you're now paying about three-four five basis points at the max for managing your money, from 1.5% to five basis points, the disruption is taking place at a dramatic pace all because of technology, and we can go on.

You are I'm sure watching YouTube blogging, these are not the influencers, these are the bloggers who are putting out a 10-minute blog under whatever, it could be somebody sharing an experience of riding a bike, somebody doing on a car, somebody home, personal experiences, urban areas, semi-metros, towns, villages, everybody is blogging. 

There is a site called Country Kitchen, or a Village Kitchen, within five-six days of uploading they get four to five crores views. And if you look at what is the earning of these YouTube channels, every million views is getting them around $500, so 2 million users getting $1000, you have got 20 million views you can imagine what is the earning. There are lay bloggers who are blogging daily eight to ten-minute blogs and getting within a day three to four million views.

We are talking of earnings of $2000 a day, let's round it of $50,000 a month half a million-plus dollars a year. And these were bloggers who had hardly any subscribers a year back. 

The second part of it is they now become consumers. You find that somebody who had to goes on a cycle goes into a first car and within a space of a year he has gone to a second car. They add things to the home, an air conditioner comes up, the home gets properly furnished, and they move home, they buy a new home. This is providing economic momentum which we are not counting still. 

I think it was not necessarily pent-up demand, it was a demand which was created by these sort of people who are the products of this new digital super cycle in its own way. 

So to me, the digital supercycle is going to come like a wave that we did not expect and interestingly has not happened anywhere before, maybe in a small way in maybe China. But the wave in India, because we are open, we are large, we are young is happening at great speed. And of course, finally, we have got very low-cost data, the lowest in the world. So this is coming as a wave in terms of creation and opportunity of economic growth.

My final question to you. It's a two-part question. What impact are all these lending startups going to have on traditional banks? And there are going to be a whole bunch of internet IPOs this year. So how is that going to change the face of wealth creation and capital markets as we know it?

The first one is something this is a business I have been in, it is not going to be easy for a Digitech firm or a Fintech firm to be a lender and do it, because moving beyond payments you're now getting into areas where you also need a risk assessment. Yes, risk assessment is moving online, if you look at retail lending that risk is now basically analysed by people like the credit scoring companies and so on, score is available and you can do it.

Again secondary and tertiary ways to assess credit risk are clearly happening. People say by knowing your attendance record, I know whether you are a good customer for me or not, your attendance record at the place you work, and all your other data is today accessible. So it may appear to be easy for people to get in but I would think this is an area regulated, so you will find it difficult for new startup companies or new players to actually scale up.

Even if they scale up getting funding is going to be a bit of a challenge. In the interim, it may happen in due course I think incumbent players will reposition themselves because they have their regulatory cover and rightly so because they are today custodians of public money, so you cannot have a free for all in that marketplace, there is to be order in that market and that's what I think the regulators all over the world are doing. So new players will be allowed but in a measured way.

In the meantime, I expect a lot of the existing incumbents to reinvent themselves. I think it's not too late at all and they can very well reinvent themselves. They will have to do some hard work, the platforms may have to change, the way they look at themselves may have to change but they have been in this business for long, they have the resources, they have the strength and they should be able to do these changes as we go along.

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And as I said earlier making money in India is not easy. The payment companies are quickly realising that that money there they're still trying to figure out where is the money. So that's going to be in India for almost all digital players because competition is severe, there is a crab mentality and you tend to drive.

So I wish them well and I hope that all of them get to a revenue model which is sustainable, sustainable revenue, sustainable profit which then you apply whatever multiple you want, I'm happy with that based on growth expectations because that's the classic old theory in terms of how you look at value. And as some of the pundits say, ultimately it's a discounting exercise, you discount your future streams and see what is your value today and of course maybe you allow for growth and so on in that multiple, you may make some exceptions but you cannot have a situation where you are not making money and expecting value and a continual increase in values in the market.

I'm sure this will be very quickly mastered by these players because at the core I think a lot of them are brilliant businesses and I wish all of the success but in a way success riding on profit.