ICICI Bank chairman K V Kamath says the best part of India's growth momentum is that around 65 per cent of the economy does not need external funding.
This will continue in future. He also expects interest rate pressure to ease from the first quarter of the next financial year.
Excerpts from an interview with Shyamal Majumdar:
Are you as bullish as you were at the beginning of 2010?
I remain bullish. It's an interesting situation, where investment-led growth is largely being met by internal generation of cash; consumption-led growth is partly being met by better earning capacity of individuals and the rest through debt in a highly disciplined manner.
The best part of the growth momentum is that around 65 per cent of the economy does not need funding from outside.
Massive capacity expansion has taken place in cement, automobiles, consumer durables and chemicals with minimal borrowing.
This is a very significant change from 10 years ago.
The same is the situation in the service sector.
The IT industry, for example, has become generators of surplus cash rather than consumers of cash.
The only sectors that need debt are a few infrastructure industries such as power and roads. In roads, the breakeven point has come down dramatically in the last five years; so banks are more comfortable in lending.
The third large consumer of debt capital is, of course, the government. And one important consumer of capital that has emerged in the last decade is the retail individual.
But some recent events have left the industry and many investors nervous.
It's unfortunate, but we have been seeing double-digit growth despite these constraints.
By and large, corporate India and consumer India have been able to manage these well. The only concern I have is the country's ability to generate adequate power and mine natural resources.
Many in industry are upset with the environment ministry's stand. Do you sympathise with them?
The policy should be clear enough so that it doesn't harm any interest -- be it environment, tribals or industry.
I think a solution will be found quickly.
There is no doubt that a clear articulation of policy is required so that corporate India understands the final contours of the playing field.
People with good intentions are trying to define the rules with proper checks and balances. It's only fair that we give them some time.
But sustained double-digit growth is a certainty.
You keep referring to double-digit growth, though we are not there yet.
The growth rate in sectors across the board is 15-30 per cent.
That doesn't happen in an economy that is growing at less than 9 per cent.
There are three kinds of growth: Stated growth, uncounted growth and unaccounted growth.
Our analysis shows while around 9 per cent is the stated growth, the last two account for another 2 per cent each.
So, my view is that actual growth is somewhere around 13 per cent.
There is a fair bit of uncounted growth that can't be captured, as we don't have adequate data points and measurement capability. Besides, the indices are outdated.
One concern I have is urban rejuvenation.
That's not happening at the desired pace. Delhi is probably the only exception; Mumbai has to catch up fast.
Also, this whole logic about users can't or don't want to pay is unconvincing.
I was reading an article the other day which said that it's illogical that a consumer, who can afford a Rs 500 cellphone bill, can't pay around Rs 100 extra for a gas cylinder.
Governments have to come to grips with this.
You have been advocating lower interest rates. But everyone expects rates to rise sharply in the New Year.
It's a very tricky situation.
The ideal situation is to keep rates low -- from the angle of domestic growth dynamics as well as global comparisons.
Our interest rate structure is already completely out of sync with the West and also with other Southeast Asian economies, who are our immediate competitors.
Going forward, there will be funding constraints, as the appetite for debt from both consumers and the government is set to rise.
The overall savings rate would not be able to fully meet this. We have a challenge in terms of the demand-supply of funds.
So, the natural tendency would be for interest rates to move up. We will need to carefully traverse the right path.
What can be done?
One simple path is for the government to look at other innovative means rather than borrowing for deficit financing.
It can release the equity value in more public sector companies and unlock the value of land that it owns.
The government can substantially reduce borrowings through divestment. Lending rates should not touch double digits because that would be a big problem.
Will easier access to global funds help counter the funding problem?
There is no doubt that global flows are easing. Earlier also, there was liquidity and low interest rates, but the lending intent was missing.
That has started happening.
Today, a $1-billion issue by banks is not difficult and banks are in a position to arrange dollar funding if customers want it.
A lot of dollar borrowings will take place either through external commercial borrowings or via banks.
This global liquidity will help counter any runaway rise in domestic interest rates.
I see this interest rate pressure continuing for one more quarter. But things will improve from the first quarter of the next financial year.
Do you agree with the view that despite the growth, not enough new jobs are being created?
Jobs are being created.
Maybe not much in the manufacturing sector, but look at the services sector.
My guess is IT will create 150,000 jobs next year, BPO another 100,000, and the total new jobs would easily cross 1 million next year alone.
Now, look at the linkage effect -- how many jobs one job will create.
The problem is that not enough mapping is done, even though this is critically important to create suitable skills to meet the new challenges. That, I think, is more critical.
ICICI Bank had talked about banking the unbanked five years ago. Do you think financial inclusion largely remains on paper?
ICICI Bank was perhaps a bit too early in articulating its vision of banking the unbanked.
The cost of technology then was high and reach low. Plus, the regulatory regime was not ready. So, we deferred our strategy.
Things have changed dramatically now -- technology has reached remote corners and the cost has dropped.
Regulation has also seen significant changes in terms of third-party bank correspondents.
So, a large part is falling into place. The Aadhaar project will add further momentum to digitally enrol a customer in remote places.
NREGA payments are also facilitating the flow of money into the accounts of target customers.
Savings are not much, so talking about lending to them is probably premature. But the first stage of banking the unbanked has started. I think it's a huge change.
What's your take on the crisis in the microfinance industry?
Lending to somebody who doesn't have access to capital is a significantly important activity.
But the pointed question to ask is whether the lending is for productive purposes at reasonable rates.
Problems begin when the lending is for consumption and the customer doesn't have the ability to repay.
Also, there have been cases of multiple loans to service other loans. That can be messy.
However, the present controversy has put everybody on notice and is a big learning not only for MFIs, but also for banks, which have financed some MFIs.
On new banking licences, do you agree with the view that large corporate houses should be kept out?
I have an open mind.
But a couple of conditions should be met.
One, the bar for capital should be raised significantly, as the challenges and responsibilities are enormous; two, we have to consider whether there is a conflict of interest, meaning, should we give licences to an entity which itself or the group may be a significant borrower?
I am sure the Reserve Bank would put in place enough checks and balances.
But do we need more banks? The sector is quite fragmented already, some say.
I see some significant consolidation in the banking industry in the next five years or so.
The past is a good way to look at the future.
Many banks, which were given licences in 1994, have gone off the radar already.
But I see both happening: Consolidation and new entrants.
Are you concerned about regulatory autonomy, given the controversy over the perception that the finance ministry is usurping the role of financial regulators?
It's a very interesting situation.
Most governments all over the world are exerting their will. After the crisis in 2008, many governments said we are the last resort, and if that be the case, we need to have a greater say on matters involving the financial community.
That will be the new equation going forward. Relationships were rewritten to some extent after the 2008 crisis.
In India, I guess the way forward is to work together.
ICICI Bank is now talking about 25 per cent growth. So, are the days of uncertainty finally over?
There was never any uncertainty. The bank's growth should be 2.5 times GDP.
There was a planned course correction in 2009 and some parts of 2010.
Our CASA was below 30 per cent; we had to bring it in sync with our competitors. I commend (MD & CEO) Chanda (Kochhar) and her team for achieving that target and stepping on the gas to push growth.
Finally, do we see you as the next Infosys chairman?
Well, there has been a lot of media speculation over this. I want to end this once and for all: It's completely baseless.
Image: K V Kamath