Mr. KV Kamath, Managing Director and CEO, ICICI Bank Limited

ICICI Bank is India's second largest bank and largest private sector bank with over 50 years presence in financial services and with assets of Rs. 3649.44 billion as on Septmeber 30, 2007. The Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of life and non-life insurance, private equity and asset management. ICICI Bank is a leading player in the retail banking market and services its large customer base through a network of over 950 branches and extension counters, 3,610 ATMs, call centres and internet banking to ensure that customers have access to its services at all times.

Mr. K. Vaman Kamath is the Managing Director and Chief Executive Officer of ICICI Bank Limited, India's largest bank by market capitalisation and the second largest bank by assets. Mr. Kamath has a degree in mechanical engineering and a master?s degree in business administration from the Indian Institute of Management, Ahmedabad. He started his career in 1971 at ICICI, an Indian financial institution that founded ICICI Bank and merged with it in 2002. In 1988, he moved to the Asian Development Bank and spent several years in South-East Asia before returning to ICICI as its CEO in 1996. Over the next few years, the ICICI Group transformed itself into a diversified, technology-driven financial services group, that has leadership positions across banking, insurance and asset management in India, and a growing international presence. Mr. Kamath was named ?Businessman of the Year? by Forbes Asia and The Economic Times? ?Business Leader of the Year? in 2007, Business Standard?s ?Banker of the Year? and CNBC-TV18's ?Outstanding Business Leader of the Year? in 2006, Business India's ?Businessman of the Year? in 2005 and CNBC?s ?Asian Business Leader of the Year? in 2001. He has been conferred with an honorary PhD by the Banaras Hindu University. Mr. Kamath is the Vice President of the Confederation of Indian Industry and a member of the boards of the Indian Institute of Management, Ahmedabad and the Manipal University.

Speaking with Nirmal Jain and R Venkataraman of India Infoline, Mr. Kamath says, ?This is the time to believe in India. ICICI is an Indian story and is a scrip which is written into the India story.?

You were among the first to go on record and talk about a 10% growth rate for the Indian economy. Given the current scenario of high crude prices, high interest rates, and rising rupee, do you expect a possible slowdown in the Indian economy?

I am very optimistic about the prospects of the Indian economy. A 10% growth rate is easily achievable. Services will continue to be the largest share of the Indian economy, even if we see higher percentage growth rates in manufacturing, the dominant part will remain services. Services will lead employment and job creation. Financial services, by itself can add more than 1 million jobs annually for the next five years. A CRISIL study says that 1 direct job creates about 4 jobs indirectly. Hence, almost 4 -5 million jobs will be created only in financial services. Then there are other services like retail, knowledge sector, IT, media, leisure, entertainment, travel and so, which will continue to create more jobs. This kind of job creation adds to the wealth effect in the bottom of the pyramid.

The Indian economy will grow at a rapid rate because of the change in mindset of the Indian industry. The Indian industry is now globally competitive and has a positive mindset and it is confident that it can take on global competition. All we need is a favourable policy framework that fosters competitive interest and exchange rates, skill building and infrastructure development.

Are you not concerned about infrastructure bottlenecks?

Recently, I went and saw Adani?s port infrastructure in Gujarat. I came back amazed and impressed. Infrastructure has been created on a global scale. Once basic infrastructure of ports is taken care of, and on top you have roll on roll off for coastal shipping, then key infrastructure bottlenecks to exports is taken care of. We have made investments in pipelines and railways. Road sector has temporarily slowed down, but I think we have got our act together for roads. Power remains a critical bottleneck. I think in the next five years we will see substantial investments in power infrastructure because of the involvement of the private sector. The delays in setting up power plants are more to do with equipment bottlenecks. This bottleneck will be addressed to some extent because of surplus equipment manufacturing capacity in China. I am optimistic about investments in infrastructure. Within 2- 3 years, the entire face of infrastructure can get transformed dramatically.

What impact would a possible US slowdown have on India?

We do not foresee any meaningful impact of US slowdown on India. The Indian economy is resilient because of huge domestic consumption market. The impact of sub-prime meltdown has been a change in the borrowing environment for Indian corporate. On an average, the yield curve has tightened by 100 basis points. Funding is tight now, luckily for us, we are able to borrow. For some countries and corporate, funding itself has dried up.

Every industry is talking about a severe shortage of relevant skills in India. This is even more pronounced in financial services. Are you not facing wage inflation?

The challenge is getting people with the right skill and mindsets. The skill set issue can be addressed by training. The private sector always finds innovative solutions to problems and most of them are investing in training infrastructure to solve the shortage of manpower. We have an experiment with NIIT where we train graduates with specific skills on financial services. The first batch has just come out and the quality of people we are getting is stellar.

The dollar inflows into the country continue unabated. What is your outlook on the rupee?

The rupee will continue to appreciate against the dollar and in the next 5 years, the dollar at Rs30 is a distinct possibility. The Indian corporate sector has to plan for this. They have some levers to manage this. The industry has to become more competitive by increasing productivity, shaving costs, currency hedging and risk diversification. Unless the corporate takes such strategic initiatives, they will face a big problem. This cannot be addressed by fiscal sops but by acknowledging the challenge and confronting it head on.

What are your strategic initiatives for international business? Your latest annual report mentions about this being a key growth driver.

All businesses, more so international operations, evolves continuously and is not static. When we started to address the international market, our base assumption was that deposits will be wholesale because we have no brand for retail deposit mobilization. We were confident about remittances and meeting the overseas needs of the Indian industry. What surprised us was our ability to garner retail assets using online internet technology. This, no doubt, needs to be supplemented by long term borrowings. Our next product for the overseas market would be targeted at SMEs. International business will continue to grow and as of now it is above 20% of the overall book.

We are a truly global bank to some extent because we already have over 120,000 customers of non Indian origin. Most of them use the ICICI Bank internet platform.

Any plans to acquire an overseas bank to scale up retail presence?

Given our success in acquiring international retail customers, there is no critical need to acquire an international bank. If an opportunity comes we can no doubt look at it. We have a huge Indian domestic opportunity to address and we will not lose focus on that.

The other engine growth for is rural markets. When do you think this will start adding to your bottom-line?

We have laid the foundation for tapping the rural opportunity. For this business to take off in a meaningful way, we need a low cost access to the rural market using telecom / other technology. Since the branches in rural area are not viable, we need a bank correspondent route. Moreover, we need a scaleable micro lending mechanism. I think rural banking will start making an impact in two to three years. Given the low cost distribution strategy, this segment should make money.

Why are your Net Interest Margin on the lower side compared to your peers?

The Net Interest Margin (NIM) is an outcome of a conscious strategy. NIM is an outcome of our cost of funds, which is linked to our liability mix and the kind of growth we wanted to target. We had old ICICI liabilities, which impacted our costs. How to fund retail asset was the question, which confronted management that time. We wanted to capture growth ? and that was our focus. We used a blend of retail and corporate deposits and hence our costs are higher. Historically, all banks had a big chunk of retail liabilities. In the last three to four years because of rising corporate profitability we had seen a shift from retail to corporate deposits. The nature of deposit mix has changed. Going ahead, we will see increased corporate contribution to deposits. Increased corporate profitability will find its way into mutual funds or bank deposits.

Has retail asset growth slowed down?

Retail asset growth has slowed down to some extent. Earlier, it was growing at 35 to 40% and now it is down to 5%. The broad mix of retail assets is 50% mortgages, 30 -35% of secured products like auto loans and 15% is unsecured personal loans. The mortgages market has flattened. The reason for this slowdown is simply an increase in asset prices and an increase in interest rates. On a very rough estimate, EMI has increased by 30 ? 50%, which has obviously deterred people from taking more loans. On the secured asset side, the client is deferring his choice of car or motor cycle and even unsecured loan is also showing slowdown because of the increase in overall debt of the family. The increase in EMI has been offset to some extent by wage inflation. The positive thing is that borrower is showing signs of maturing and is being circumspect in increasing his EMI and loans.

Retail asset growth has stalled and I think, at least for the next quarter we will see this kind of situation before it gathering fresh momentum. Clearly, Indian per capita income has moved from a level of $500 to a level of $1000, which will increase over the next 5 to 10 year period to $1500 - $2000 band. If the economy continues to grow and we have a competitive interest rate environment, with correct supply conditions, retail assets will grow rapidly. People?s aspirations change when they move from one per capita income level to another and hence growth in retail assets is inevitable.

What is the RBI?s final view on your raising capital in the finance holding company?

On a very macro level, India needs capital to grow and financial services is one of the key drivers of growth, and this growth will require capital. We await RBI?s final opinion on this matter. Capital is a lever to grow, and as of now we are well capitalized. 20% of my capital can be put in para banking, and hence insurance subsidiaries can get capital from parent to grow. Our strategy is to continue to grow these businesses.

The ICICI Group has number of subsidiaries - investment banking, securities, asset management, life insurance and general insurance, with value that can be unlocked. We will explore all options in the best interests of the shareholders. The choice and timing will depend on the policy environment and interests of the shareholder.

We read reports that ICICI expects about 400 new branches in the current year. What are your branch expansion plans?

Smiles. I cannot make forward looking statements. We look at a branch as one more touch point with the customer. We leverage ATM, Internet and telephone to reach out to customers. More than branches, we will continue to leverage other channels like ATM etc. 20 -25% of transactions are internet based and branch is below 15%, and other channels are also catching up.

What are your views on banking sector consolidation?

There are merits in sector consolidation because it helps to avoid duplicity of branches, investments in technology and manpower. To get the maximum benefits from sector consolidation, the banks need complete freedom and flexibility to fix wages and manpower rationalization. If this is not done, the benefits of sector consolidation will not accrue. For the small private sector banks, they will have to define their roles and competitive positioning, especially in the context of 3 -4 large private sector banks in the next 3 -4 years.

The markets expect a big bang in banking sector in 2009 post WTO regulations. This is reflected by the P/E multiples of smaller banks. Will this materialize or will 2009 be a non event?

We should put this in context. India is already very liberalized when it comes to financial services. In fact, India is much more open than other countries. Getting a license to open a bank is much more difficult in USA than in India. Except UK, which is much more open, all other markets are closed and difficult to start business.

No foreign bank has taken efforts to build a business because they think it is much more simple to acquire. No doubt, the market is paying a premium for small banks. Will they buy at such valuations? And even if they do, what benefits will they get? In the next three years, there will be at least three Indian private sector banks who will have the scale to take on global challenges. They will have capital, human resources and technology to make an impact. We are not afraid of competition and I think in the next three years we will put others on notice.

[ See table at end of interview for key differences in operating environment for banks in USA and India ]

What is your message to our readers for the New Year?

There has never been a better time to be born in India. This opportunity comes once in the lifetime of a nation and we, as nation should make the best of it so that our future generations will benefit. This is the time to believe in India. ICICI is an Indian story and is a scrip which is written into the India story. As long as the India story plays out, ICICI will have a meaningful role to play.

Table: Key operating differences in banking environment