Mr. K. Vaman Kamath, Chairman, ICICI Bank Limited, India's second largest bank. Mr. Kamath has a degree in mechanical engineering and did his management studies at 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 Managing Director & CEO in 1996. Under his leadership, 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 an international presence. He retired as Managing Director & CEO in April 2009, and took up his present position effective May 1, 2009. Mr. Kamath was conferred with the Padma Bhushan, one of India's highest civilian honours, in 2008. He has received widespread recognition internationally and in India, including being named "Businessman of the Year" by Forbes Asia and "Business Leader of the Year" by The Economic Times, India in 2007 and CNBC's "Asian Business Leader of the Year" in 2001. Mr. Kamath was the President of the Confederation of Indian Industry for the year 2008-09. He is also an independent Director on the Board of Directors of Infosys Technologies Limited, Lupin Limited and Schlumberger Limited. He has been a co-chair of the World Economic Forum's Annual Meeting in Davos and is a member of the Board of the Institute of International Finance.
ICICI Bank is India's second-largest bank with total assets of Rs3,634.00 billion at March 31, 2010 and profit after tax Rs40.25 billion for the year ended March 31, 2010. The Bank has a network of 2,009 branches and about 5,219 ATMs in India and presence in 18 countries. ICICI 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 and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).
Speaking with Nirmal Jain and R Venkataraman of IIFL, Mr KV Kamath says, "I think we should change this perception about India being a poor country to that of India being a country with poor people."
The Europe crisis seems to be only spreading by the day. What is your view on the actual impact it could have on the economy? Do you expect more countries to join the contagion?
I am very optimistic about India and USA whereas I am not so optimistic about China and Europe. Whatever feedback I have got from companies and banks in America, things appear positive. Cash flows are positive, debt is manageable, and we are seeing profitability and profits increase. The feedback from corporates is corroborated by feedback from investment bankers as well. The banks say that the worst is clearly behind them and the balance sheets are getting cleansed. Only there are problems with retail loans but over time that will also get under control. Of course, unemployment at around 10% is an issue.
The US economy has been witnessing corrections in roughly 15 year cycles and they have the necessary wherewithal to manage it. Interestingly, US has the levers to control the deficit too. They can tweak with defense expenditure, healthcare expenditure or do even simple things like implementing tax on petrol. These measures can bring deficit quickly under control.
Unfortunately, Europe is in a bad shape. It has a socialistic philosophy and that cannot be managed at the current levels of economic activity. The jury is still out on whether the EU will collapse. I think it will take some time for Europe to come out of the woods and we have to wait and watch as the events unfold in Europe before coming to any conclusion.
How do you see the Chinese economy?
I am getting negative vibes from China. There will be disruption if the economic growth comes down to ~8% from the current 10-11%. The entire economy of China is export-led; as and when we see the demand slowdown happening in Europe and America, it will have a huge impact. Essentially, they have built huge capacities. Hence, even a marginal decline in demand can have an impact; especially on jobs. We read media reports about how wage increases are taking place. This was long overdue and was an event waiting to happen. It will impact China’s long term competitiveness. If there is job disruption, its consequences will be felt in the economy, banks and corporate balance sheets.
In the beginning of this century, there were rumors about China’s NPAs at 50% of the banking system; but somehow they managed it. Overall, Chinese economy will witness headwinds.
What about corporate India then?
Corporate India offers a very optimistic outlook. Wherever I go, there are smiles in corporate India. They have been able to manage their growth aspirations with internal accruals and minimum debt and leverage. The balance sheets are very healthy; profits are also looking good. We have instances where cement capacity almost doubled without any stress in the balance sheet; again funded mostly through internal accruals.
Internal cash flows are extremely strong for companies. Around 15 years ago, promoter contribution used to be a big issue. Now promoters are meeting their contribution very easily and most of the capex is being managed with internal accruals.
What do you think needs to be changed as far as India is concerned?
The perception is that India is a poor country. I think we should change this perception from India being a poor country to that of India being a country with poor people. That mindset will lead to a lot of philosophical changes and thinking.
When we talk about spending on the poor, we should not talk about subsidies. We should talk about investment in the people. The entire NREGS has led to growth in consumption and that has been extremely positive.
The Indian deficit is manageable. I think we have multiple levers to bank on and manage the deficit. Listing of PSUs is one among them. Unlocking value of Indian railways and other such institutions are the others.
We are entering into US$ 1000 per capita cycle and at this level users will be able to pay for infrastructure, for services of various kinds. For example in telecom, people are paying usage fees. If you look at issues concerning the fuel price increase, I think an Rs100 hike for LPG, which is consumed average 4 times a year, is easily possible. The customer would be willing to pay for it. It requires a mindset change.
On the infrastructure front how do you view the progress?
We need momentum on the infrastructure spend. Classical economics talks about infrastructure and manufacturing leading India’s economic growth. However, I think in India, we have had a services-led growth and there is nothing wrong or nothing bad in it. As growth in services take place, it has a cascading effect on manufacturing as well. We talk about services not only in IT and ITES but also in media, tourism, healthcare, telecom and retail. This growth has led to a demand in sectors like FMCG, white goods, housing, realty and automobiles. Hence growth in services is leading to demand in manufacturing sector. Clearly, automobile demand has gone into a different orbit.
We will have a segment of people moving upwards from US$500 to US$1000 per capita GDP. The set of US1000 may move higher to US$1500 per capital GDP while those in the US$2000 will jump to US$3000; and this will continue to progressively bring in multiple benefits causing a positive impact on the Indian economy.
When we talk about infrastructure, may be 10 years ago, we didn’t have the physical capacity or financial ability to launch mega infrastructural projects. Now, we have the financial ability to launch multiple and big infrastructure projects. Though we may be lagging behind in infrastructure, in the next 2 -3 years, things will change. In roads, we are three years behind time, in power we are lagging by three to four years, in ports we are on track and in airports we are slowly catching up. I think we have the financial ability and capacity in place. It is just a matter of getting our act together and doing it. It is good to know that India’s savings rate stands at 35%.
So do you see India catching up with China?
In China they will have internal challenges as the demand slows down and joblessness increases. But if that happens then that is also positive. Fears about China emerging as the biggest consumer of all raw materials may not materialize. If Europe and US demand comes down, China’s exports will fall. China’s production capacity is 2 -3 times that of India’s capacity but I imagine, their consumption of raw material could go down. So they will have their own set of internal problems to face. I think India is behind China by a decade and slowly and steadily I think India will catch up.
What should be the strategy to reach out to the poor?
We have interesting ways on how to reach out to the poor. For example technology-driven initiatives can in their own way reduce the gap between India and China. I will give you an interesting example; we have solar lamps which cost about $10. This $10 roughly comes to around Rs450 and if we give it to all the poor people in rural India, direct subsidy bill would be around $1 billion.
But the spillover effect will be tremendous. We can look at it as national investment because now with light, people can study, working hours can go up and we would have done our part to reduce carbon consumption. This will be a green initiative and also consumption of kerosene will come down and this will have huge spillover effect for the Indian economy’s growth. And to avoid leakages, this distribution can ride on the FMCG distribution channels. We need out of the box thinking now.
With micro-finance and inclusive banking, are you seeing a silent revolution happening in rural India?
I am extremely positive on rural India and I think rural India will slowly and steadily overtake urban India. Gujarat is a good example. States in the west and south are good examples. There are some challenging pockets like UP, Bihar, Central India and North East but rural India is the next big story. The agricultural share in rural economy is coming down. That is not coming down because it has lost its importance; rather it is because other drivers are growing faster. The improvement in agriculture is linked to improvements in agricultural handling like grading and sorting, which has resulted in value-added growth in the agricultural sector.
There will be some issues like soil quality issues linked to fertilizer quality but I think that can be addressed. I don’t expect it to remain a long term issue.
What India needs to ensure is food security beyond our borders. May be you have to look for investments in Africa. Who would have thought that some Indian company would like to make some acquisitions in Brazil like the way Shree Renuka Sugars has done.
The priority is water and transport linkages. We need water everywhere. We need integration of canal system and must improve our inland waterways and coastal shipping, in addition to roadways and railways.
What is your view on consolidation in the Indian Banking space?
On the consolidation front, I think the banking sector has to offer multiple products to the customers and hence size is important and so is technology. I think competition is good with setting up of new banks as long as banks are set up with adequate capital, adequate depth of management. It should be a level playing field so that people can compete and this will benefit the customer.
What about the real estate sector?
In real estate, we are not seeing the kind of correction one would expect because this time, the builder has funded land purchase with equity and hence he can wait. But clearly prices have risen much ahead of fundamentals and there could be a correction. As and when more land comes into the system, which is either by improvement in the FSI or by redevelopment, I think prices should correct. In high-end properties, we are not seeing that kind of same numbers which we hear from the builders. And hence there will be some kind of short supply. It is now a matter of who brings up their projects first.