Perfect situation for incumbent banks to blossom and grow as the Indian economy grows: KV Kamath

"Indian policy makers have done a great job – whether at the Ministry of Finance level or at the Reserve Bank level. I would think that this was nicely calibrated in terms of keeping rates at a level which was comfortable and trying to bring down inflation simultaneously and keeping liquidity flush so that the growth momentum did not suffer. In hindsight, it proves that a right prescription was adopted," says KV Kamath, Former Chief, New Development Bank & Chairperson, NaBFID, in an interview with ET Now.


We started the year on a volatile note. The world is split right in the middle. Some are concerned about inflation and the impact of it on demand while others are debating how the economy or global economies can fight fear of a recession after central bank policy action in 2022. What according to you will be the dominant theme for 2023?
I guess what we have seen during the last year will continue for some time and that sometime will be determined by how long the events in Europe last because that is having an unsettling impact all over the globe. Yes we can talk about our getting insulated a little later but what we have seen in the west – inflationary impact and then its impact on the economy per se– may continue. Till the overhang of the global geopolitical events in Europe are settled, we will see this disconnect between interest rates and inflation.

For example, Europe is still not in a sense making the right moves to get the inflation under control through interest rate exercises because they have other concerns whereas the US has gone to some extent and all this creates even greater flux. That is why I say till the geopolitical equation settles, we will see these economies continuing to have inflationary pressure, continuing to have growth pressure. At the time, we may say they are going into recession, we say they may not be going into inflation. But it is a state of flux.

When do you think the state of flux will move to a state of clarity?
I would think that on the first signs of the European conflict situation getting resolved, these will settle very quickly. People can then take what I would call economic decisions in a true economic context. Now they have to make the economic decisions keeping in mind what is happening there and then we have got other challenges which will have to play out.

For example, the whole challenge with settlement currencies and the noise that we have around it now is that we have to separate fact from what is probably thought but there also, we will get clarity. Now, is there going to be a relook at the fiat currency? It is going to play out again in the next six months or so.

That was a result of certain actions where many countries thought they should not necessarily rely on a single currency to settle but can you do by part, do a club and so on and so forth. So, there is a lot of wheel spinning – the conflict, the inflation, the interest rate impact on that, settlement currencies, payments. In a way, these are very exciting times from an economic context for countries around the world to go through.

Do you think the current interest rates are just normal interest rates or are central bankers in their quest to control inflation, have stormed growth which will cost us dearly?
If you take Europe, it is a situation where inflation is still very high and the interest rates are still very low. So, there is a lot that central banks could do. Clearly, they have not increased interest rates so as not to make it too difficult for its constituents and people in terms of their daily needs but that is not helping inflation. So the bet there is that this conflict will moderate or come to an end and we will have the interest rate and the inflation rate come closer. So that is one assumption.

In the US, the assumption is entirely different. The assumption is that we will increase interest rates and that has had a salutary impact on inflation and that policy seems to be working but Europe is what is bothered. Then other countries have played it in their own way. For example, India has done a great job, our policy makers have done a great job – whether at the Ministry of Finance level or at the Reserve Bank level. I would think that this was nicely calibrated in terms of keeping rates at a level which was comfortable and trying to bring down inflation simultaneously and keeping liquidity flush so that the growth momentum did not suffer.

In hindsight, it proves that a right prescription was adopted. I would think that there are several ways in which different central bankers have addressed this. The way our central bank and our finance minister addressed this, appears to be the most fit for purpose.

In our previous interview, you alluded to the fact that the kind of disruption that fintechs and startups are bringing is something which is real and that would be changing the entire banking landscape. However, you did raise concerns about the underlying valuations at which some of the consumer tech and fintech stocks were trading. Do you think that Humpty Dumpty has had a great fall and fintech valuations are now looking reasonable?
Let me give a slightly long answer to this. There are two parts here. There are the incumbent banks and then there are the fintechs. Let me just address incumbent banks since the talk based on maybe two quarters numbers and particularly the numbers of this quarter which have just come, those are exceptional numbers.

Typically people say exceptional numbers looking at profit. But I say exceptional looking at the health of the balance sheet. All the leading banks have net NPAs of less than 1% and more like half a percent. I would think that this is something that I have not seen ever in my 50 years’ career.

I have said it earlier in a different context, there was capital but now I am saying it in terms of quality, asset quality, it has never been better to my knowledge over the past. Second, getting to the balance sheet, capital adequacy is at very healthy levels. Provisioning has been dramatically coming down on the P&L front.

I would think that there is a perfect situation for incumbent banks to blossom and grow as the economy grows at the projected 8-9%. We ought to grow and we probably will grow. So if we are growing that way, we need strong banks. So the banking sector is strong, healthy and doing what it should do.

Now come the digitechs, the fintechs. Yes, last time I did mention about the challenge that fintechs have. They have created enormous value in the platforms but the valuation is out of sync. Now I have had an occasion to look at these fintechs a little closer over the last two or three quarters and I stand by what I say that they have created enormous value.

In fact, they have created more value than I thought at that point in time was going to be there in their platforms. But the problem is, they still are not clear about their cash flow prospects. Their cash flow prospects need to be worked on which will get the valuation right and then we will have what I would call a good cycle for them to grow.

In the interim, they are in a way collaborating with the incumbent banks and partnering with them and providing products and I would think this will be something new that will happen because as they find that they have a challenge in generating a positive cash flow, they and their funding partners will look at other opportunities to breakeven and make a healthy cash flow. You could put in a plug in the front end for a bank and that is happening with newer banks.

Then credit card providers, who have a plug into an older bank, are also doing the same thing. They will have the skill sets of the people or the technology to do what is required and this interface provides that technology and gets them to market and so on. When you dig deep, you have got so many nuances, in terms of scoring a customer. That is not just a CIBIL score but overall a score based on multiple feeds or multiple data which is available in the public domain and then getting that customer set ready and most importantly in interactions I find that the newer fintech players are getting the customer basically as not a walk in but the drop in online through the internet connection.

If you remember in our days, we had to appoint DSAs and we had to go out and physically talk to a customer and then the customer came to us and all credit appraisals, scoring and so on was physical. Now it has moved to entirely online real time and virtual in terms of the customer having a buying decision. Credit could be made available to this customer small or large.

I would think fintechs have really mastered this interface. I am sure some big banks will master this as we go along. But for those who have not been able to master it, fintechs become the continuum to do this.

I like to draw your attention to the incumbents which you just mentioned. Banks across the board have reported profits like never before. Credit growth is stunning. Do you think that the credit cycle which started two quarters ago has a long, long way to go and for the next two or three years barring one or two percent here or there the uptrend in the credit cycle is real and here to stay?
KV Kamath: I could entirely agree with the proposition that you have made. I will spell out the reasons. Typically, the credit cycle will be one-and-a-half to a little more than one-and-a-half times the GDP. If GDP is around 8%, then credit should be 12% to 15%. That means there was a pent-up investment that had not been done and people are pushing that. If it is higher than that, then probably the base number is not fully correct.

Either way, we are looking at a good time and good things in terms of the credit cycle.

Now, credit cycles do not fizzle out very quickly. Once momentum starts happening, then it catches that momentum and growth. Why? Because the improvement and profitability of the banks is not a one quarter phenomenon. We have not been seeing it for about two-three quarters happening and it seems to be getting better and better and likewise the corporate profitability.

A few weeks back, there was some worry whether rural India was doing as well as urban India but that again there is commentary to say that rural India is also not picking. Given this, I would think that we are looking at a long horizon of growth and a long horizon of growth would mean bank credit as demand.

We can break bank credit into three parts. One is the retail part, which indeed is growing strongly and it will grow with probably a linear correlation to GDP with a multiplier, 1.5 or 1.75 times GDP growth. Then comes manufacturing and I include MSME and the entire range of manufacturing enterprises in this.

Those enterprises have gone through a phase of resetting their balance sheet and that also is likely over. By resetting, I mean reduce debt and increase its equity as it were. So initially we were in a mode to pay back debt, now they are probably using that debt to grow. Will they leverage? They will leverage as necessary but as the cash flow is so strong, I think borrowing from this sector is going to be slow. It is not going to be as robust as in the retail sector.

The agriculture sector will continue to borrow and there is a set pattern to the borrowing and I think that will continue. I am sure newer credit tools will come to facilitate the agriculture sector and with better reach and better way of delivery of credit to the sector.

Lastly and probably I should have placed it up front – is the infrastructure sector. That could be a great guzzler of credit. Now here, it has to go through a disintermediation stages, the credit has to go through disintermediation stage because with the lessons of the last 10 years or so, both the borrower and the lender are going to be cautious so that you match the right tenure and the right repricing formula and so on, given that banks typically have one year money and these projects could be requiring 10-year money.

So the term loan is to be carefully handled. I think this will answer your question in simple language. The demand for credit will sustain. It will sustain from all the areas that I mentioned – retail, corporate, agriculture and infrastructure and it is a long run.