ICICI chief K V Kamath feels that the government should create an enabling environment for strengthening public utilities - roads, railways, education, public health systems. All of these are the bedrock for sustainable economic growth as has been demonstrated in the developed economies. Speaking to Tamal Bandyopadhyay, Kamath says this is the right time for banks and financial institutions to invest in economically-viable public utility projects.
Excerpts from the interview:
Bankers generally feel there is no demand for funds from the manufacturing sector and tell-tale signs of economic slowdown are everywhere. Do you share their perception?
While various indicators during the last two or three quarters were pointing towards a slowdown, it is very evident in the manufacturing sector today. The slowdown is primarily being caused by the deep restructuring of our economy as we are integrating with the global economy. More and more Indian companies are setting up shop overseas.
If this is one side of the story, on the other side we are seeing that the resulting globalisation is putting competitive pressures on the Indian businesses and exposing their inherent deficiencies. This restructuring has to continue and be completed before fresh capital can be infused into the sector. The current slowdown is expected to continue for the next six to eight quarters.
Even the infrastructure sector on which banks and financial institutions (FIs) have been pinning their hopes is not taking off. Why is this so?
Currently the sentiments in the infrastructure sector are negative, primarily due to outstanding issues in the power sector. Dabhol Power Corporation (DPC) is also an issue which needs to be resolved fast. There have been happenings in the telecom sector. All power sector-related issues need to be expeditiously resolved, before we can expect the infrastructure sector to take off.
However, in the interim, there is a lot of scope for projects in the nature of urban rejuvenation and rebuilding in the areas of water supply, sewerage, roads, fly-overs, etc. The roads and ports sectors, in particular, are looking up.
How long will this spell continue?
It may continue for the next six to eight quarters.
What, according to you, should the government do to fight the slowdown?
At present, there is sufficient liquidity in the system. Given this we could consider using part of these resources for investments in economically-viable public utility projects.
The government needs to facilitate an enabling environment for strengthening our public utilities including roads, railways, education, public health systems, etc. All of these are the bedrock for sustainable economic growth as has been evidenced by the developed economies and would act as a priming pump.
Are you saying that the government should let go of its resolve to contain the fiscal deficits?
Yes and no. Like in any business, it needs to focus on expenditure which brings in the best returns. A deficit in itself is not bad, provided it is used to fund projects that are economically-viable and provide satisfactory returns.
In fact, the prime minister's rural road project (announced in his August 15 speech) is a great idea, and I think a great effort has gone into the idea. What we need to do is to invest in infrastructure that will link the villages with the towns. It will immediately improve the productivity of the agriculture sector.
Taking it further, if we are able to invest and fund a series of cold storages, mandis, and so on on the way, we will be able to put up a great infrastructure which will greatly improve the productivity in the agricultural sector, and by containing spoilage, will lead to greater farm incomes. It is easy to see that a boost in farm incomes has immediate linkages with consumer demand.
There is enough liquidity in the system and the interest rates have hit historic lows. What should banks and institutions do at this point of time in order to grow business?
Indeed there is liquidity and since there is a lack of private projects, it may be appropriate for banks and financial institutions to invest in economically-viable public utility projects after ensuring that these are tightly structured to take care of the repayments.
You sound very enthusiastic about public utility projects. But are they economically viable? Aren't municipalities, etc in the same kind of financial strain as the state governments?
Yes, they are. But I see much greater dynamism in the sub-national entities to tackle their problems. For instance, many municipalities have made an effort to raise debt on strength of their own cash flows.
They are willing to raise user charges so as to make their operations viable. I think, we need to sit and work with them to create the most suitable financial structures which will enable them to provide the infrastructure facilities that are sorely needed in small towns and cities. These are places where growth is going to come from.
Is the twin phenomenon of liquidity and low interest rates sustainable?
In the context of the slowdown, liquidity is likely to remain good and, barring any systemic shocks, interest rates can be expected to remain low.
Why do the development financial institutions want to convert themselves into banks?
In a marketplace, which is experiencing increasing disintermediation, access to low-cost funds is critical. Further, there is a need for financial institutions to diversify activities and thereby de-risk their portfolios.
In effect, the need to become a bank is justified both from the liability as well as asset aspects. On the asset side, once you are a bank you are able to access relatively cheap demand deposits which will bring down the cost of funds. On the liability side, by becoming a bank you can grow retail loans. These are all possibly best done as a bank.
Talking about ICICI, what would you gain by becoming a bank?
ICICI has been working virtually as a universal bank. By turning into a bank, we will substantially save on the cost of funds.
Taking into consideration pre-emptions like SLR and CRR on your net demand and time liability, to what extent will your cost of funds come down?
Even after accounting for SLR and CRR, the cost of funds will come down by around one and a half percentage points once we become a bank and access demand deposits.
Despite your efforts to clean up ICICI by declaring huge provisioning on account of non-performing assets (NPAs), the general perception is ICICI has huge hidden NPAs.The market also feels that ICICI has resorted to evergreening of assets. Your comment?
ICICI has always been proactive in its provisioning policy and is currently more aggressive than mandated by regulation. As regards evergreening and hidden NPAs, the regulatory norms in this context are explicit and do not allow for any interpretation.
You have recently announced plans to go global. Could you please tell us more on your plans on international operations?
We will articulate our global strategy at the right time. We are still exploring the vast opportunities in the global sphere, as we believe that any Indian business needs to be connected globally to be successful in this millennium. But overall, we expect one-third of our business to come from international operations over the next five years.
