In next 10 years, financial services cos will be 8x-10x bigger: KV Kamath – Economic Times

By Nikunj Dalmia

KV Kamath, Chairman, RBI Committee Loan Restructuring & Former Head, New Development Bank, in conversation with
ET Now.

What is your understanding of the world when the Covid crisis was at its peak in March and April?
In March, I remember meeting of the heads of multilateral urban banks and we had everybody whoever we are dealing with, the multilateral banks in the world and the view was totally negative. The response was that there will be a refrain for massive balance sheet restructuring around the world. I do not think that view has come true. Clearly there is pain and revival is required but the fear of massive balance sheet restructuring globally has not transpired. The overall world view is things are coming back to normal quickly. India is keeping in sync with that as we are arriving at the new normal quicker than I had expected.

How do you think India is handling the Covid crisis? Do you think in hindsight, when we will look back, would the monetary policy of RBI and the economic policies of the government appear a mistake or would they be conservative but a differentiated strategies?
I look at it in the context of what dots were visible when we went into the lockdown and provided the packages? We have to work within that scope. At one end, there was the China model which is a complete, very tight lockdown and probably for that reason it succeeded. We had a lockdown which for a very different reason had to be porous. That clearly meant that you kept the economy going, put food in the hands of people. So, it was a completely different model to what we would have otherwise had.

I would think that our model is an India centric model. It was meant for India and it has worked as an Indian model in the last few months.

Now coming to the steps taken by the government, a very innovatively structured, large package has been put on the table. The structure is large and at the same time, it does not put strain on the fiscal. It leverages the strengths that are there. For example, the foodgrain stock that we had. It leverages liquidity that was in the banking system and provides a gentle helping hand to make sure that these reach places where it has to be reached.

So far, by and large it seems to have done its work. Yes there is some more residual work in terms of how to look at companies which are in distress and so on and that is being addressed by
the Reserve Bank of India. All in all, this is a very innovative, thoughtfully structured package that has been put in place.

Loans at right interest rates is key to success of Atma Nirbhar Bharat: KV Kamath

“India has a high cost of debt due to tight correlation between interest rate and inflation. I would think that in a growing economy, there need to be other ways to combat inflation. Getting interest rate equation right is going to a key part in how we do Atma Nirbhar Bharat”, says KV Kamath.

All banks have used benign liquidity conditions to raise capital? How should one understand this because if banks are raising capital, minority shareholders would say that that it would have an impact on return ratio for next two or three years?
The lateral view that will have an impact on certain ratios is the short term view. Banks should always take care to have adequate capital and this is one of the principles of governance for a bank because after all, in today’s banking what are the three capitals? You have financial capital, you have human capital and you have technology as capital. If one of these capitals — you are talking of finance — is judged to have come under challenge, proactively raising capital in advance is always better than raising it afterwards.

I would actually compliment the banks for having raised capital whether they need it or not because we are in an unpredicted resolution based on numbers so far, based on steps taken so far and quarterly results that we have looked at most banks which are still fairly well capitalised.

But we did not know what turns are ahead and it is better to adequately shore up capital at this stage and not read too much into it in a negative context that banks are doing this because they read something. I do not think anybody is in a position to read anything in today’s world. It is just good sense and good management that the banks are raising capital. I am happy that if 40-50% of the financial sector derisks itself by having adequate capital, the other 50% or 60% which is basically the government is the majority shareholder, can very quickly come up to speed on this. So the steps taken I am very happy about it.

When I started my career you were with ICICI Bank and that time growth and market share gain was really your mantra. Your vision for 1999 and 2000 and 2001 was that private banks will become large, India will have a vibrant financial sector and India will have big businesses especially insurance, credit card and others. Where do we go from here?
My view is that the banking sector has probably travelled 10% to 15% of its journey and that may come as a surprise. I believe 85% is still to be achieved in terms of scope, scale, size and what the banking sector can do. Why do I say that? I say that because I am looking at an India of 10 years hence. A 5 trillion economy is going to a 10 plus trillion economy in 10 years and if that happens, it is not that banks will become threefold or fourfold in size. It will probably become eightfold or ten-fold in size of the current banking sector.

The dimensions of this banking sector are going to be completely different from what it will be five and ten years from now, one. Second, even more exciting is the change in the nature or the character in which we will do business.

We did business starting in 2000, when the leveraging technology was available and then painted a picture of the future. If we were to paint that picture today, you will get a completely different picture. This is a picture where you will have a digital world accelerating at a speed that we never looked at.

One point of reference, in 2000, I used to always say we go by Moore’s Law. If the power of computing is squaring every two years, you can afford to grow at that pace and still the technology will be affordable, because costs were also dropping at the same pace. So technology will be powerful enough and cheap enough to allow you to grow.

Today AI power is increasing at 10-fold pace every year and the price performance ratio is improving as costs are dropping. If I look at five years from now, probably we will be in a world where 5G is present, where virtual becomes real and you are looking at a world where change is going to happen in the blink of an eye and AI is going to be key.

If it is the banking or financial services sector, any player in this sector which embraces all these things is going to be a winner in the new picture that I am trying to paint. This is my own perception as I look at technology and as I look at the scope of it. This is not only in India because a lot of these changes are happening around the world and there is no lag anymore.

Earlier, when a new technology came, it took a year, two years, three years, initially five to ten years to spread everywhere, Then it took less and less time and now it is coterminous. Financial services sector will probably be at the cusp of changes that will happen. They are much bigger scale wise — 8X to 10X — and are technology led players.


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