RBI action on unsecured lending warranted: Jio Financial chairman Kamath

"I think there is some sort of abuse of technology that is happening (by loan apps) and as a result, there is laxity in the whole process of lending"

Despite some concerns in the banking sector, K V Kamath, chairman of Jio Financial Services, said the industry now was healthier than ever before and the economy was also in good shape, considering corporate earnings. In a fireside chat with Tamal Bandyopadhyay, consulting editor, Business Standard, Kamath also discussed challenges from increased reliance on technology, data, artificial intelligence (AI) and machine learning (ML). Edited excerpts:

 

As the BRICS bank chairman, with your experience, how do you assess the impact of China’s second massive stimulus package and the ongoing developments in the US on the Indian economy, especially from a market perspective?

 

I can give my perspective on what is happening in China. I have not been to China for the last four years. My own assessment is that their accelerated growth period where they transformed themselves was from the year 2000 to 2015 and thereafter it's natural that growth slowed down. So, I would guess that what they are now trying to do is to stabilise growth at a new peg as it were from a double digit to maybe we are looking at a 5 per cent or so. And, if they anticipate that growth will be below that level, they are trying to support it and that's what we would see in the stimulus that they have just given because to all and then within the $18 trillion economy, even if you grow at 5 per cent, that's a large addition to go. So, they are on their path and they run it differently from what we do.

 

Having closely observed NaBFID’s inception and growth, how do you assess the role of institutions like NaBFID in infrastructure financing, especially considering the demand-supply gap and the impact of banks’ past exposure to infrastructure-related NPAs?

 

Let me put this in context. Around 75 years ago, there were three pioneering institutions — IDBI, IFC, and ICICI. We had to evolve into a bank because we lost access to funding. Without funding, we became a bank, issuing government-guaranteed bonds eligible as SLR securities, which allowed banks to invest in us. This was based on the appraising expertise of these three institutions. Over time, new and infrastructure banks were experimented with, but these emerged when funding was scarce. Fast forward to today — infrastructure is going to be a key driver of our economy for years. However, commercial banks face a dilemma — they are lending 10- and 15-year money for infrastructure, but their own liabilities are short-term. When you take one-year money and try to use it for 15 years, someone is going to face challenges, especially when it is repriced every three months. That’s why the government’s decision to set up NaBFID is both timely and correct.

 

In light of the growing financialisation, the high credit-deposit ratio concerns raised by the Reserve Bank of India (RBI), and the changing role of savers turning into investors, and your experience in the banking industry and Indian economy, how do you see a structural shift in the financial architecture, particularly?

 

I think the shift towards financialisation of savings is happening slowly, driven by several factors, with technology being a key element. Technology has provided greater access and a better understanding of investment opportunities, making it easier for savers, especially those in the mass affluent category, to access financial products. Previously, they would have struggled to find such opportunities, but with technology and tools like SIPs (systematic investment plans), it has become much simpler. If SIP sizes are reduced even further, this trend will see even more growth. However, this shift in deployment also comes with risks. RBI Governor has raised concerns about the risks of market participation, especially with lay people getting involved in F&O (futures & options) markets.

 

Do you think money is leaving the banking system and flowing into the stock market through unsecured personal loans?

 

If people are borrowing at 20-25 per cent and the lender says that my net interest margin (NIM) is 10 per cent, it means that the lender is prepared to lose that money. Tell me which business or which activity I, as a lay consumer, can do which will allow me to cover a 20-25 per cent funding cost, then make money and repay it. I can't think of anything as a banker. So, this is primarily going into some sort of speculative activity or some sort of consumption which would be a little difficult to understand that you will borrow at 25-30 per cent and consume. So, it is going to some activity which ought not to have been.

 

And how do you see RBI’s latest action because you are praising RBI which not too many think about RBI's clampdown on personal loan, unsecured loan. What about RBI’s clampdown on four NBFCs?

 

It is in the same order, same vein because if the RBI doesn’t do it now in an environment which is changing because here again there is technology at play. There are several things at play and the regulator is taking action to understand what is happening with use of technology, with the laxity in certain processes and the consequences of that which could be very difficult for a regulator to then in a way address. They are taking I would say, proactive action.

 

Given the different views on the NBFC sector— one suggesting only a few bad apples and the other warning of brewing problems with over-leveraging and irresponsible lending — what is your assessment of the current situation?

 

Let me provide some context. I believe the action taken by the RBI is absolutely warranted. About six or seven months ago, I casually asked a CEO of a credit scoring company about the typical credit score for fintech lending. He mentioned that it was around 550, whereas traditional bankers usually look for scores of 700-750. I was shocked, and he explained that each borrower had an average of five loans, and many were still seeking more. This indicates a pyramid scheme where borrowers take new loans to pay off old ones, creating a dangerous cycle. It was around this time that the RBI raised the risk weight and issued a cautionary warning, which was timely. While I can't pinpoint exactly where this debt is sitting, the good news is that the banking system seems healthier than ever.

 

So, the mischief is being played by the loan apps. They are the primary mischief makers you are saying?

 

I think there is some sort of abuse of technology that is happening and as a result, there is laxity in the whole process of lending.

 

Given the shift of savers to investments like arbitrage funds for better returns and tax advantages, do you see a structural shift in India similar to developed markets, where corporates increasingly borrow from the market rather than relying solely on banks?

 

This shift is already happening, as we have a robust capital market today, and firms are increasingly accessing funds through it. The key differentiation will come when corporates, unable to meet long-term capital needs through their own cash accruals, will turn to the market to raise bonds, as it is the most efficient way to do so for the right maturity. I see this trend growing significantly. Additionally, the creation of (Infrastructure Investment Trusts) InvITs and (Real Estate Investment Trust) Reits is changing how projects are funded.

 

Do you see the stress from unsecured loans affecting only NBFCs, or is it also impacting the banking sector, particularly private banks, which are quick to write off loans? Do you think the best phase of the banking system is changing?

 

I can’t say whether I am yet seeing the pain that you are describing, probably it is there but I will put it in a larger context. Any lending activity goes through cycles. So, there has to be a cycle and there will be pain at some point in time in that cycle whether through retail or the corporate side.