There is alignment of everything that we need in banking: K V Kamath

"The rise of the mutual fund industry is key. Mutual funds today are taking in more money. These could give better returns than banks," said Kamath

K V KAMATH, veteran banker and chairman of Jio Financial Services and National Bank for Financing Infrastructure and Development (NBFID), spoke with Business Standard Consulting Editor Tamal Bandyopadhyay in a fireside chat at the BS BFSI Insight Summit 2023 on a range of issues. Edited excerpts:

Can you elaborate on why you said you had never seen such a good banking system in 50 years?

I honestly meant it. I have never seen a banking sector, in India or abroad, which is consistently running such high levels of capital adequacy, and such low levels of credit losses and NPAs (non-performing assets). And then there is the India opportunity. You have got a 25-year growth runway. The third reason is profitability. They don’t need fuel. They don’t need equity capital. I don’t think we have ever seen such alignment of everything that we need in the banking sector.

Talking of geopolitics, do you see the current global economic challenges impacting the banking system?

I think these are transitory. Given the inverted yield curves and returns in domestic investing, an overseas investor from a developed country is taking a short-term view and arbitraging the opportunity there instead of putting long-term money here. I think that will level off as we go along. So, I am not worried.

After Covid, along with the situation in Europe, we saw inflation rising. It was everywhere. It didn’t rise to that extent in India. We had an appropriate response, a very measured one. But surprisingly, the West, which always taught us to get the interest rates up if there was inflation, did not do anything, particularly Europe, for a large part. They let the inflation stay very high and interest rate low. The old economic theory written over 100 years ago is now being revisited by certain domains. We will need to factor in that too. As to what is happening in the external world, they are living with high inflation. Some countries are living with high interest rates. Some have arbitrage opportunities. The impact of all these flows into India. All these are transitory and should level out.

The banking system may be well capitalised and the asset quality impeccable. But because of the rising interest rates, particularly in the retail segment, there might be certain cracks. Probably not 90-day non-payment but in the so-called special-mention accounts. Do you agree that we might hear bankers saying fresh slippages have started?

We will have to watch. I don’t think anything clear has come either from banks or the regulator. I don’t want to call them rumours. There is a perception that some statements, probably the larger loans – the Rs 5 lakh, Rs 7 lakh, Rs 8 lakh loans – are more stable than the smaller ones. This will play out over the next six to eight months. But one thing that needs to be remembered: We lent at an NIM (net interest margin) of 2-2.5 per cent. We were very lucky at 3 per cent. Your ability to absorb losses was constrained. We are now looking at NIMs of 5-7 per cent or maybe 8 per cent, so that ability is higher. Once you start running at that level of NIM, you are going to have some misses and you can hope that the strength of your overall book is good enough to take care of that. It is all part of the learning curve. We have wonderful regulators. I am sure they will take appropriate steps in advance to prevent any systemic blows.

When you came to the helm at ICICI, and it became a bank from a development finance institution, there was a problem on the liability side. ICICI overcame a particular problem by converting itself into a bank through reverse merger. But there is a war for deposits. Have you seen this kind of deposit rate war in your career?

Deposit rates are high for two key reasons. One is the underlying inflation. If you have the government bond at 7 per cent, you need to make sure you are pricing your deposits appropriately. Markets will determine how high it should be, or how much higher than the government bond it should be. And two, the NIMs are high. Banks are taking money at 8 per cent or 9 per cent, and still we are talking of 4.5 per cent average NIMs for big banks in the last reporting quarter. In our time, 2.5 per cent was lucky. We were happy with that. Two factors here. First, keep an eye on inflation and raise money appropriately. Second, keep an eye on spreads and decide what they can raise. But there is something else happening which you alluded to.

The rise of the mutual fund industry is key. Mutual funds today are taking in more money. That will happen because the market are slowly understanding mutual funds. These are instruments which could actually help in the long term and give better return than banks. Todays saver is an educated saver... in the sense of financial education. And he or she is comfortable taking that risk, and I see that happening.

You headed the Brics (New Development Bank). And now the BRICS is talking about a common currency. And China wants G20 to be replaced by Brics. What’s happening? And, in this context, how do you see our efforts to make the rupee international?

These will happen in parallel. This talk about the Brics settlement system has been there right since the time Brics was founded. Quiet work was going on. Also, BRICS had in place a structure akin to the IMF. All the tools that were there in the western world. Now Brics is 9-10 years old in terms of what it has been doing. If you look at it now, the importance of some of the steps comes forth. For example, the settlement system. The global settlement system was riding on only one platform. Now there are competing platforms, completely digital, end to end.

Take UPI (Unified Payments Interface) itself. Using these in a concerted manner to settle globally is not difficult. That is the next move one could see. Similarly, if you have a currency basket of like-minded players, you have an alternative system in place. I see that evolving. It is not imminent today. But it will evolve as we go along. So, you have a choice. The developing world has a choice on how to settle and with what instrument to settle.

Interest rate risk is now becoming more critical than the credit risk, particularly in the developed markets. Does this raise concerns about the stability of the banking system, particularly in the US and parts of Europe?

It is a new risk and it is relevant. But that risk is much less in India because the structure here is very well managed. We do not have that sort of divergence; that is, we never had interest rates near zero and near 5 per cent. Zero and 5... if you have 10-year paper, basically 50 per cent is gone. So, I would think the risk is real. But I don’t think they have an answer as to how to resolve it. The only hope is that things will come back to manageable over time... where you are talking of interest rates 1-2 per cent. That will depend on inflation. Some countries will be more vulnerable than others. Europe did not take any steps. You got a real inflation on your hands. Yes, in the next 2-3 years, this challenge of interest rate risk will become more important than credit risk. It is going to be very true. Silicon Valley Bank is in a slightly different situation: It was a short-term matter. It was very clear and obvious in the balance sheet. But it slipped — the regulator or everybody who was looking at it — slipped very quickly down the very slippery slope.

So, you give credit to the Reserve Bank of India?

I give complete credit to our regulators and the government. Particularly, I observed during Covid and post-Covid, what I call supporting the economy. The government did two things. One was at the assembly level, they provided a safety net through food support to the mass. The Reserve Bank unbelievably took this bold step of keeping liquidity and for a large part keeping interest rates low. I cannot imagine that in any situation a central bank would have had that courage. That allowed things to turn around at a pace which we did not expect.