“You have a situation where almost any company that you talk to has free cash flows, which are good enough to drive their future. They believe that they can meet most of their needs in terms of brownfield expansion and a bit of greenfield expansion out of their own cash flows, with some recourse to the markets, equity or debt, or to the banks for working capital,” says KV Kamath, Chairman, NABFID & Chairman, Jio Financial Services.
How do you envision the financial services sector evolving in India, considering the current shift from bank-driven growth to funding through capital markets and internal cash flows, particularly in the context of corporate self-sufficiency and the rising prominence of retail financial services?
You will also have the capital market as a driver for growth. Let me just dissect where will funding for all this growth come from. If we were talking just a few years back, when corporate balance sheets were full of problems and bank balance sheets too were full of problems, I would not have been as bullish, though I am normally bullish. But today, you have a situation where almost any company that you talk to has free cash flows, which are good enough to drive their future. They believe that they can meet most of their needs in terms of brownfield expansion and a bit of greenfield expansion out of their own cash flows, with some recourse to the markets, equity or debt, or to the banks for working capital.
Only in infrastructure and very heavy industry that you need outside lending support, I think this is what will drive the country forward as we go along.
And this then puts into perspective what is going to happen in the financial services. My four or five decades of being in the financial services business was primarily bank-driven growth. Banks drove growth. So, if you wanted to look at a proxy for what is happening in terms of capital investment, you looked at what was a bank’s lending portfolio. Have loans grown? If loans have grown, then yes, capital growth has happened.
But that is no longer so. Today, capital growth happens through cash accruals, through equity raising as required, and access to capital markets, so that part is probably going to be so in the future also, except for infrastructure. So, where will financial services then, as we understand, go? Basically, it will need to drive the aspirations of the people. The retail at large and this is so everywhere in the world.
You have seen growth over a period of time. The retail book of banks grow whereas at some point in time your growth path, the corporate book starts evening out and then maybe dropping and then dropping significantly.
So, I would see that same thing happening in India with retail financial services growing at a faster pace than the corporate side of the book. Then, something interesting is happening. Now, as you mentioned, who are the growth drivers in this financial space? Historically, it was the banks. Yes, banks will continue to be players. Here again, I think the capital market will come in to provide funding to some of the players who will on lend moneys to the retail public at large and the retail public will borrow for their aspirational needs. And of course, the lender will need to be cautious that these are meeting aspirational needs within, I would say, a caveat. The caveat being that you have the ability to repay.
So, I am sure an equilibrium will be found at times. Today you are seeing, irrational exuberance in the market, so when you see lending happening at a NIM of 10% plus, I think that is irrational exuberance on both parts, the borrower and the lender. I am sure it will correct.
I am talking of growth in a balanced way, in a measured way, both the lender and the borrower understanding the risks in all and then proceeding to borrow.
But growth will come primarily from the retail side, with the corporate side mostly self-sufficient and/or finding records in the capital market.
What has happened in America has happened in China and what has happened in China we tend to think will happen in India. And the reason why I am bringing this good old classic comparison is that if I look at the debt levels in Indian household balance sheets, compare them with the leverage levels of what China and US have, do you think Indian retail debt level can really grow multi-fold before they start backfiring? Do you think we still have a lot of safe and predictable headroom?
The caveat is very simple that you need to grow the book, the banks need to grow the book and the borrower needs to grow his liabilities in sync with what is his ability to repay and that in turn is linked to overall GDP growth.
So, we need to continue at our aspirational growth and for me aspirational growth is between 8% and 10%. So, the number that is fixed in my mind is 9% and I am reasonably sure that if we go along that number will happen.
If you see the last few quarters, we keep aside this whether it should be GVA or GDP, but if you look at numbers, numbers are consistently coming above what has been called.
I think this is what is going to happen in the future also. Numbers will come well over what has been anticipated, at least I call it the first rung. The first rung is your next eight or nine years of growth.
If you grow at 9, the next 8, you will double your size of the economy. So, from 4.25, 4 and that region, we should go to 8.5, 9.
I think reasonably so in the next eight-nine years, by 2030, 2031 we should hit that number. Thereafter, the next step is going to be interesting because growth may taper off a little bit, but over the next 10 years I think you should then aspire to double that and that is a significant jump and that allows us to catch up on a whole lot of things that we have missed out in the past and it is in that run up over the next 16 years or so that you will see the retail book growing to what we have seen in other countries.
It still may not be at the size that we see it in other countries, but in context it will be a very sizable book that you will see.
Do you expect the credit growth on this kind of a base of 4 trillion, it could be in the range of 13% to 15% for next three to five years. Can it sustain?
Yes, I think it will sustain and why do I say that? I say that because the unfinished agenda in terms of what we need to do in our country is so large that we certainly can be growing at that pace and if I pick just one area and that is infrastructure.
The act of investing in infrastructure gives you growth and thereafter the fruits of that infrastructure give you further growth.
So, as long as you have infrastructure which is really needed and you are investing in that, that act of investment which creates employment, which creates all the building blocks, steel, cement, et al, and heavy equipment, machinery, so on and so forth, drives growth.
Thereafter, the fruits of having put that in place provides you momentum. So, I would think that the first 7-10 years will be the act of investment and thereafter the fruits of investment.
Though I said first 7-10 years, the actual act of investment could be longer and that is why I say that we have a 15-20-year horizon. The first 10 years I think we should aspire to grow at 9% as an aspirational number and work towards that. Thereafter, because the base becomes large, the growth number could look slightly lower, but in aggregate terms, investment will still continue to happen.
I am optimistic given what I have seen around the world, the history of growth as it were, GDP growth as it were, starting with the East Asian economies very early on and the Southeast Asian economies and then around us, countries that have grown, I think we are following on that path in terms of how we are growing and we can see the growth drivers and we are ready to meet all those growth drivers. So, I am optimistic that it is long-run sustainable growth at the numbers that you mentioned.
