KV Kamath, Chairman, Jio Fin Services & Chairperson, NaBFID, says “NIMs will have to correct because it should be affordable to the borrower also. Banks will need to learn to do things in a lean way. Lean in terms of their processes, lean in terms of technology and try to bring that cost-income ratio down significantly and I would dare say the target, I would have set if I were anywhere here, is to say can I operate at a cost-income ratio that is half of what I am now operating at because that will allow me to take NIMs down, be competitive and pass on the benefit partly to my borrower and partly to my bottom line.”
On financial sector
KV Kamath: The financial sector is going to underpin the growth story of India – The Amrit Kaal. Look at Japan and Asian Tigers and more recently China. It is now our turn. When the economy starts rolling, this sector provides the momentum to it. So, it is a long-term story, at least 5 to 10 years. It continues to be relevant even after that, but there will be other sides of the economy which will take the baton and run thereafter.
CASA is the new gold or as some would call it – the new data or new Bitcoin. There is a war of liability. So, while banks are growing, they have a challenge in terms of maintaining that kind of pace on deposits. Is that a reasonable concern for the sector per se?
KV Kamath: Yes, my view is, it is going to be there to stay. To what extent, one would have to look at and banks will need to then figure out how they operate in this new normal and I will tell you why I am saying it is going to be there to stay. A large part of CA (current account) earlier on was corporate, now that has moved to virtually overnight investments elsewhere which give them higher return. So, one leg of CA is gone.
SA basically was the saver, where the money stayed in the bank account as savings and when it got above a particular threshold, it went into a fixed deposit and then you remember the process, there was a certificate and then you had to renew the certificate and submit the certificate and so on. Today in a world which is digitally connected, everything is real time. The saver has also understood that he has options to put that saving into other instruments at the touch of a button and as we go on into the next five years, even people below the middle of the pyramid, tending towards the bottom of the pyramid, will be fissile in using an app to move money to what they consider to be better investment opportunities. So, this is going to provide a challenge to the savings account (SA) which is sitting in the banks as we go along. So, banks will need to figure out how they are going to compete in this new normal and what are the sources of funding that they would need to look at. They will figure it out in due course as they go along.
The hallmark of the Indian banking sector, at least the private banking sector, has been that they have enjoyed margins which are perhaps highest in the world, that is largely because of the construct of the Indian sector. Do you think high margins, spreads of 3% plus, NIMs of 2.5% to 3% that is all history now?
KV Kamath: Most of my banking career, the bank I worked for ICICI, worked with margins of well below 3%, initially because you were a development bank which became a bank and you had to pay extra for all the liabilities. You had to build up, provide SLR and CRR on that and so on and so forth. And later on, the nature of business changed. So, this current high margin and high NIM business is transitionary. It is partly fuelled by the high NIMs that we are seeing in the fintech space. But to me it is transitionary.
So, what will happen? I think NIMs will have to correct because it should be affordable to the borrower also. Banks will need to learn to do things in a lean way. Lean in terms of their processes, lean in terms of technology and try to bring that cost-income ratio down significantly and I would dare say the target, I would have set if I were anywhere here, is to say can I operate at a cost-income ratio that is half of what I am now operating at because that will allow me to take NIMs down, be competitive and pass on the benefit partly to my borrower and partly to my bottom line.
So, do you see a reset because the competition will intensify, some banks will be able to pass on cost, some banks will not be able to pass on cost, especially the legacy banks. So, then are we looking at repricing of loans, are we looking at pressure on NIMs going forward in three to five years?
KV Kamath: Yes, because I do not see an alternative and life may not be as hard as they believe it is because it is going to be because technology is now becoming so agile and so I would say, it provides you comfort that you can actually take the existing technology in a bank and virtually float in a completely new platform at probably one-tenth the cost that you are paying today. It is still not sinking in. The risk is looked at as overwhelming. But as long as one or two brave banks take that risk, and maybe float in new technology for parts of their operations, and that is observed to be successful, then there will be a rush to migrate.
Fintechs are already able to do that. So, fintechs are not able to make money for other structural reasons, not because their technology cost is high. So, there has to be learning from the fintech business which will seep into the banking and rest of the financial services space, which then will provide this opportunity.
Every bank is taking a lot of pride in retail book. They say the retail book is growing, which is more than half of the total book. There are no NPAs there and they are very careful in terms of using technology to ensure that NPAs do not come. But the Reserve Bank of India has a different take on how unsecured loans in the retail book is growing. What is your take on this?
KV Kamath: Long back when we had just started credit card business and there were not too many people in the credit card business at that point in time, I was told by either Visa or MasterCard that the fraudster is only at max three to six months behind you. So, whatever algorithms that you have in terms of AI that you use to keep the fraudster out, he is going to very quickly crack it.
So, you need to be ever vigilant and then have a healthy blend of unsecured and secured lending which will keep you in good shape. Just now the caution or the red flag raised by the Reserve Bank in terms of increasing the risk weightage is very appropriate and that will probably correct things which otherwise could have gotten to a situation where it was not going to be correctable.
A lot of fintechs also are in a sense now doing loan syndication. They are borrowing between two individuals whether it is B2B or B2C that runs into north of 25% plus and I wonder that if somebody is borrowing at 25% plus looking at the cost of the economy, I mean this is like a time-bomb ticking because it is a matter of time they will default in servicing the loan.
KV Kamath: I will look at three data points to put in risk which the regulator definitely saw when this call was taken. The fact that a large number of borrowers are borrowing from the new environment that is out there and providing funds and are sitting with the multiple loans. Once you sit with multiple loans, you start juggling. So, you start evergreening and then you have got credit card debt, so you fiddled with that. I think there are so many ways in which the borrower is fiddling that the bank or the intermediary is not able to realise this.
Let me also add that as a risk layer because now there is an intermediary who is originating that loan for a set of banks. So, you are adding another layer and it becomes invisible to the final lender as to what is the embedded risk in the product or in the borrower. So, there are a whole lot of grey things that are happening here.
What next for the banking sector? In this decade, who has the right to win in the banking sector?
KV Kamath: It is very simply three things. One is somebody who creates that trust in the minds of the counter party or customer who provides the customer the best convenience and that will come through technology. I will give you a small anecdote. This goes back 25 years when we had a brand which was just being built. ICICI was not a retail brand but we had started introducing technology; ATMs, net banking and within a span of two years from 90% transactions in the bank happening at a branch 90% had moved to the ATMs. We used to run customer understanding of what we are doing and our brand and things like that on a regular basis.I was amazed that very soon the key scoring point was convenience. Second was brand and I attached trust to brand which I would never in my life at that point of time have imagined that somebody will say for a bank convenience is more important than trust.
We are seeing that all over again now with the UPI payment. People who ran with the UPI payment are the fintechs who you normally will not trust but convenience was king and you rode that wagon as it were and they are now doing things. So slowly, this trust is going to be balanced by convenience as you go along in a larger and larger manner. So banks will need to learn that convenience is king, trust closely follows and we play it out and anybody who can manage this in an appropriate manner is going to be the winner.
What is the third point, so convenience, brand and what is the third point?
KV Kamath: The third is execution. You may have financial sector players who have the ability to do this but do not have the execution ability and for various reasons they either do not have the people nor the will or a combination of the two. I think that will slowly erode your strengths as you go along.
One looks at the pecking order of the top five banks in India. I am going to take the clock forward five years from now. Do you think the pecking order could change because simply what these five banks are doing?
KV Kamath: No, I would not name any bank but the order could change based on their ability to use technology and the heart they have to use technology.
A five could become two or two could become one but do you see that the top five banks in India a new entrant?
KV Kamath: I would think that it is very difficult for a new bank to come in there because the whole lot of base foundation built up and if I look at it anywhere in the world, the last two turns were Tiger economies and before that Japan the incumbent banks became stronger and stronger. So the top five banks certainly will remain strong. There will be a good base of other banks but the base that the top five banks have built is very difficult to replicate. And also one has to remember that these banks and the base that has been built provide the regulator comfort to build and grow and provide support to an economy, which is going to grow.
I would think we are going to grow near 10%. My mantra is 7.5% is a given and another 30% because of the digital economy so you are near 9%. Now I can confidently say that you can add another half to one percent because India is going to be a domestic tourism led country as you go along.
How large do you think tourism could be for India because if you are talking about GDP and multiplier, then we are looking at a multiplier of 1% kicking in on a $4 trillion base?
KV Kamath: Yes. I am looking at 10% growth overall. You can then parse it in whichever way. I call it existing then I lay on that digital and then I lay on that new. New is all the momentum that we are seeing and you know my view is that every time I have gone into rural India, you see the new rural India. Rural, semi-urban, tier-2, tier-3 cities. It is the new India that I see whenever I have gone, I have not travelled that much. So I am trying to figure out why people are saying the rural economy is not kicking in. Something is not right in that statement and we will have to figure it out.
You had made this point in 2021 that fintechs are here to stay but fintech valuations will not stay and then interest rates went higher and fintechs went through a funding winter. What is your take on the fintech world?
KV Kamath: It has not changed. Fintechs have built great platforms but the basic mistake the VCs made was they thought that they could get it to a price which they thought was right. I would not say anything more and then leave it to the public marketplace. The public marketplace at least in this country has turned out to be much smarter than that. So unless you show a solid bottom line or visibility on the bottom line, you are not likely to get funding and till that is changed, winter will probably ease but it would not be a spring summer in full bloom.
At 77 you are incubating a new business chairman of Jio Financial Services. They say that after 69, Indians should retire but you have taken a challenge of a new innings. What keeps you going at 77?
KV Kamath: At 68-69, I had one challenge; to go to a different country and work with five different cultures and five different countries to set up an institution. So in a way, I got conditioned. I think it is just the excitement of building or contributing to this new India. I do not think anybody would have an opportunity to go through a country which is going to grow at 10% for 25 years. And even if I have five years of joy in working on that, that drives me through.
So, I have to be fit, I have to be alert. My mind has to be like that of a 25 year old’s. So if I cannot understand what is understood then I am back to my real age. So at every moment I am trying to see where should I be in terms of that 25-year-old recruit who is sitting out in the office.
And what do you do? What is a day like so that you make sure that you think like a 25 year old?
KV Kamath: I try to read everything that would keep me in that ballpark particularly on technology, trends, what is happening, how to use and so on. And then there are well wishers who drop hints. One of the biggest things that I got was a few years back when Vishal Sikka mentioned to me that AI’s price performance is doubling every 3.4 months. And prior to that the benchmark was Moore’s law where you could say price performance squared every two years. Now squared every two years against 3.4 months doubling you take it through the year and that is 10x increase in a year.
So you imagine what the performance is improving or the price is dropping for the same given performance. Now if that is happening, you have to look around and see what is happening in your own organization. Are you seeing the benefits of that and this is before gen AI and now comes gen AI in terms of what you could do. So it is going to be great fun. Basically, I tell every youngster that you have to be retrained when you come in, you have to be exposed to these new things. You are good otherwise you have to be.
