The Hindu Business Line : `Banks need to reinvent themselves every three years'

WE all know that in the last five-six years, banks have struggled with lack of credit growth, in the real or the agricultural sector, and elsewhere. I want to put this in context of what is happening, and what has happened.

Five or six years ago, we, ICICI Bank, and I am sure other banks also, saw a complete shrinkage of traditional borrowing by corporates. About that time, infrastructure lending had gone into reverse gear as also working capital lending. . Honestly, we all thought Indian industry is in deep trouble.

What we now see, when we talk to customers, is a completely different story. I have an illustration. Three years back, I asked one of our leading motorcycle manufacturers, how would you compete with China?

The answer was uniform, well, we really can't go head to head with China. If asked what do you think is the disadvantage we have; the answer was higher costs, 25-30 per cent in terms of manufacturing cost.

The same manufacturer, when asked the same question today, says we can compete with China. In fact, we have better quality than China. Initially we, as a bank, thought that this is happening only in the automobile industry and light engineering industry. But barring one or two sectors, we are hearing this refrain in every single industry now. The last industry I have heard this in is the textile industry.

I think a combination of three-four factors has led to this transformation. One factor clearly is what I would call shop-floor-level reinvention. The companies have gone back to the shop-floor and literally swept processes clean, and got productivity and quality up. When they did this, they found they got the working capital requirement down 40-60 per cent.

That answers one question banks had, why aren't companies borrowing any more for working capital... If you can cut the working capital by half, the line item — the interest expense — comes to 25 per cent of what it was. And the corporates also used organic generation of capital (internal generation) to retire old debts and leveraging themselves much better than what they had in earlier times when the norm was 2 to 1; every corporate would come to us and say, "we want to be borrowed at 2 to 1," and it was a mantra.

The last five years corporates have corrected the situation. This has happened in industry after industry...Also, in restructuring over the last two years, corporates would have restructured Rs 50,000-60,000 crore of corporate debt. Essentially, restructuring has meant bringing down interest rates from where they were — a high of 17-19 per cent to 10-11 per cent. That has provided tremendous relief to the corporates.

Banks also cleaned up their act to avoid the sort of situation that South-East Asia and China now face. The Chinese banking system has a bad debt equal to 50-60 per cent of GDP, not of the banking system. To put this in context, that number, at the worst of times in India, was probably 5-6 per cent of GDP, and post clean-up it is probably 3-4 per cent, and probably improving dramatically.

The dropping interest rates also meant huge treasury gains for a large number of banks — not that much for ICICI Bank, but for the rest of the banking system, certainly a huge profit which they used judiciously to clean up. So the bad debt problem came under control for the banking system. So you have now a competitive real sector, you have now a healthy banking sector.

What do you see in the real sector? In the last two months companies have been coming to us with their capital investment needs, for over Rs 100,000 crore. This pipeline did not exist last year, this pipeline did not exist six months back. I think that is the clear answer to the critics who ask "Is India shining?" Clearly, India is competitive. It is not an anecdotal evidence. Corporates are coming to us and sharing their plans with us.

Are there investment plans? Clearly there are investment plans. I say that this is just a tip of the iceberg... . If we go deeper into it, in, say, six months, this pipeline will look even healthier. A real sector investment pipeline of Rs 100,000-150,000 crore reflects the new-found competitiveness. Together with a healthy banking sector, I think all augur well for real sector momentum.

What is happening on the consumer side of the business? Consumer credit probably was in the range of Rs 15,000-20,000 crore four or five years back. It is in the 40-50 per cent region compounded in the last two-three years. So last year, we put the number at around Rs 65,000-70,000 crore of consumer credit, split 50 per cent for housing loan mortgages, and the balance for other assets. This year, our estimated demand for consumer credit is something like Rs 100,000 crore.

The demand from the manufacturing and infrastructure sectors will be Rs 100,000-150,000 crore. So, clearly there is consumption and there is growth in terms of productive capacity that is going to be set up.

So what will be the economic growth? Whatever growth is being reported — 8 per cent or 8.5 per cent — we believe it is little higher than this for a very simple reason: We are not counting several areas appropriately.

I will give you a small example. In the industrial sector, the basket has not been recalibrated for at least 10-15 years. All the growth drivers, which are giving momentum to the economy, are under-weighted in the basket; whether it is the consumer durables sector, auto-ancillaries, entertainment or the electronic sector.

Even sectors which ought to have no problem at all, textiles, we count what is produced in the mill sector. We do not count what is produced by the powerlooms. Today, 90 per cent plus of fabric is produced by the powerloom sector and this is not counted. Even if we do a small reset of this, we can count another 0.5-3.25 per cent in terms of growth.

I will not go into what is not counted in the services sector. Indeed there is a large chunk of it here that doesn't get trapped because of difficulties in assessing the real numbers in this sector. So, clearly, things are happening; I think "India shining" is a phrase we can accept because we can see underlying growth. Clearly, the economy is in good nick.

Let me turn to the banking sector: One piece of extremely good news is that the banking sector has cleaned up its act in terms of its non-performing assets. The challenge in terms of transformation is on three-four different planes. I would guess the first is induction of technology, the second is growing new business lines, third is the challenge of getting the right skill-sets to do business, and fourth is as we go along global competition.

Let me turn to the technology issue first. Clearly, technology transformation has taken place, not only in our bank but in several banks. But I want to put this in context; three years back 93 per cent of transactions in ICICI Bank took place in our branch, and 7 per cent at the few ATMs we had.

Today, just about 27 per cent of transactions get done at branches, 50 per cent happens at ATMs, and the balance over the Internet or via the call-centre. We have 5.4 million Internet customers. That should put us in the top 10 Internet banks in the world. We have a 700-seater call-centre, again one of the largest in the world.

Clearly, the customer in India wants to embrace technology. If a bank is not able to provide services that the customer demands, the customer is going to migrate. Now, that is the challenge the banks will face here. How do we make technology affordable in a country like India? I don't mean affordable just in the urban sense. We cannot grow this country if we do not address rural India.

We cannot use conventional technologies. We cannot use Western scale and costs in taking technology to the rural masses. We are running technology at 5-10 per cent of the cost of any global bank anywhere in the world. And that is just about making us competitive. Because the ticket size for an average deposit for ICICI Bank is $1500, and the rest of the banks it is $500. Now the average ticket size in the US is $15,000.

You have to make technology work with very small ticket sizes. That is the challenge. When we go to rural India, we have a delivery problem. The way we are trying to address it, and I am sure other banks will also find the same way, is to work through intermediaries who can work at very low costs and you can interface with at a particular level.

So, for example, if you work with micro-credit institutions that can network the rural fabric, as it were, and deliver credit at the lowest possible cost, then you act as intermediary, buy the assets wholesale, securitise and sell... We started in a small way and it is growing. Solutions which are lateral are required if we are to take credit to rural India.

Similarly, we have episodes in farmer financing where we are trying to go directly to the farmers working with different sets of intermediaries, who could be the fertiliser company, the seed company, or firms dealing in farm inputs. Your interaction point is the office of the intermediary.

Again, this is unconventional banking. You cannot follow the route of setting up a branch, pumping technology there and doing business, because it cannot work in a country like India. So, radical solutions are required on the technology front. I would say we have taken the first few steps in this area.

There is big opportunity by just taking first few steps. And we are not looking at it as a priority sector. We are looking at it as the banking opportunity. We are looking at the opportunity to create value in rural India, to see what sort of a transformation we can bring about as a banking sector because that is where the mass is, and the opportunity is.

The second challenge is consumer credit. The challenge here is of a different order. Because Indian banks historically were deposit-takers. Once you took the deposits, we put into government securities because that was mandated, or you put it into "priority sector", which was also mandated, which left very little for consumer credit. You did not have skill-sets in consumer credit. So one has to build skill-sets, which means build the product, build the skill-sets to distribute the product, get the materials right, get collection under control, and so on.

You need to get all these right and maybe, then, you will come to the conclusion that the branch's set-up is not the right way to distribute credit. That is what we found, that this credit cannot be driven through bank branches but will have to be driven through specialists. So this is the challenge of learning

The third challenge is the skill-set challenge. Again, the technology/treasury level or the treasury management level is critically important. The terminology used today, the techniques used today, I would say, did not exist three-four years back. The phraseology being used today, oftentimes, I do not understand ... one has to go back and read current books to understand what is being talked of in the treasury context.

And I think we are all getting obsolete every three years, at least some parts of our business are. The question is, do we in the banking sector have the skill-sets to respond to the changes happening so rapidly. The question the banking sector is to ask is, do we have the skill-sets to reinvent ourselves every three years? This question is wide open and I put it on the table.

The final challenge for the banking sector that will evolve over the next three years is the global challenge. We have started Indian branches and are opening up more than other domains have. The challenge is that the global banks are coming in with capital, with skill-sets and having learnt from mistakes made in other domains. So this is a challenge we will face. How do we prepare ourselves? The answer is to get the first three questions right, if we are to face up to the challenge in the global market.

To sum up, the economy, from a banker's perspective, is in excellent shape. Growth is well-diversified now. It is in the real sector, the services sector, and I want to say here that maybe we have to reinvent the term `services sector', because this services sector as we understood it in the past, and as we learnt in economics, is no longer so.

The services sector is driven by knowledge and today you are creating value out of knowledge. Again, in the past you invented a machine using knowledge, you populated a factory with those machines with added value, or created value out of these machines. So you had something called the real sector. Today, you are creating the knowledge in the laboratory or in the office floor, as it were, depending on whether it is an IT company, a biotech company, or a pharma company.

It is no longer services, it is the value creation activity that we see. So there is momentum, whether it is the real sector, the knowledge sector, or the services sector, and the agriculture sector if we do some of the things that we as a bank can do, I think we can give a further boost to the rural economy to contribute significantly to overall economic development.

I am sure Indian banks will reinvent themselves, we have seen tremendous transformation already in the pipeline in the last two to three years. So, we look forward to banks growing with the economy. And I am sure the fruits of this growth will be shared by all of us.

(Edited excerpts of Mr Kamath's speech at Business Line's 10th anniversary celebrations.)

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