Who could have thought it was possible to build up a retail portfolio of nearly Rs 100,000 crore (Rs 1,000 billion) in five years? Probably not even Kundapur Vaman Kamath. To Kamath goes the credit for not just spotting the retail opportunity but also cashing in on it.

In a conversation with Business Standard's Shobhana Subramanian, the 58-year old managing director and CEO of ICICI Bank [Get Quote] says all is well with the corporate sector though consumer demand may slow down

Do you think growth could slow down?

As of today, we're not seeing any indication of a change in mood or in mind. As long as corporate India has positive cash flows, there should not be a problem. But, clearly there was a signal from the authorities, of a real estate asset bubble that we need to temper.

I would think that the rate increase, that a bank like ours has clearly passed on to the customer, will put some sort of a break on consumer demand. Now, what would that be? Consumer demand was growing at around 40 per cent compounded.

I don't think it is going to stay flat, but, it is going to be somewhere between the two. By any standard, a 20-25 per cent growth will be healthy and the signalling impact will cool down prices, which will then be a win-win situation. But, clearly a rate increase will have an impact on the sort of growth -- 40-50 per cent -- that we saw.

Will that have an impact on corporate India and demand?

There could be some pressure on corporate India, if retail demand slows down. Besides, commodity inflation and other input cost increases, in this context, could put some sort of a squeeze on corporate profits.

But, I guess it's a bit early, let's see how it goes. I would think the final check on this is really the cash flow pattern. If cash flows turn negative, demand from corporates for debt will shoot up. That will then mean further increase in interest rates. It's then that we will need caution.

Currently, there is no pressure from interest rates on companies, we have not seen any slowdown in capex, no drop at all, though we would carefully continue to watch whether positive cash flows are becoming negative. So, we are now wearing extra thick lenses.

Has the bank passed on the rate hikes to all sectors? How are they coping?

We have passed on the rate hike to everyone but since companies have reduced debt, it is no longer a significant part of the equation and so far, even SMEs appear to be coping well.

Two things I am so far not hearing, which I would hear repeatedly in the past -- one high interest rates and the other a strong rupee. The rupee being too strong, I have not heard in a long, long, long, time possibly because it is now factored into the base case of corporates.

As for interest rates, as yet I have not heard any complaints. But, I can see that the retail customer will probably be the first one to blink if interest rates keep going up, I don't want to speculate -- but another per cent or per cent and a half -- and the retail consumer will come under pressure. If he finds his EMI is disturbed, he's going to re-define his basket.

Which means, two things. One is, he will recast his consumption basket and second, his aspirational basket will also get hurt. So, he will maintain his current payments and cut out something. And that's where the slowdown, if at all, will happen.

The consumption basket clearly will impact the branded guys, but the unbranded guys will not be impacted because there will be a migration effect. So, I think this is what we will have to watch for, in the next two quarters.

How do you read the macro environment?

I would keenly watch the signals from the monetary policy. Considering that a part of the oil price has been passed on, oil is nudging $75, global interest rates have hardened and inflationary pressure seems to have hardened, frankly, you cannot say that caution is ill-advised.

What is striking is the increase in interest rates, in a very short period of time. Everyone of us has to learn to live with this sort of change, because it has been done with a purpose.

But, a lot of liquidity with banks now, is from corporate cash balances that have been built up over the last two-three years. There are no readily implementable projects, for them to get drawn down immediately, it will be a long process. And if profitability remains strong you will have more free cash.

Do you think the India story is still a good one?

The India story has to be looked at on several fronts. To me a major front is how does the world look at India?

My own fear is that the world is looking at us with more expectation than we can deliver, particularly on infrastructure. This has to be done by the government and the implementors, in a private-public partnership mode.

So, that's why, sometimes you are a little bit worried, whether their expectations of what is happening are too high. But, I take comfort from the fact that when you meet corporates and when you see what they are doing, you see a new corporate India, that is driving growth.

Today the mantra is efficiency, quality, productivity and global competitiveness, which were alien words just ten years back. The external perception has not changed, we have to live up to it.

What do you make of the markets?

As long as the fundamentals haven't really changed, I would not be worried. The right thing to do is watch this quarter's numbers, maybe one more quarter to see what is the cumulative impact of several things: commodity prices, interest rates, demand. The sum total should be seen in this quarter's results.

As far as the market is concerned, if it trades at a reasonable PE -- and I saw someone say that if the market is trading at 15 times earnings, it should be in a stable condition -- I think that is not to be quarrelled with.

The key here is the earnings and earnings growth. Again, a number put to us, 15 per cent, I would not quarrel with that at all. As of last quarter, the corporate sector was growing at upwards of 15 per cent, so I think, it merited a higher PE. Activity is still robust so let's wait for the results.

Do you see enough entrepreneurs emerging in the country?

It's very difficult today for an entrepreneur to start a greenfield project, compared to the eighties. Earlier, he could basically leverage himself completely and access the market on day one.

Today, projects have to be set up by someone who starts up with venture capital or expands an existing business. It's tempting to say that growth is happening just at the larger end.

But, just to put this in context, the activity taking place in the SME sector is something phenomenal. We run a contest for SMEs -- across nine verticals: last year we had 6,000 applicants, this year we had 36,000. What this tells me is that we have here a set of companies saying "I'm going to stand up, I think I need to be counted."

To me, that confidence itself is something remarkable and clearly when you look at those companies which make the cut, it makes you proud that you have such companies in your midst. And these are all small companies. I think we are seeing a new breed of entrepreneurs.

Will so many SMEs survive?

We need an ecosystem for corporate India to survive and compete. I'm happy that there are 36,000 SMEs.

As corporate India grows, it has to relate in an even deeper way with SMEs whether it's to bring down costs, improve quality or better time to market.

One of the criticisms that has been made about India, particularly in the electronics space is that India does not have an ecosystem, but ecosystems develop very quickly. I'm happy about the SEZs coming up. What we're not realising is that the SEZs will create an ecosystem and play a critical role.

In which areas does ICICI Bank see growth for itself?

After five, six years of hardly any growth in the corporate sector, including infrastructure, we find growth there this year, both through the domestic book and international acquisitions. We see rural India as another growth driver.

The bread and a little part of the butter will come from consumer lending, even on the high base. But after four years of consumer credit growth, this year onwards, there will be a change in the mix, with corporate and rural credit growing faster.

Is deposit growth slowing down?

Not really, at 16-17 per cent, we are doubling the base every five years. But what's happened is that the systemic mix has now swung in favour of 60-65 per cent for corporate deposits.

It is critical for banks to model what sort of shocks could arise if corporate deposits suddenly turn negative. Corporate deposits are not necessarily more expensive, unless you take the branch overhead as a sunk cost. If you add branch costs to retail deposits, they will be as expensive.

So, you see GDP growing at a healthy clip?

I have gone on record to say that growth is really at ten per cent. I will not change that. Our assessment of growth is higher than depicted. So, if the current growth is 7.5-8 per cent, it is actually 10 per cent. There is a two per cent error somewhere in our GDP numbers.

Are there still high-growth, high-margin industries?

The short answer is, there are. That's because we are looking at an India, which has this enormous potential. We have robust economic growth. Credible corporates are making big plans.

The SEZs are the first moves to set up facilities that will compete with China, the SEZs are pitching at a market space which is today occupied by China.

What impresses me is the footprint in these SEZs, people are talking of investments between Rs 20,000-Rs 50,000 crore (Rs 200-500 billion). Never before has that happened in our history. True, they have to be realised, but earlier such plans were never even articulated.

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