In a span of just four years, ICICI Bank has emerged as a consumer banking behemoth. With a retail book of over Rs 56,000 crore (Rs 560 billion) and a market share that is the envy of competition -- it has a share of over 30 per cent -- ICICI Bank today has reached a commanding position.
The bank boasts of the widest integrated technology platform in the country and only a fourth of its business takes place at its branches.
Its legacy of non-performing assets (NPAs) -- for which it has been rated below its peers -- is now almost history with net NPLs (non-performing loans) down to 2 per cent.
Armed with a much stronger balance sheet, ICICI Bank is aggressively foraying into overseas markets and also has an eye on rural India.
Chief Executive Officer and Managing Director Kundapur Vaman Kamat spoke to Shobhana Subramanian on the banking scenario in the country and the bank's future plans and strategies.
How do you see interest rates moving globally and at home?
Global interest rates will move up. To me, the gap between domestic and American rates was artificially high and if global interest rates are going up the gap is coming to appropriate levels. So, there is no need for Indian rates to go up just because global rates have gone up.
Of course, we will have to look at the inflationary situation -- oil prices are uncertain -- and liquidity, and we need checks and balances. Despite the Fed rate hike there has been no impact on domestic market.
Given the liquidity, there may not be an immediate increase in interest rates and there's been no sudden jump in rates since the Credit Policy. In fact, since March interest rates have come down; deposit rates are down.
What are the global risks to the Indian economy?
At this point, I would say oil prices and any impact of a slowdown in China. The impact would mean prices all round will start dropping and it would definitely have an impact on business.
It's good for the consumer but corporate India will suffer; we'll then have a downward cycle for all commodities.
Won't banks need to raise deposit rates to fight competition from small savings?
I don't see any immediate rise in deposit rates because the liquidity situation is outweighing everything else. Because ultimately interest rates are a function of supply and demand.
We are in a peculiar situation where the interest spread has widened for the long bond; at the short end there has been no widening.
There's no big draw on bank funds from the corporate sector; that leaves consumer credit as the only big user of liquidity in the system. This year consumer credit will grow by about Rs 40,000 crore (Rs 400 billion) from Rs 145,000 crore (Rs 1,450 billion) to Rs 185,000 crore (Rs 1,850 billion).
Last year, despite competition from small savings, incremental deposits grew at 15 per cent and this year, too, the RBI (Reserve Bank of India) is pegging deposit growth at 15 per cent. That's not too different from the historic growth rate of 17 per cent over 30 years. I acknowledge that small savings pose competition; they have a lot of arbitrage.
But, interestingly, mutual funds were not competitors. MFs, I find, are competitors when interest rates decline; they don't have ability to compete when rates rise.
Also insurance companies, which saw money because of the tax incentives, could be under pressure with the incentives going.
How would you assess the competition in the industry today?
You need to put the competition in context. We need to look at the systemic ability to do a certain type of business. I'm the first one to admit that we did not have the skills four years ago.
Anybody who wants to get in a serious way has to build skill sets. It's going to take a little time for widespread competition to come in; as of now it will be between a few players.
There has been, to some extent, a settling down of the competitive landscape. Today foreign banks are not of any consequence; they have ceded territory. I can be bold and say they were prominent players four years ago, but frankly today they have really no influence on the market.
Established private sector banks have done a great job in consumer credit. We will have to wait and watch the newer banks. The big unknown competitor is the public sector; they will drive the market ultimately but in what time frame is unknown.
What do you feel about the lifting of voting rights for private sector banks?
Foreign players really have no barrier to enter; they can set up a subsidiary and the regime is easier than that in almost any other country that we have seen.
So I don't think that anyone has any reason to say banking entry is not appropriate. What the regulator says is that we are putting some restriction on acquiring banks.
Two years ago foreign banks could have bought banks; they didn't. But going the organic way should not be a barrier. I don't think the voting cap being raised will mean a rush by foreign banks.
Given that corporates have adequate funds, how are you growing assets?
While that is true for large and perhaps medium companies, it's not true for SMEs (small and medium enterprises). Also, we are using technology to drive business. Today no corporate comes to the branch; it's completely online.
Now, the SME, too, wants the same service because even the small entrepreneur is connected with a computer. And he wants the ability to bank with his constituents; for instance, if he is dealing with a car manufacturer, he wants to deal with the bank that is online with the manufacturer.
Just to put the numbers in perspective, we are adding 20,000 SME accounts in a month. The ticket sizes are small and that's the beauty of it because they are not even lending sizes; the current account is bigger than our lending to them. But they want to have the ability to transact efficiently and we are giving them that service for they are willing to pay a charge.
This is a sea change that we are seeing because if there had been no value to that customer, the number of accounts that we are getting would not have been significant.
What is your strategy in the global market?
The global opportunity spectrum is changing dramatically, and in the next three years, our global business will contribute one-third of our book -- topline and bottomline. Today it's about 10-12 per cent. The NRI is a great customer and the other is the Indian corporate who is globalising -- either in the trade business or is setting up businesses abroad.
Our USP (unique selling proposition) is our technology; we can get him to talk to his constituents online. The NRI is an interesting link because today he has tremendous needs in India; he wants to remit money, buy a home, especially the H1 visa guys. This year 10 per cent of our home loans will be to NRIs.
Does it make sense to do a global acquisition?
Not really; that is a capital intensive strategy. We would rather partner with other banks and have them cross-sell our products. For instance, in the United Kingdom we have a partnership with Lloyds Bank and are present in 30 branches there, promoting joint products, and they get new customers.
In the United States we have a tie-up with Wells Fargo and their customers can start a remittance into India from any channel. We need to use new delivery channels and leverage technology to an end use.
Are you looking at an acquisition in the domestic market?
We believe organic growth is the best route. Bank of Madura was an excellent experience; the acquisition at that time had a purpose. We needed reach because we had just 100 branches and needed a step up.
We got some 300 branches, most in urban areas, a few in rural areas and we have kept them. It gave us a complete all-India network but today the footstep we're taking is through organic growth. We really don't need to acquire a book.
You have been talking of opportunities in rural India?
Yes, its an opportunity, somewhat premature, but in the next 12-18 months our strategy will be seen. We don't look at agri lending as something that is directed; it's a viable business proposition, but it has to be driven carefully. We can't have branches because that is not workable in terms of costs.
The real way there is to partner with micro-credit institutions, corporates providing inputs or buying products from the farmer and self-help groups.
Industry is talking of huge capacity creation? Is that a concern?
You have to look at the capacity in the context of need in India. The only proxy we have is China. Scale it down; say our need is half of theirs, then you're talking of 125 million tonnes of steel and 150 million tonnes of cement. We have just 35-40 million tonnes of steel.
If you look at the scale -- Chinese population, demand and growth -- and weight it for our population, we still are grossly short of China in terms of per unit consumption.
Capacities are growing wherever we are cost competitive. Nobody is taking a bet on protection; they are not overleveraged and we have a growth economy. Will there be cycles going forward? Yes. Even in China there are cycles, but the cycles that we have today will be different.
Because despite everything we have had sustained near-double digit growth in China for 20 years. I am extremely bullish that we are still not expanding at a break-neck pace that would land us into deep problems.
How much capital does ICICI Bank have for growth?
A lot will depend on how we implement Basel II norms. If strictly implemented, we believe it will give some relief and would be wonderful. But, if risk weightings are higher then we have an issue.
Global banks have access to hybrid instruments -- debt or preference capital -- for Tier I capital; we hope that these will be considered by RBI. If these things are allowed, most Indian banks will not have a problem. The whole idea of Basel II is to put Indian banks truly on an equal footing with global banks; we're not implementing it just like that.
When will you list ICICI Bank's subsidiaries?
We need clarity on the 49 per cent foreign holding since we have foreign partners for both our insurance ventures. We will most certainly hold 51 per cent in both. The general insurance company is giving us 20 per cent ROE; so it could go to market anytime.
In terms of book profits, the life insurance business may take a couple of years but in terms of NBAP (new business achieved profit) this year, it is around Rs 312 crore. The valuation multiple is between 20 and 30 times the NBAP; so we are sitting on a nice nest egg there -- our investment is around Rs 600 crore (Rs 6 billion).
Why does ICICI Bank command a lower valuation than HDFC Bank?
This is a transitionary thing. We were commanding a much lower P/E than anyone else at 5 or 6. The market has recognised our progress.
This is a market process; it has to build confidence in our ability for sustainability of income and we have to recognise that we had a historic NPA problem and till the market can say that is off the books, the market is going to balance two things -- the new initiatives and the NPLs. We have overcome most of it and will clean it up further this year. We have come a long way.
So soon you'll be getting HDFC Bank's P/E?
Laughs.
Photograph: AFP/Getty Images
Design: Rahil Shaikh
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